China Practice

PRC Legal Update

SAFE Updates Regulations Governing Foreign
Exchange Administration for Chinese Outbound
Direct Investment

JULY 2009

© 2009 VINSON & ELKINS LLP. ALL RIGHTS RESERVED.

PLEASE CONTACT MING LI AT MLI@VELAW.COM FOR ADDITIONAL COPIES.
PRC Legal Update
SAFE Updates Regulations Governing Foreign Exchange Administration for
Chinese Outbound Direct Investment

On 13 July 2009, the State Administration of Foreign Exchange (SAFE) promulgated

the Regulations on Foreign Exchange Administration of Outbound Direct Investment by
Domestic Institutions (the Foreign Exchange Regulations) (《境内机构境外直接投资外
汇管理规定》), which will take effect on 1 August 2009 and are aimed at streamlining the
approval process for Chinese companies and institutions making “outbound” investments.
At the same time, SAFE is also abolishing the nine earlier regulations relating to its
administration of outbound investment by domestic Chinese institutions and companies.1
Following its promulgation, on 15 July 2009, SAFE issued a set of Q&A to clarify the
key developments underlying the Foreign Exchange Regulations.

A. Legislative Background

During the past several years, as Chinese companies have become more active in
outbound investment, they have sought to simplify procedures for obtaining Chinese
government approval and registrations for making such investments. In response, the
Chinese government has promulgated several new pieces of legislation and regulations
aimed at facilitating outbound direct investment and allowing Chinese companies to
compete on equal footing with international counterparts.

In addition to the Foreign Exchange Regulations, another key regulation governing

outbound investment by Chinese companies is the Administrative Measures concerning
Outbound Investment (the Administrative Measures) (《境外投资管理办法》)
promulgated by the PRC Ministry of Commerce (the MOC) on 16 March 2009 and
effective on 1 May 2009. Together, the Foreign Exchange Regulations and the
Administrative Measures have simplified the approval and registration procedures
and have provided domestic Chinese companies more discretion in making business
decisions with respect to their overseas direct investments.

1
One of the legislative objectives of the Foreign Exchange Regulations is to unify various foreign
exchange administrative measures and regulations. Nine earlier regulations have been abolished with
the promulgation and implementation of the Foreign Exchange Regulations. Please see Annex I for a
checklist of the nine regulations that have been abolished.

1
B. Approval and Registration Procedures concerning Remittance of Outbound
Direct Investment Funds

The following chart outlines the key approval and registration procedures required by the
various regulations governing outbound investments (including those set forth in the Foreign
Exchange Regulations and the Administrative Measures) that domestic Chinese companies
and institutions must complete before they will be permitted to remit foreign exchange out of
China to fund an outbound direct investment. In addition to the MOC and SAFE, the other
principal government authority regulating outbound investment is the National Development
and Reform Commission (the NDRC).2

NDRC or the State Council Approval/Filing

Apply to the NDRC for Approval Documentation or Filing Certificate

MOC Approval Procedure

Apply to the MOC for the Certificate of Outbound Investment
by Domestic Institutions (企业境外投资证书)

SAFE Registration Procedure

Apply to SAFE for the Foreign Exchange Registration
Certificate concerning Outbound Direct Investment
(境外直接投资外汇登记证)

Bank Review of Remittance Application

Apply to the Designated Foreign Exchange Banks for Outward Remittance of the Funds

Inward Remittance of Profits and Capital Gains from Outbound Direct Investment
or Kept Abroad Upon Approval

2
According to Interim Administrative Measures concerning Approval of Overseas Investment
Projects (《境外投资项目核准暂行管理办法》) (the Interim Administrative Measures),
promulgated on 9 October 2004 by the NDRC, outbound investment projects shall be subject to
either (i) the NDRC’s approval or both the NDRC’s and State Council’s approvals, or (ii) a filing
with the NDRC. Moreover, in accordance with the Circular on Improving the Administration of
Outbound Investment (《国家发展改革委关于完善境外投资项目管理有关问题的通知》) (the
Circular), promulgated on 8 June 2009 by the NDRC, for those outbound investment projects which
involve bidding as well as overseas acquisition projects, the domestic investor must submit a Project
Information Report to the NDRC for preliminary review before applying for the NDRC approval in
accordance with the Interim Administrative Measures. The Project Information Report must also be
submitted before engaging in any other activities restricted by the Circular.

2
C. Major Legal Developments of the Foreign Exchange Regulations

1. Foreign Exchange Funding Sources Broadened

The Foreign Exchange Regulations broaden the funding sources which domestic Chinese
companies and institutions may utilize or avail themselves of to make outbound direct
investments. These include without limitation: foreign exchange which the Chinese investor
owns itself; domestic foreign exchange loans conforming to relevant Chinese laws and
regulations; foreign exchange purchased using the investor’s own Renminbi (RMB); in
kind; intangible assets; and profits from outbound direct investments which the investor
has retained overseas. Furthermore, the SAFE examination procedure for verifying such
foreign exchange sources, which was mandated by a prior regulation,3 is no longer required.
Rather, SAFE now only requires that the domestic company or institution seeking to make
the outbound investment submit a written clarification of its sources of funds along with its
application for the Foreign Exchange Registration Certificate concerning Outbound Direct
Investment (the FER Certificate).

2. Funds Remittance Examination: Formality vs. Substantial Review

With respect to the remittance of investment funds by a domestic institution to its directly
invested offshore subsidiary, a SAFE examination is no longer required: the applicant is
only required to submit a Certificate of Outbound Direct Investment by Domestic Institutions
(the Certificate of Outbound Investment) — along with the FER Certificate — to the
designated foreign exchange bank for authenticity review.

We understand this authenticity test is not a substantial review, but only an examination
of the formalities of these two certificates. This means that as long as the domestic
institutions have been granted the FER Certificate and the Certificate of Outbound
Investment, a domestic institution should have no regulatory problems in remitting
outbound investment funds.

3. Outward Remittance of Upfront Fees

If prior to completing the Chinese approval and/or registration process for an overseas direct
investment,4 the domestic Chinese company is required to remit out funds to pay upfront fees
with respect to its proposed overseas direct investment (such as, for a deposit required either

3
See SAFE Circular Concerning Streamlining the Examination of the Foreign Exchange Fund Sources for
Overseas Investment promulgated on 19 March 2003 (《国家外汇管理局关于简化境外投资外汇资金
来源审查有关问题的通知》). This regulation has been abolished pursuant to the Foreign Exchange
Regulations.
4
The major PRC regulatory authorities include the NDRC, the MOC, and the SAFE.

3
by a transferee or by law with respect to the acquisition of assets or equity, for a bidding
deposit, for market research cost, for office and equipment rent payments, for employment
and agency costs, etc.), it may apply to SAFE for approval to remit such funds. The Foreign
Exchange Regulations provide with respect to the remittance of upfront fees:

• Generally, the amount of such upfront fees shall not exceed 15 percent of the total
amount of the overseas direct investment; however, a domestic institution may apply
for remittance of more than 15 percent of the total investment amount as upfront fees,
if necessary;

• The upfront fees shall be credited against the total amount of the overseas direct
investment upon remittance of the investment funds; and

• After remittance of such upfront fees, if the MOC approval procedure is not
completed within 6 months, or (upon approval of an application for an extension
for up to an additional 6 months) up to 12 months at the latest, any unspent portion
of the upfront fees previously remitted outside the PRC, if any, must be remitted
back under the supervision of the relevant foreign exchange authority.

4. Provision of Commercial Loans and Security to Offshore Subsidiaries

The Foreign Exchange Regulations expressly stipulates that a domestic institution

may provide its directly-invested overseas subsidiaries with commercial loans or
security in compliance with the Regulations of the People’s Republic of China on
Foreign Exchange Administration (《中华人民共和国外汇管理条例》) and other
relevant regulations. This stipulation enables a domestic institution to provide
continuous financial support to its offshore subsidiaries. Special attention should be
paid to the relevant regulations governing the security to overseas institutions when the
Chinese investors are planning such financial support.

5. Disposition of Foreign Exchange Profits and Capital Gains

According to the Foreign Exchange Regulations, domestic institutions may remit back
profits and capital gains with respect to the overseas direct investments. These profits can
either be remitted back or placed in a foreign exchange current account or can be settled (i.e.,
converted into RMB). In addition, the capital gains on foreign exchange derived from a
capital deduction, a transfer of equity, a liquidation of established overseas enterprise, etc.,
can either (i) be remitted back through a special assets capitalization foreign exchange
account, or (ii) be kept abroad upon approval of the relevant foreign exchange authority.

4
Moreover, if a domestic institution transfers its equity in an overseas directly invested
enterprise to any other domestic institution, the consideration for such transfer must be
paid in RMB within the PRC. In such event, both parties must establish, amend, or cancel
(as applicable) their respective foreign exchange registration of overseas direct investment.

6. Application to Both Financial and Non-Financial Institutions

The Foreign Exchange Regulations provide that these regulations apply not only to
domestic non-financial institutions, but also to domestic financial institutions. Thus, the
Foreign Exchange Regulations unify the foreign exchange administration of outbound
direct investment.

See Annex I on next page.

For further information on this topic, please contact V&E lawyers Paul Deemer,
Xiao Yong, or David Blumental. Visit our website to learn more about Vinson &
Elkins’ China Practice.

This paper is intended for educational and informational purposes only and does not constitute legal advice or services.
If legal advice is required, the services of a competent professional should be sought. These materials represent the views
of and summaries of the author, and do not necessarily reflect the opinions or views of Vinson & Elkins LLP or of any of its
other attorneys or clients. It is not guaranteed to be correct, complete, or current, and it is not intended to imply or establish
standards of care applicable to any attorney in any particular circumstance. Prior results do not guarantee a similar outcome.

5
 Annex I

Regulations Abolished Pursuant to the Foreign Exchange Regulations

1. 《关于发布<境外投资外汇管理办法实施细则>的通知》（[90]汇管投字
第381号）— Circular for Promulgating the Implementation Rules of the Measures on
Foreign Exchange Administration of Overseas Investment ([1990] Hui Guan Tou Zi
No. 381)

2. 《境外投资外汇风险及外汇资金来源审查的审批规范》（1993年9月20日国家
外汇管理 局发布）— Criterion for Examination of the Risk of Foreign Exchange in
Overseas Investment and the Financial Source of Foreign Exchange (promulgated by the
SAFE on 20 September 1993)

3. 《关于对境外投资外汇风险审查和外汇资金来源审查书面结论统一规范的通知》
（[91]汇管投字第434号）— Circular for the Uniform Criterion for the Written
Conclusion of the Examination on the Risk of Foreign Exchange in Overseas Investment
and the Financial Source of Foreign Exchange ([1991] Hui Guan Tou Zi No. 434)

4. 《关于<境外投资外汇管理办法>的补充通知》（[95]汇资函字第163号）—
Supplementary Circular for the Measures on Foreign Exchange Administration of
Overseas Investment ([1995] Hui Zi Han Zi No. 163)

5. 《关于部分项目免缴境外投资汇回利润保证金的通知》（汇发[1999]287号）—
Circular on Security Deposit Exemption for Certain Projects on Remitting Back Profits
of Overseas Investment to China (Hui Fa [1999] No. 287)

6. 《国家外汇管理局关于简化境外投资外汇资金来源审查有关问题的通知》（汇发
[2003]43号）— SAFE Circular on Relevant Issues concerning Simplification of the
Examination on the Financial Source of Foreign Exchange in Overseas Investment (Hui
Fa [2003] No. 43)

7. 《国家外汇管理局关于扩大境外投资外汇管理改革试点有关问题的通知》（汇发
[2005]35号）— SAFE Circular on Relevant Issues concerning Enlarging the Pilot
Reform of the Foreign Exchange Administration of Overseas Investment (Hui Fa [2005]
No. 35)

8. 《国家外汇管理局关于调整部分境外投资外汇管理政策的通知》（汇发
[2006]27号）— SAFE Circular concerning Adjustment to Certain Policies on Foreign
Exchange Administration of Overseas Investment (Hui Fa [2006] No. 27)

9. 《国家外汇管理局关于下放境外投资外汇资金来源审查权限的通知》（汇发[2007]
47号）— SAFE Circular concerning Devolution of the Authority to Examine the
Financial Source of Foreign Exchange in Overseas Investment (Hui Fa [2007] No. 47)