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China – SAFE’s New Rules Simplify Foreign Exchange Receipts And Payments For The Service Trade.

25 September, 2013

 

On 18 July 2013, the State Administration of Foreign Exchange (SAFE) of China released the Circular Regarding Foreign Exchange Administration of Service Trade (Huifa [2013] No. 30) (“Circular“), which includes Guidelines for the Administration of Foreign Exchange Under Service Trade and Detailed Rules for the Implementation of the Guidelines for the Administration of Foreign Exchange Under Service Trade, as well as a list of 49 SAFE regulations to be abolished. The Circular became effective on 1 September 2013. The Circular marks a significant relaxation of China’s foreign exchange controls and facilitates the making of service trade related foreign exchange payments.


The Circular applies to foreign exchange receipts and payments (“FERP“) related to trade in services, including service fees, dividends, royalties, profits, expense reimbursements and other current account matters other than trade in goods (“Service Trade“). It relaxes regulatory restrictions and simplifies procedures related to the Service Trade FERP for legitimate transactions and eliminates the need to provide supporting documentation for service related remittances of USD 50,000 or less.


The Circular cancels SAFE approval requirements for Service Trade FERP. The relevant financial institution involved in the remittance, normally an onshore commercial bank in China, now has the authority to directly process Service Trade FERP without SAFE’s pre-approval. While a prompt report of the remittance to SAFE is still required, SAFE action is not required for the remittance. SAFE will continue monitor Service Trade FERP via the foreign exchange monitoring system and will have the authority to conduct on and off site verification or inspection of abnormal FERPs. The onshore institutions/individuals and the financial institutions involved must comply with the relevant regulatory requirements and will be responsible for timeliness, completeness and accuracy of the submitted information.


Transaction documents (“交易单证”) will no longer be required to be submitted to the relevant financial institution for review or verification for a single Service Trade FERP in an amount of USD 50,000 or less, unless the source of FERP funds is unclear or the remittance is suspicious, in which case the financial institution shall require the relevant onshore institution/individual to submit transaction documents for review. Based on the SAFE statistics, almost 88% FERP transactions involve less than USD 50,000. This should significantly ease the remittance process.


The transaction, however, needs to be legitimately under the threshold. The Circular explicitly prohibits the intentional splitting of single transactions into multiple transactions to avoid the threshold. Such illegitimate splitting will be subject to aggregation, and SAFE may impose a fine up to 30% of the foreign exchange remittance amount. In serious cases, which are not clearly defined, SAFE may impose a fine of between 30% to 100% of the said remittance amount.


In contrast, when handling a single FERP transaction related to Service Trade in an amount over USD 50,000, the financial institution shall review, verify and retain transaction documents, which are required to be compliant with PRC laws, regulations and prevailing business practices. The required documentation may include a contract, invoice/settlement list and special documents based on the nature of the service transactions. Chinese translations of any foreign language transaction documents will be required.


The Circular also cancels many pre-approval and pre-registration requirements. It is no longer necessary to produce the relevant tax payment certificate to arrange the outbound remittances of over USD 50,000, but the onshore payer shall make recordal filing with the state tax bureau through the submission of the duly-stamped contract or relevant transaction documents (with Chinese translations). Standard Tax Recordal Filing Form of External Payments under Trade in Services and Other Items will normally need to be submitted with certain exceptions as specified in the Announcement of the State Administration of Taxation and the SAFE on Taxation Record-filing of External Payments under Trade in Services and Other Accounts (Announcement 2013 No. 40 of the State Administration of Taxation and the SAFE) released on 9 July 2013. A Standard form will be returned affixed with the chop of the state tax bureau to the payer for filing with the financial institution.


SAFE has also relaxed its restrictions on the offshore deposit of the foreign exchange income. An onshore institution (exclusive of any onshore individual) in service trade may retain its service trade foreign exchange income in an offshore foreign exchange deposit account (“Offshore Deposit Account“) and use it to receive payments from its offshore payers. Nevertheless, an onshore institution must satisfy certain conditions in order to open such an account (i.e. the onshore institution must be engaged in the service trade, have service trade foreign exchange income and ongoing payment and settlement needs overseas, and be free of violations of SAFE’s regulations for the prior two years, etc.) and, the opening of such an account is subject to SAFE approval. Deposits in an Offshore Deposit Account are not permitted to exceed 50% of the account holder’s total service trade related foreign exchange income for the last year.


These changes should greatly facilitate the handling of foreign exchange service payments. The simplification of the procedures for remittances of USD 50,000 or less should be particularly welcome as should the elimination of the tax pre-payment requirement, although the taxes themselves will remain applicable.

 

Deacons

 

For further information, please contact:

 

Edwarde Webre, Partner, Deacons
edwarde.webre@deacons.com.hk


Lynn Lin, Deacons
lynn.lin@deacons.com.cn

 

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