China's foreign exchange rules to be relaxed

12 September 2013

Ai-Leen Lim, Rieko Michishita

Chinese Government relaxes foreign exchange administration rules in a bid to boost cross-border service trade transactions.

New Rules

At present, it is very difficult and time consuming to transfer money out of China due to stringent foreign exchange regulations, but this is going to change. In July, the Chinese State Administration of Foreign Exchange (“SAFE”) adopted new rules aimed at facilitating international payments and international receipts for service trade transactions. The new rules will become into force on 1 September 2013.  Service trade transactions include, amongst others, payments of intellectual property licence royalties and technology transfer fees.   

The implications of the new rules

The new rules facilitate international payments for service trade transactions mainly by (1) abolishing the administrative authorisation requirements for outbound international payments; (2) simplifying the documentation review performed by the banks prior to processing payments; and (3) simplifying the tax document submission procedure.

(1) At present, SAFE still requires administrative authorisation of outbound international payments in some exceptional cases.  This procedure will be abolished by the new rules, regardless of the amount of money transferred to a foreign bank account.

(2) According to the new rules[1], financial institutions will only perform document review if the payment exceeds a threshold of USD 50,000 (instead of USD 30,000 at present). The requirements for this document review will also be substantially relaxed.  Only the agreement between the parties and an invoice (“Fapiao”) will have to be submitted to the bank.  This means that, regarding payments pursuant to an IP licence agreement, the previously required recordal certificate of the IP licence agreement issued by the relevant local IP authorities (Patent Office, Trademark Office and Copyright Office), will no longer be required.

The removal of the requirement to present the IP licence recordal certificate is a great relief to foreign IP right holders granting licences to partners in China.  The licence recordal certificate is often misused by disgruntled former licencees after termination of the actual licence, because the recordal remains in place at the registry unless both parties agree to terminate the recordal.  Previously, the foreign licensor would have no choice but to obtain the licence recordal certificate in order to remit the royalties outside of China.  Now that this documentary requirement is removed, licensors will no longer have to run the risk of obtaining the licence recordal certificate.

(3) At present outbound payments above 30,000 USD still require a “Tax Confirmation Letter”, issued jointly by the State Tax Authority (STA) and the Local Tax Authority (LTA). Pursuant to the new rules however, the Tax Confirmation Letter will no longer be required. The new rules stipulate that in case of a transmittal above 50,000 USD, it will be the transmittal itself (instead of the Tax Confirmation Letter) that will have to be registered with the regional branch of the STA (instead of with the STA and LTA). The recordal form issued by the STA must subsequently be submitted to the bank, which can then process the payment. 

The new rules in practice?

After consulting with local offices of SAFE (including those in Beijing, Shanghai, Guangzhou and Shenzhen) regarding the abovementioned changes, we obtained information that the local offices will change the relevant regulations in compliance with the new Guidance and Implementing Rules.  However, we have been advised that the local banks may have different operating procedures within the limitations provided for by the new rules.  The banks we have made inquiries with, have informed us that they will only issue their new operating procedures after the new regulations take effect.

If you are a foreign IP licensor and require the remittance of royalties outside of China, we would recommend that you notify your local licensee of the new rules to ensure that they clarify the new remittance requirements with their local bank.  We would also recommend that you review the status of current IP licence recordals and consider whether to terminate the recordal to remove the potential risk of misuse by the licensee in view that the recordal is no longer required for royalty remittance.

This update gives general information only as at the date of first publication and is not intended to give a comprehensive analysis. It should not be used as a substitute for legal or other professional advice, which should be obtained in specific circumstances.

Authors

Michishita-Rieko

Rieko Michishita

Partner
China and Hong Kong

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