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China: Foreign exchange measures to facilitate cross-border trade and investment

China: Foreign exchange measures

The foreign exchange authorities introduced 12 new measures to facilitate China cross-border trade and investment.

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Huifa [2019] No. 28 was issued by the State Administration of Foreign Exchange (SAFE) in October 2019 and is referred to as SAFE Circular 28. Among the measures in SAFE Circular 28 are provisions to remove restrictions on foreign invested enterprises (FIEs) from using their registered capital for domestic equity investments. The restrictions previously applied when these were not “FIE investment enterprises” (i.e., FIEs with equity investment as a listed activity in their registered scope of business). The change builds on earlier pilot programs and is intended to facilitate the expansion of foreign business and investment in China.

FIE investment in domestic equity

Since 2008, policies governing FIE use of registered capital for domestic equity investment have evolved:

  • SAFE Circular 142 (2008) stipulated that the RMB capital obtained by an FIE from foreign exchange settlement had to be used within its approved business scope. Such RMB capital could not be used in domestic equity investment, unless specifically provided (for instance, pursuant to the regimes for FIE investment enterprises). In addition, FIE investment enterprises—such as foreign invested venture capital investment enterprises (FIVCIEs) or qualified foreign limited partnerships (QFLPs)—could only transfer RMB capital for equity investment after obtaining SAFE approval. Subsequent SAFE Circulars 59 (2012), 21 (2013), 13 and 19 (both 2015) simplified the foreign exchange (forex) administration processes, but did remove the limitation on FIE non-investment enterprises. 
  • In July 2019, the Shanghai and Shenzhen SAFE branches issued Shanghai pilot FTZ policy and Notice 19. These guidance items provided that FIE non-investment enterprises in the Shanghai FTZ and Qianhai/Shekou area could use their forex capital account and RMB capital obtained from foreign exchange settlement to undertake domestic equity investment—subject to the investment being “genuine” and reasonable, and complying with the foreign investment “negative list.” Under the latter, certain sectors are prohibited or restricted for foreign investment or may need to meet special conditions and get special approvals.

SAFE Circular 28 effectively adopts this treatment and uses substantially similar treatment for FIE non-investment enterprises nationwide. 

SAFE Circular 28

Implications of SAFE Circular 28 for foreign investors include:

  • Previously, FIE non-investment enterprises could only invest in China equity by using their accumulated business profits. Going forward, foreign investors have more flexibility to use foreign capital to establish enterprises in China (e.g., by establishing onshore holding companies and underlying China operating companies), conduct mergers and acquisition, and undertake restructurings. There is no need to change the business scope to include “equity investment” to do so.
  • In view of this, FIE non-investment enterprises could become an alternative structure for making domestic equity investments (alongside QFLP, FIVCIEs, and other variants of FIE investment enterprises). The tax rules are clearer for FIEs than for other investment platforms such as QFLP.  FIEs can also benefit from the incentive in Circular 102 (2018) which defers the application of withholding tax on dividends when profits are reinvested in China. 
  • “Red chip” structures (that is, Chinese companies with a Hong Kong or Cayman top company as listing entity) may also benefit. These can inject the foreign capital raised overseas into their onshore controlled entities, which can then make onward domestic equity investments.


KPMG observation

  • SAFE Circular 28 provides that the domestic investments made with registered capital must be “genuine” and reasonable. It is not entirely clear what this means—it could be that capital cannot be invested in companies without a substantive business. Further guidance is needed in this regard.
  • SAFE Circular 28 states that FIE non-investment enterprises can use registered capital in domestic equity investments. The Shanghai FTZ pilot policy goes broader, allowing foreign debt and other capital to be used as well. It remains to be seen whether the scope of Circular 28 will be similarly expanded.
  • There are differences in the cash flow and registration procedures for FIE non-investment enterprises and FIE investment enterprises. The latter can directly remit capital into the RMB settlement accounts of subsidiaries or equity transferors without restrictions. The subsidiaries or equity transferors themselves do not need to complete an information registration on receiving the payments. FIE non-investment enterprises are subject to more cumbersome rules.


For more information, contact a KPMG tax professional:

David Ling | +1 609 874 4381 | davidxling@kpmg.com

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