Capital injection has been necessary for some foreign businesses due to recent events. Declining revenues and business closures are not all that COVID-19 has brought to the world. It has somehow boosted some companies and even caused great success in others.
At the beginning of the pandemic, physical stores faced great difficulty in keeping open due to the mass lockdowns. However, online shopping and deliveries improved all over the world. With the virus being a pandemic now, the solution and aid often come from across borders as well. Foreign aid, additional capital, and other transactions have continued back and forth between countries. With those cross-border transactions and payments come related tax charges that also benefit the taxing country.
Read more about it in our previous article Cross Border Payments and Related Tax Charges in China
What are the rules on foreign capital injection in China? What do businesses need to know? Keep reading!
What is Capital Injection?
Capital Injection, as the name suggests, is a way of boosting a business by having individuals or other businesses invest capital. It usually comes in the form of lump-sum cash, but may also consist of equity or debt. Although the transaction generally implies that investment is received by a business in distress, it may also pertain to any lump-sum or one-time investment. Purposes of capital injection may come in the form of:
- startup funding for new businesses;
- growth or expansion;
- initial public offerings;
- financial distress; or
- bailout funding.
Capital Injection in China
China’s State Administration on Foreign Exchange (SAFE) provides rules and regulations to facilitate foreign investment, including capital injection.
Foreign exchange capital funds voluntarily settled by foreign investors
“Voluntary settlement of foreign exchange capital funds of Foreign Invested Enterprises (FIEs)” means that foreign exchange capital funds in the FIE capital fund accounts can be settled in banks according to their actual business operational requirements. The local foreign exchange bureau recognizes these funds as the rights and interests of capital contributions. Banks, therefore, shall examine and verify the authenticity and compliance in the use of the funds for prior transactions of foreign exchange settlement.
Management of bank accounts
China’s SAFE requires FIEs to open a separate bank account (“capital account”) for foreign exchange funds settled and to be paid (“settlement and payment accounts”) for the deposits of RMB proceeds from the voluntary settlement of foreign exchange. This must be done on a one-to-one corresponding basis. These bank accounts are for the foreign exchange capital funds and for transactions of various payments/receipts through these accounts. However, RMB proceeds from payments in foreign exchange settlement other than mentioned above shall not be used for payments through the settlement and payment accounts.
Have a look at our article on the Types of Bank Accounts for Foreigners in China
For Capital Fund Accounts
Receipts in the FIE capital fund accounts should include:
- Foreign exchange capital funds remitted from overseas or capital funds subscribed to and contributed by foreign investors. This includes contributions from non-resident deposit accounts, offshore accounts, and domestic foreign exchange accounts of foreign individuals;
- Foreign exchange capital funds or capital funds subscribed to and contributed as transferred from special accounts for security deposits of overseas remittances;
- Funds returned after transfers (subject to other regulations)
- Funds received from the capital funds account of the same name;
- Returned funds due to revocation of the transactions;
- Received interest income; and
- Other receipts registered or approved by the foreign exchange bureau.
On the other hand, the scope of payments from the capital fund accounts include:
- Foreign exchange settlement within the business scope;
- Transfers through the foreign exchange settlement into the settlement and payment accounts;
- Domestic transfers in the same currency to the special accounts form security deposits of domestic transfers;
- Capital fund accounts of the same name;
- Accounts for entrusted loans;
- Special accounts for concentrated funds management;
- Special accounts for overseas lending, domestic reinvestments, and foreign debt;
- Outward remittances owing to capital reductions or withdrawals by foreign investors;
- Outward payments for current items; and
- Other capital items expenditures registered and approved by the foreign exchange bureau.
For Settlement and Payment Accounts
The scope of the receipts include:
- Funds from foreign exchange settlement as transferred from the corresponding capital funds accounts;
- Domestic accounts for the rationalization of assets or accounts for domestic reinvestments;
- Funds returned after transfer from these accounts following regulations;
- Returned funds due to revocation of the transactions;
- Received interest income; and
- Other receipts registered or approved by the foreign exchange bureau.
The scope of payments from these accounts include:
- Expenditures within the business scope;
- Payments of the RMB security deposit;
- Transfers to the special account for centralized funds management;
- Repayment of RMB loans after completed utilizations;
- Foreign exchange purchases and payments or direct outward repayments of foreign debts;
- Direct outward payments or foreign exchange purchases and payments owing to capital reductions or withdrawals by foreign investors;
- Foreign exchange purchases and payments or direct outward payments for current item expenditures; and
- Other capital item expenditures registered or approved by the foreign exchange bureau.
Prohibition on the use of capital funds
For the utilization of funds to be according to this regulation, principles of Authenticity and Self-use within the business scope must be followed. That is, FIE capital funds and RMB funds from their settlement shall not be directly or indirectly used for expenses outside the business scope, or against the law.
Moreover, generally, using these funds for security investments is prohibited as well, whether they are used directly or indirectly. Since these accounts are for the purpose of investments from foreign exchange, using these accounts for the supply of RMB entrusted loans is also prohibited (unless permitted by the business scope).
In addition, payment of expenses relevant to the purchase of real estate not for one’s own use, unless as a foreign-invested real estate enterprise, is also prohibited.
Allowable methods for conversion of foreign currency capital into CNY
- Conversion to pay suppliers: There is no limit to this transaction and all documents requested by the bank must be provided such as contract, invoices, etc.
- Conversion for “PETTY CASH”: There is a limit of USD 100,000 per month and in order to convert additional batches, proof of payments must be made available. To avoid time-consuming trips to the bank, it is recommended to bring sufficient first batch. Note that the conversion for petty cash can only be carried out again after the previous conversion is completely used up.
Furthermore, there are some restrictions to which the usage of conversion capital is allowed. It is best to seek advice from local experts in order to avoid future conflicts. On the other hand, the bank and SAFE rules renew their related rules on foreign capital injection and conversion from time to time. Therefore, it is also best to contact your bank or take assistance from advisory firms for detailed requirements before taking any action.
Conclusion
Knowing the basic intricacies that surround foreign capital injection is important to have sound business transactions in China. Moreover, strict rules and regulations may be implemented for the benefit of all concerned. But this does not mean that foreign investments are discouraged. This means that foreign interest is well safeguarded to prevent fraud of any kind.
Contact us
S.J. Grand’s corporate finance advisory services can assist you in matters concerning foreign capital injection in China. Our local experts will assist you throughout the requirement and procedures. Contact us to get you started.
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