Many times over the years American clients of ours have asked us whether their buyers in China are telling the truth when they claim not to be able to pay the American company more than $50,000 in one year. Our response has always been that we were dubious of such a claim because we have other clients who get paid millions of dollars each year by their China buyers, but if they want us to research this issue for them, we would be happy to do so, at our regular hourly rates.
We had never researched this issue….until now.
And even now, we did not exactly do the research ourselves and the research is confined to money from Chinese citizens, not companies. We are involved in a case with a number of other law firms and in that case one of the Chinese parties said that they could not pay one of the law firms more than $50,000 this year. As you might have guessed, when a law firm’s own money is at issue, the research gets done and the following is what the law firm found:
- China controls inbound and outbound foreign exchange flows. If a Chinese citizen needs to make an overseas payment it is required to purchase the foreign funds with RMB from a bank qualified to do foreign exchange business. Most banks in China are qualified to do foreign exchange business.
- When converting RMB to a foreign currency at a Forex Bank, the bank is required to review whether the outbound capital is for investment or for regular payment. Outbound capital investment refers to overseas equity investment and is strictly restricted. Outbound regular payments are permitted, including those for overseas tours, training, relatives visitation, business negotiations, meetings, service, labor, etc.
- Legal service fees paid to an American lawyer for the service rendered is deemed a regular payment item. Chinese citizens can convert and remit freely up to USD $50,000 equivalent per year. Conversions exceeding the USD$50,000 quota is still possible, but the citizen cannot complete it at a bank counter freely; he or she must apply to the local State Administration of Foreign Exchange for written approval. Chinese banks will not let the extra conversion go without seeing SAFE’s approval letter.
- To secure approval to exceed the USD$50,000 limitation in yearly payments to an American attorney, the Chinese citizen needs to submit documents verifying the underlying transaction. The application documents mainly include: (1) an engagement letter/contract signed between the Chinese party and the American attorney; (2) notarization and legalization of the engagement letter/ contract; (3) tax return certificates of the US payee (theoretically the US attorney needs to pay Chinese withholding tax for the revenue gained from China); (4) a request for payment from the US attorney.
Well now we know.