In the original post in this series, Getting Money Out of China: It’s Complicated, I wrote on how incredibly frequently Western companies have been seeking the help of my firm’s China lawyers in an (often desperate) effort to get money out of China so they can get funds due to them on all sorts of deals. On our China Law Blog Facebook Page, I linked over to the original post and described it as “In which we begin to answer THE question everybody is asking.” That has turned out to be no exaggeration as that Facebook post alone has generated nearly 10,000 views. And the requests for help from American and European companies seeking assistance in getting paid from China show no signs of letting up. But as I noted in part 2 of this series, most of the requests deal with purchasing single family homes in the United States and “slapping together 3-5 single family homes and calling it a fund is not likely to make a difference with the Chinese government allowing money to leave!”
In part 2, I discussed how the Chinese government seems to apply a three part test in determining whether to allow funds to leave China to go to a Western company. Based on the many deals on which our China attorneys have worked, and the reports we get from our clients and their bankers and financiers, and from China consultants and bankers and financiers with whom we regularly share information, we see legitimacy and benefit to China and deal structure as the three key elements. In part 2, I looked at legitimacy. In part 3, I looked at the “benefit to China” element. In this post, part 4, I look at what is actually happening in China that is slowly down payments from China. In part 5, I will look at what has historically been the primary reason why foreign companies face China payment problems: how they structure and write up their deal. That post will also provide tips to increase your odds of getting paid.
It is widely believed that China recently changed its rules regarding outgoing funds, but that is not really correct. China’s regulations on sending money out of China have not changed. There is no limit on the amount a compliant Chinese company can send abroad. But Chinese banks — acting on instructions from Beijing — are becoming much stricter with remittances. This new strictness has come about in an effort to limit capital outflows and to make sure taxes are paid in China before money leaves the country.
Chinese law generally requires a Chinese company to obtain a “tax certificate” from its local tax bureau before more than USD$50,000 worth of RMB can be converted into a foreign currency and remitted abroad. As the name might suggest, the certificate confirms that the Chinese company has made all necessary tax payments on the money or has some kind of exemption for the money. To obtain the certificate the Chinese company needs to submit copies of the relevant contracts (and oftentimes invoices) and provide particulars of the transaction. The tax certificate must be presented to the foreign exchange bank before the payment transaction occurs.
The regulations provide for a blanket $50,000 exemption from approval. No proof or justification is usually required for up to the $50,000 limit. However, we are getting many reports of Chinese banks denying requests for RMB conversion of amounts below the $50,000 limit.
Sometimes, the real problem, especially with larger remittances, is simply that the Chinese company can’t get a tax certificate, or doesn’t want to get a tax certificate, because that would require it to pay taxes it wasn’t planning on paying. To be fair, problems sometimes arise when the Chinese company genuinely wants to make a remittance and is prepared to pay the applicable taxes. These problems vary depending on the type of payment. They mostly affect payments for services, royalty payments and Foreign FDI or M&A payments. Payments for the purchase of goods are generally not as complicated, so long as the foreign side has its own paperwork in order as well.
In my next post I will discuss what you can do in structuring your deal and drafting your contract to improve your odds of getting paid in full.