In 2016, we did a six part series on legally getting money out of China. We wrote that series during a time when China was hyper concerned about foreign currency leaving China. China is about ten times more concerned with that now than then.
In our original post in this series, Getting Money Out of China: It’s Complicated, we wrote how Western companies were contacting our China lawyers to get money out of China to get paid 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 turned out to be no exaggeration as that Facebook post ended up generating around 25,000 views in just its first few days.
In part 2, we 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: legitimacy of the deal, benefit to China, and deal structure as the three key elements. Our Part 3 focused on the “benefit to China” element and Part 4 was on what was happening in China that was slowing down payments from China. In Part 5, we focused on increasing your odds of getting paid. In Part 6, we talked about how important it is to draft your China contracts with the Bank of China and the Chinese Government in mind and how important it is to draft your contracts assuming the money you need will never leave China.
One thing we rarely write about on here is getting the money your WFOE or Joint Venture earns in China. That is mostly because but with a few short term exceptions when China really wanted to shut down foreign currency from leaving China, this is rarely a problem. When our clients for whom we were forming a WFOE would ask us about transferring the WFOE’s profits from China to their home country, our stock response has been something like the following: “Generally, if you operate legally in China and you have paid your taxes, that should not be a problem.” This was our stock response because it was true.
It is still probably true now but I am less certain of this. In just the last week we have heard from a bunch of WFOEs who for the first time are having trouble getting their profits out of China and the troubles we are hearing about this are, well, troubling. These companies are being told that they did not comply with this or with that and in once instance, the bank essentially told them not to come back. What is going on here?
Still not entirely clear, but our suspicions are as follows:
1. Some of these instances could just be a bank or even just a person at a bank pissed off about geopolitics and taking revenge against the WFOE because of this.
2. It could be the case that money is not going to leave because money is not going to leave. We really doubt this.
3. The most plausible explanation is that China’s banks will still let money leave if all of the WFOE or Joint Ventures ducks are in a row, but the ducks in a row standard/measurement just got a lot tougher.
What we are telling our clients is that they should not go to their bank to send money out without first making sure that they have done everything they need to do to get their money out of China AND that they have gathered all of the evidence of that in a format for presenting to the bank along with their request to get the money out. Everything about this presentation for the bank should be done so as to “make it easy” for the bank to say yes to your money leaving China. Needless to say, this means it should be in Chinese. We will be working with the companies that have been denied being able to send their money out of China but as is always true with China, once declined for anything, your chances of eventual success decline as well. So again, do not go to your China bank to get money out of China without first being 100% prepared with your advocacy piece as to why you should be allowed to do so.
What are you seeing out there?