- More foreign firms are having problems getting paid
- Rules haven’t changed and there is no limit on amounts
- Chinese banks are becoming stricter with certain remittances
Our China lawyers have seen a spike in queries from foreign companies encountering problems getting paid by Chinese companies. I’m talking mostly about private Chinese companies without affiliates or assets abroad. This is the first post in a series I will be writing on the new issues in getting money out of China.
An excuse commonly offered to the foreigner by the Chinese company is that the rules have recently changed so foreign payments are no longer possible or practicable. Another one is that the Chinese company is simply not allowed to send more that $50,000 at a time or even $50,000 in total each year. Is there any truth in this?
The underlying regulations have not changed and there is no limit on the amount that can be remitted abroad by a compliant Chinese company. But Chinese banks are becoming much stricter with certain types of remittances. This new strictness has come about in an effort to limit fraudulent capital outflows and to make sure tax is 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 $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 required, up to the $50,000 limit. However, in June of last year, Chinese banks began arbitrarily 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 tax 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 look at the delays and complications affecting different types of payments.
—This post was first published on the China Law Blog.
