What happen if a foreign invested enterprise (FIE) in China requires additional funds? The alternatives are mainly two: (i) increase of registered capital, or (ii) obtain a loan.

In China both options required pre authorization from competent PRC Authorities (in particular from the competent branch of the State Administration for Foreign Exchange, “SAFE”) and were subject to a tight scrutiny: from 13 May 2013 entered in force the Operational Guidelines for the Registration of Foreign Debt (the “Guidelines”), that aim to both clarify some issues on the matter and, especially, to simplified the approval and registration procedures for obtaining and using a foreign loan.   In this article, we would like to report just some of the main provisions contained in such Guidelines.

For instance, even before the Guidelines, PRC laws and regulations on foreign debt restrict the amount of loan that a FIE can lawfully obtain to a percentage of the FIE’s registered capital. To simplify, it can be said that by checking a FIE bylaws and Business License, it could be noted a discrepancy between the registered capital and the total amount of investment: such discrepancy corresponds to the amount that a FIE may request as loan.

With the Guidelines such restrictions have been confirmed, but, finally, some ancillary aspects have also been clarified: for instance, in order to successfully request approval to a foreign loan, the foreign investor of a FIE should have paid at least one installment of its portion of registered capital. In addition, the amount of loan that can be lawfully requested and approved shall be proportioned to the portion of registered capital actually paid by the foreign investor at the moment of the request for approval of the loan itself. In fact prior practice, in absence of specific legislation, considered the amount of registered capital paid by any investor of a FIE (either foreign or Chinese), and, in calculating the amount of loan that could have been approved, the total amount of registered capital (whether paid in or not) was taken in consideration.

As anticipated, the new legislation also introduced some simplification in the administrative procedures: for instance, after the issuance of the Guidelines, and in case of a loan received by entities that differs from financial institutions, a FIE may directly open a specific account to receive the loan, convert the loan in RMB, and repay the loan and the relevant interests without SAFE pre-approval and simply by dealing directly with the FIE’s bank. Such legislative amendments should positively help many FIE in managing the amounts obtained as foreign loans by eliminating some of the bureaucratic impediments that discouraged many enterprises from even apply for a foreign loan.

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