Originally published June 14, 2011


Recently, the Chinese government tightened its policies on foreign exchange and taxes with respect to cross-border mergers and acquisitions ("M&A") transactions. Local government authorities with oversight over foreign currency issues are now given discretion to deny applications to properly register funds designated for M&A transactions in China. In addition, a tax certificate is now required before funds can be remitted offshore.

As a result, we believe it will generally take more time to complete M&A transactions and that those not in compliance with the requisite foreign exchange and tax laws in China will be more frequently subject to fines and hurdles in the M&A process. In addition to complying with all PRC government regulations on foreign exchange and taxes, we recommend that parties to an M&A transaction in China consult with legal counsel to mitigate any potential negative effects the heightened regulatory environment will have on a proposed M&A deal.

1.1 China's Foreign Exchange Regulatory Framework

China maintains strict control over all types of foreign exchange transactions that take place across its borders, and its official currency, the Renminbi ("RMB"), is not freely convertible in the international currency markets. The State Administration of Foreign Exchange ("SAFE") is the main authority in charge of foreign exchange controls in China and is responsible for drafting the regulations, rules, standards, and policies that govern China's foreign exchange administration. SAFE also approves foreign currency and RMB flows in cross-border transactions and monitors foreign exchange bank accounts. SAFE regulates four (4) types of transactions which involve the movement of foreign exchange: inbound payments, outbound payments, conversion of foreign currency into RMB, and conversion of RMB into foreign currency.

The process SAFE uses to examine and approve foreign exchange flows requires the submission of documents from both the party purchasing the domestic shares or equity interests ("Acquirer") and the company whose shares or equity interests are being acquired ("Target").

In cross-border M&A transactions, either inbound payments or outbound payments are involved in the transfer of shares or equity interests (collectively, the "Shares"). An "Inbound Payment" refers to a payment by a foreign Acquirer to a domestic shareholder ("Transferor") to purchase Shares of the Target, and an "Outbound Payment" refers to a payment by a domestic Acquirer to a foreign shareholder of the Target to purchase the Shares of the Target. As such, every cross-border M&A transaction in China is subject to the examination, approval, and supervision of a number of different Chinese government entities, including SAFE and its local counterparts.

1.2 Increased Scrutiny of Inbound and Outbound Payments

Following the promulgation of the Provisions on the Takeover of Domestic Enterprises by Foreign Investors in 2006 (the "M&A Rules"), SAFE has promulgated certain regulations and circulars regulating Inbound Payments and Outbound Payments.1 Some parties in cross-border M&A deals have failed to comply with the requisite procedures. In response, SAFE recently allowed its local counterparts to decline applications to obtain or amend Foreign Exchange Certificate Cards (each a "Forex Card") by the Target companies.

The Forex Card contains information about the Target including its shareholding structure, the amount of foreign exchange approved for the M&A transaction involving the Target, and the Target's basic foreign exchange bank account information needed for the transaction. Only after the Target has obtained the Forex Card or a renewed Forex Card containing the new shareholding and foreign exchange amount can foreign parties receive any remittances from the Target. The Forex Card is a prerequisite for every cross-border deal that involves the transfer of foreign currency into or out of China, and SAFE's refusal to approve the Forex Card may substantially affect a cross-border M&A transaction and the parties involved.


2.1 Designated Forex Account

During the implementation of the above requirement, SAFE issued Circular 239 and Circular 137. According to these two circulars, in the event of a cross-border M&A deal involving an Inbound Payment, the domestic Transferor and/or the Target must submit certain materials and forms to SAFE which confirm the closing of the transaction as well as the transfer of the payment into a designated foreign exchange bank account ("Designated Forex Account"). The procedure for opening, making deposits to, and closing the Designated Forex Account is as follows:

  1. the equity holder of the domestic Target (domestic Transferor) or the Target itself (as the case may be) must first apply with SAFE for approval to open a Designated Forex Account to receive the payment for the Shares in foreign currency. The following materials must be submitted to SAFE:

    • application form for opening the Designated Forex Account;
    • application statement specifying the use of the proceeds, amount of foreign currency to be received, etc.; and
    • approval of the transaction from MOFCOM or its local counterpart.

  2. at the closing of the transaction, the domestic Transferor or the Target must also apply to SAFE to deposit the foreign currency into the Designated Forex Account in connection with the acquisition. Along with the application, the following materials must be submitted:

    • application form for the deposit of foreign currency;
    • application statement;
    • share transfer agreement;
    • most recent audited report of the Target;
    • deposit notice issued by the bank; and
    • capital verification report of the Target.

  3. to convert the foreign currency in the Designated Forex Account into RMB, the domestic Transferor must apply to SAFE to close the Designated Forex Account.2

2.2 Tightening of SAFE Policy

As mentioned above, in response to the failure of certain parties in cross-border deals to comply with SAFE's requirements on Inbound Payments, SAFE has recently taken measures authorizing its local counterparts to decline Target company applications to obtain or amend their Forex Cards. SAFE emphasized that in the event the above procedures have not been followed, legal compliance requires the following:

  1. where the foreign party has not yet paid any consideration in the equity transfer, the Target must reapply for the opening of the Designated Forex Account. Only after the Designated Forex Account has been established can foreign investors legally make payment for the Shares; or
  2. where the foreign investors have already made payments to the domestic Transferor of the Target with respect to the acquisition through other channels, SAFE requires that the Target first pay a fine administered by its examination department; otherwise the parties cannot proceed to register the foreign funds and currency received from the cross-border deals.

2.3 Impact on Deals

The Designated Forex Account and the recent tightening of SAFE policy are likely to have a significant impact on cross-border M&A deals. We have seen many cases, especially those involving global M&A transactions, where the Acquirer directly pays the equity purchase consideration for the Shares of the Target to an offshore affiliate of the domestic Transferor to avoid time-consuming foreign exchange examinations and approvals. Furthermore, some Acquirers failed to make payments via the Designated Forex Account because the parties were not aware of such requirements. In such cases, SAFE will decline the Target's application to obtain or amend its Forex Card and consequently, it will be unlikely for the foreign Acquirer to receive any payment remittances from the Target, including dividends, profit sharing payments, liquidation proceeds, capital reductions, etc. SAFE will require that the Target pay a fine for its failure to comply with its requirements on Inbound Payments.


3.1 Requirements Regarding Outbound Payments

SAFE and the State Administration of Taxation ("SAT") jointly issued several circulars, including Circular 64 and Circular 52, to ensure that taxes are duly paid in cross-border M&A transactions.

SAFE does not require the parties to set up a foreign exchange account for Outbound Payments. However, Circular 64 requires that if a domestic company (including a foreign- invested enterprise ("FIE")) or an individual wishes to remit an Outbound Payment and such remittance exceeds the amount of $30,000 in a single transaction, such company or individual must pay the applicable taxes and then apply for the Tax Certificate for Outbound Remittance of Payments ("Tax Certificate") prior to the remittance.

In the context of cross-border M&A transactions where a foreign shareholder of a Target transfers its Shares to a Chinese corporation, the domestic transferee must apply for a Tax Certificate through the taxation bureau located in its registered domicile, and then the domestic transferee must submit the Tax Certificate to SAFE before it can apply for any changes to its Forex Card which would allow the RMB to be converted to foreign currency and remitted offshore.

3.2 Application Procedures

Before remitting Outbound Payments, the relevant party must apply for a Tax Certificate from SAT by submitting the following application materials:

  1. the contracts, agreements or other documents setting forth the rights and obligations of both parties;
  2. the invoices or other documents of the foreign organization requesting payment;
  3. the tax payment certificate or approval document for tax exemption; and
  4. other materials requested by the tax authority.

3.3 Impact on Deals

Since SAFE now requires a Tax Certificate to make Outbound Payments, the Outbound Payment process will be lengthened. This will postpone the closing of a cross-border M&A deal in China. The time this procedure takes differs from case to case, depending on how long the relevant parties take to pay the taxes and how efficiently the tax authorities can handle the case and grant the Tax Certificate. As a result, parties to a cross-border M&A deal need to be aware of this process, to consult internally or with a financial advisor as to how long it may take to obtain the Tax Certificate, and to prepare for a prolonged closing.


Mergers and acquisitions by foreign entities in China are subject to increased scrutiny. The reminder by SAFE requiring the establishment and use of a Designated Forex Account to make payments for cross-border M&A transactions in China by foreign investors is evidence of a renewed focus by SAFE to actively monitor every cross-border M&A deal. Furthermore, there is also heightened scrutiny by SAT with respect to the tax issues surrounding cross-border M&A deals. In such a regulatory climate, it is imperative that foreign investors take greater precautions to structure any M&A transactions in compliance with all SAFE and SAT regulations.

If all approval documents for the Designated Forex Account and Tax Payment Certificate are not in place, SAFE may decline or suspend a Forex IC Card application. As a result, since no foreign funds can be wired through the Forex IC Card, the entire deal may be prolonged and the closing date will be delayed.

We suggest parties to a cross-border M&A deal consult with their legal counsel regarding the timeline and structure of their deal to avoid undue delays and penalties.

Furthermore, foreign investors may consider establishing a presence in China. This will entail setting up a PRC corporate structure to enable them to inject foreign currency into China, convert it into RMB, and use the funds to complete payments onshore. Once the funds have been approved and are in the onshore PRC corporate structure, the foreign investor can more freely purchase the assets and equity interests of PRC enterprises.


1. The circulars include, but are not limited to, Circular No. 239 Huifu [2007] (Reply on Opening of Capital Account and Retaining the Foreign Exchange Income from Shares Transferring by Domestic Institutions or Individuals) ("Circular 239"), Circular No. 137 Huizongfa [2008] (Notice on Distributing Implementation Measures on Foreign Exchange Matters in Foreign Direct Investment) ("Circular 137"), Circular No. 64 Huifa [2008] (Notice on Relevant Issues about the Submission of the Tax Certificate for Outbound Remittance of Payments of Service Trade, Income, Frequently Transferred and Partial Capital Items) ("Circular 64") and Circular No. 52 Huifa [2009] (Notice on Further Clarifying the Issues Concerning Tax Certificates for Outbound Remittance of Payments on Service Trade, Income, Frequently Transferred and Partial Capital Items to SAFE) ("Circular 52").

2. The SAFE requirements above are promulgated under the Regulation of the People's Republic of China on Foreign Exchange Administration promulgated by the State Council on August 5, 2008; the Regulation on the Administration of Surrender, Sales of, and Payments in Foreign Exchange promulgated by the People's Bank of China on July 1, 1996; the Regulation on the Administration of Domestic Foreign Exchange Accounts promulgated by the People's Bank of China on October 15, 1997; the Measures for the Administration of Individual Foreign Exchange promulgated on February 1, 2007; SAFE's Reply Regarding the Settlement of the Domestic Individual's Foreign Exchange Income Generated from the Equity Transfer to the Foreign Investors; the Registration Issues of the Foreign Funds and Foreign Exchange; and the Interim Provisions on the Takeover of Domestic Enterprises by Foreign Investors promulgated by SAFE and the Ministry of Commerce (the "MOFCOM") on September 8, 2006 and amended on June 22, 2009.


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.