Besides registered capital and financing through operational payments, a keyway for international investors to finance their Chinese operations is through foreign loans to their subsidiary. To do so, international companies need to understand several key legal conditions.
As China continues to apply strict foreign exchange controls on capital payments, a fundamental pre-condition to the foreign debt instrument is to register it with the local State Administration for Foreign Exchange (SAFE). While SAFE does not set a lot of conditions on the loan and so registration is mainly procedural, these days the process sometimes takes several months to complete.
In addition, China's National Development and Reform Commission (NDRC) has set requirements for certain foreign debt instruments, which may require the issuance of the Certificate of Registration for Foreign Debts Issuance (in Chinese: 企业借用外债审核登记证明). Obtaining this Certificate could take 3 months or even longer, and so from a procedural perspective this is a key issue to consider.
Maximum Loan Amount
Under China's thin capitalization rules, there are two ways to calculate the maximum foreign loan that a Chinese limited company can receive from abroad:
- Under the Investment Gap Mode (in Chinese: 投注差模式), the maximum foreign loan amount is the difference between the total investment and the registered capital, proportional to how much of the registered capital has been paid up. Every foreign-invested enterprise has a set total investment amount (as per its Articles of Association), for which the law sets the maximum.
- Under the Net Asset Mode (in Chinese: 全口径宏观审慎模式), the maximum foreign loan amount is calculated as a multiple of the Chinese company's net assets. This multiple depends on the term of the loan and whether the loan is provided in CNY or foreign currency.
Foreign debt instruments are an acceptable means to finance operations. However, under Chinese thin capitalization rules, businesses will more likely see it as an additional way rather than the only way. At the same time, pre-approval is required and procedures are fairly lengthy. Thus, international companies are advised to strategize as early as possible.
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.