BRIGHT & RIGHT华沛德 - China International Business Lawyers中国涉外商务律师/出版物

Dr. Michael (Zuowei) Liu, Dr. jur. (Münster), LL.M. (Münster), M. A. in English, Attorney-at-Law & Partner

With the rush flow of foreign capital into the market of Mainland China (hereinafter called “China”) with the open-door policy in China since 1978, lasting for more than thirty-three (33) years until now, during which the foreign capital has become full-fledged, playing rather main or dominant roles in many sectors of business life in China now, the domestic capital in China has been trying to develop as fast as it can, and it has finally come to the stage where it can now tentatively probe its fledging outside China. Compared with the development of foreign capital in China, which is like a mature business man, enjoying his business success in China, the development of Chinese domestic capital in foreign countries is, to some extent, rather like a baby-boy, trying to walk independently without the mum’s support, thus the success stories of local Chinese capital in foreign countries can seldom be read nowadays. However, that baby-boy has got to grow up one day, and the trend of Chinese domestic capital into the foreign countries is irresistible, in particular facing that unsustainable mode of economic development in China, which has used up the natural resources and destroyed the natural environment and made the mass local residents herein suffer therefrom. Consequently, the Chinese government has made the relevant administrative regulations to regulate and guide the outbound investment from China into foreign countries.

Though the outbound investment from China into foreign countries is either done by Chinese enterprises or individuals, the outbound investment by the enterprises in China will be the main focus herein, as it is the main stream of the capital flow from China into foreign countries, and it is the main target of the governmental administrative regulations in China, which is manifested in the official definition of outbound investment as the acts of establishing overseas non-financial enterprises by way of new establishments, mergers, acquisitions and the like or the acts of obtaining equity interests such as the ownership, right of control, right of operation and management and the like in the non-financial enterprises by the enterprises legally incorporated in China (Art. 2 of Administrative Rules on Outbound Investment, promulgated by the Ministry of Commerce of People’s Republic of China on March 16, 2009, which has entered into full force and effect since May 1, 2009). While the capital flow by individuals from China into foreign countries, which remains the branch stream, is not the focus herein, though it is subject to another type of governmental administrative regulations in China, and is undergoing progressive reforms at the moment in China in the direction of less restriction and more encouragement[2].

The key concern of the legislation on the Chinese outbound investments is the relevant approving procedures required by the competent governmental institutions in China, which, in nature, belongs to the administrative permission, whereby the relevant governmental examination is concentrated on the consistency with the relevant national policies and strategies of China for the sake of safeguarding the national interests of China. That means, the relevant administrative approving procedures do not involve the examination of such business factors as market prospect, economic profitability, project funding, technology support and the like of the outbound investment project itself, for the business feasibility and decision are to be made and the business risks are to be taken by the investor alone (so Art. 9 II of Administrative Rules on Outbound Investment in conjunction with Item 3 of the Notice by Commission of Reform and Development on the Good Implementation of Delegation of Approving Authority on Outbound Investment Projects, Commission of Reform and Development on Foreign Investment (2011) No. 235, dated on February 14, 2011).

1. Outbound investments with special appraisal, approval & registration required in China

One outbound-investment project by one Chinese enterprise, which depends upon its specific circumstances of investment, such as the origin of capital, the investment target, the scale of capital in foreign currency and the like, can be subject to the relevant appraisal and approval procedures.

If a state-owned enterprise in China plans to invest outside China, the relevant legal provisions in the Law on the State-owned Assets in Enterprises of People’s Republic of China, which has come into full force and effect since September 1, 2009 (hereinafter shortened as “Enterprise State Assets Law”), such as Artt. 30-38 on the general conducts of such enterprises and Artt. 47-50 on the relevant appraisal procedures therein, and in particular, the Interim Measures for Appraisal Management of State-owned Assets in Enterprises of People’s Republic of China (which has come into full effect and force since September 1, 2005), where the detailed appraisal procedures are prescribed, shall be observed. Only when the relevant legally prescribed procedures therein are implemented, such outbound investment project can be moved forward to the next step.

As to the investments to be made by the enterprises managed by the Chinese central government, for which there have been the circumstances of chaos or vicious competition among such enterprises recently, such outbound investment projects are now additionally subject to the following administrative procedures, for which the legal basis comes from the Interim Measures of Supervision and Management for Outbound Investments by Enterprises of Central Government[3] (hereinafter called “Supervision & Management Measures for Outbound Investments by Central Enterprises” )

The outbound investments herein refer to the acts of investment in the fixed assets, equity shares and the like in the territories outside China as well as in the regions Hong Kong, Macau and Taiwan by the enterprises of central government as well as the enterprises with their sole investments or the enterprises with their controlling shares (Art. 2 of Supervision & Management Measures for Outbound Investments by Central Enterprises).

The outbound investments by the enterprises of central government should be consistent with (i) the planning for the national economy and social development as well as the business policy for outbound investments, (ii) the directions in the state-owned economy layout and the structure adjustment, (iii) the enterprise development strategy and strategy of international management, whereby the main businesses will be highlighted, which is helpful to the enterprise’s international competition capabilities and (iv) the laws, policies and local customs in the country/region, plus (v) the scale of investment remains consistent with the capital management, assets balance, financing capabilities and financial capabilities of the enterprises (Art. 5 of Supervision & Management Measures for Outbound Investments by Central Enterprises).

The enterprises of central government as well as their sub-enterprises are further required to make the outbound investment plan, to establish and improve the management system for outbound investment (Art. 5 of Supervision & Management Measures for Outbound Investments by Central Enterprises). And such management system for outbound investment in the enterprises of central government is required to be registered in the Supervision & Management Commission for State-assets (Art. 6 1^st sentence of Supervision & Management Measures for Outbound Investments by Central Enterprises).

The said management system for outbound investment shall include the following contents: (i) the guiding direction and policies for outbound investment, (ii) the management institution for outbound investment as well as its functions, (iii) the decision-making procedure and management process for outbound investment, (iv) the system for management of risks in outbound investment, (v) the system for evaluation, examination, auditing of outbound investment and responsibility prosecution, and (vi) the supervision and management system for outbound investment in their sub-enterprises (Art. 6 2^nd sentence of Supervision & Management Measures for Outbound Investments by Central Enterprises).

The enterprises of central government shall make the yearly outbound investment plan, which shall include (i) the total scale of outbound investment, the source of capital and the capital composition, (ii) the circumstances on the key investment project such as project background, project contents, equity structure, location of investment, amount of investment, financing plan, project term, risk evaluation, investment return and the like, and submit such yearly outbound investment plan to the Supervision and Management Commission for State Assets in a timely manner (Art. 7 of Supervision & Management Measures for Outbound Investments by Central Enterprises).

In principle, the enterprises of central government are not allowed to make outbound investment in non-main business sectors, and when such a necessity to invest in a non-main business sector does exist, which is to be approved by the Supervision and Management Commission for State-owned Assets with the following documentations: (i) application for the investment in non-main business sector, (ii) the decision-making documents by the enterprises of central government on the outbound investment in the non-main business sector, (iii) the relevant documents such as the feasibility study report and the due diligence, etc., (iv) the report on risk evaluation, risk control and risk prevention for the outbound investment in non-main business sector, and (v) other necessary documents required (Art. 10 1^st passage of Supervision & Management Measures for Outbound Investments by Central Enterprises).

Based upon the relevant provisions on the supervision and management of the state-owned assets, the Supervision and Management Commission for State-owned Assets will take the following factors into consideration in the process of examination and approval: (i) the necessity of outbound investment in the non-main business sector, (ii) degree of influence of such investment upon the enterprise development strategy and the development of main business, (iii) the enterprise’s capabilities of investment burden and risk control and the like, and then give the written opinions thereupon within twenty (20) working days (Art. 10 2^nd passage of Supervision & Management Measures for Outbound Investments by Central Enterprises).

The enterprises of central government shall report the changes in the process of implementing the key investment project, such as the material changes to the contents of investment project, the big adjustment in the investment amount, the changes to the equity structure of investment target and the like, to the Supervision and Management Commission for State-owned Assets (Art. 11 of Supervision & Management Measures for Outbound Investments by Central Enterprises). For those outbound investment projects, which shall need the approval from the State Council or from the relevant departments in the State Council, the enterprises of central government shall copy those approval documents to the Supervision and Management Commission for State-owned Assets at the same time (Art. 12 of Supervision & Management Measures for Outbound Investments by Central Enterprises).

c. 　　Approval & registration for Chinese outbound investment by State Commission of Reform and Development

Meanwhile, depending upon the investment target, the scale of investment capital in foreign currency, Chinese outbound investment is subject to the approval by the State Commission of Reform and Development either on the national or provincial level and/or the registration in the State Commission of Reform and Development on the national level. To be exact, if the investment target of one Chinese outbound investment, which is to involve a large amount of investment capital in foreign currency, belongs to the development of natural resources in foreign countries, then, the relevant approval or registration herein is required.

Specifically, the national State Commission of Reform and Development is responsible for the approval of outbound investment project involving the development of natural resources in foreign countries, such as the investment in the exploration and development of crude oil, mines and the like, where the amount of investment from the Chinese party is more than 300 million US$, and for the approval of outbound investment project that does not involve the development of natural resources in foreign countries, where the amount of investment from the Chinese party is more than 100 million US$ (Art. 4 of Interim Administrative Rules on the Approval of Outbound Investment Projects, Decree No. 21 of State Commission of Reform and Development, which has come into full force and effect since October 9, 2004 in conjunction with Item 1 of the Notice by Commission of Reform and Development on the Good Implementation of Delegation of Approving Authority on Outbound Investment Projects, Commission of Reform and Development on Foreign Investment (2011) No. 235, dated on February 14, 2011). The national State Commission of Reform and Development is also responsible for the approval of outbound investment project involving a large amount of foreign currency, where the foreign currency to be invested by the Chinese party is more than 10 million US$, and if the foreign currency is more than 50 million US$, then, the relevant outbound investment project is to be finally approved by the State Council after the examination done by the national State Commission of Reform and Development (Art. 4 of Interim Administrative Rules on the Approval of Outbound Investment Projects, Decree No. 21 of State Commission of Reform and Development, which has come into full force and effect since October 9, 2004 in conjunction with Item 1 of the Notice by Commission of Reform and Development on the Good Implementation of Delegation of Approving Authority on Outbound Investment Projects, Commission of Reform and Development on Foreign Investment (2011) No. 235, dated on February 14, 2011).

Furthermore, the provincial State Commission of Reform and Development is responsible for the approval of outbound investment project involving the development of natural resources, where the investment capital from the Chinese party is less than 300 million US$, and for the approval of outbound investment project that does not involve the development of natural resources in foreign countries, where the amount of investment from the Chinese party is less than 100 million US$ (Art. 4 of Interim Administrative Rules on the Approval of Outbound Investment Projects, Decree No. 21 of State Commission of Reform and Development, which has come into full force and effect since October 9, 2004 in conjunction with Item 1 of the Notice by Commission of Reform and Development on the Good Implementation of Delegation of Approving Authority on Outbound Investment Projects, Commission of Reform and Development on Foreign Investment (2011) No. 235, dated on February 14, 2011). It is also responsible for the approval of other outbound investment projects where the amount of foreign currency as investment capital is less than 10 million US$, while the specific approvals are to be copied by the provincial State Commission of Reform and Development to the national State Commission of Reform and Development (Art. 5 of Interim Administrative Rules on the Approval of Outbound Investment Projects, Decree No. 21 of State Commission of Reform and Development, which has come into full force and effect since October 9, 2004 in conjunction with Item 1 of the Notice by Commission of Reform and Development on the Good Implementation of Delegation of Approving Authority on Outbound Investment Projects, Commission of Reform and Development on Foreign Investment (2011) No. 235, dated on February 14, 2011).

The approval document or the registration document obtained from the State commission of Reform and Development constitutes the precondition for effectiveness of all the other relevant legal documents for the Chinese outbound investment projects. Namely, before any binding legal document for the outbound investment is to be signed, the approval document or the registration document therefor is first to be obtained from the State Commission of Reform and Development (Art. 20 of Interim Administrative Rules on the Approval of Outbound Investment Projects, Decree No. 21 of State Commission of Reform and Development, which has come into full force and effect since October 9, 2004).

2. Outbound investments with normal approval required by governmental institutions for commerce in China

Those Chinese outbound investment projects with special appraisal, approval and registration required in China, as discussed above, as well as those others with no such special appraisal, approval and registration required, are further subject to the normal approval procedures by the Ministry of Commerce on the national level and the competent governmental institutions for commerce on the provincial level, as the Ministry of Commerce is in charge of the administration and supervision of the outbound investments on the national level and the competent governmental institutions for commerce on the provincial level are in charge of the administration and supervision of the outbound investments in their respective administrative regions, which is clearly prescribed in the Art. 4 of Administrative Rules on Outbound Investment, whereby the “Outbound Investment Administration System” will be established by the Ministry of Commerce, based upon which the Enterprise Outbound Investment Certificate is to be issued to the outbound investment projects that have been approved thereby (Art. 5 of Administrative Rules on Outbound Investment).

In the process of conducting the relevant approving procedures by the Ministry of Commerce on the national level and the competent governmental institutions for commerce on the provincial level, it is to check whether or not such an outbound investment project from China will

(i) violate the relevant laws and regulations of China, and/or impair the national sovereignty, the national security and the public interests of China;

(ii) impair the national relations of China with the relevant country(ies) or region(s);

(iii) possibly violate the rights and obligations in the relevant international treaties, to which China is a signatory state; or

(iv) be related to the relevant technologies and goods, which are prohibited to be exported outside China.

And if any of the aforesaid circumstances is to be found in the outbound investment project, then, the relevant approval is to be denied (Art. 9 of Administrative Rules on Outbound Investment).

The Ministry of Commerce of China is responsible for the approval of the relevant outbound investment projects

(i) in the foreign country with which China has not entered into the diplomatic relationship;

(ii) in the particular countries and regions (the list therefor is to be made by the Ministry of Commerce together with the Ministry of Foreign Affairs and the other relevant departments of China);

(iii) where the amount of investment by the Chinese party is more than 100 million US$;

(iv) where the interests of several countries (regions) are involved; and

(v) where the special purpose company is to be established therefor (Art. 6 of Administrative Rules on Outbound Investment).

c. Scope of approving authority by competent institutions for commerce on provincial level

The competent governmental institutions for commerce on the provincial level are responsible for the approval of the relevant outbound investment projects

(i) where the amount of investment by the Chinese party is more than 10 million US$ and less than 100 million US$;

(iii) for which the investment is to be sought and attracted within China (Art. 7 of Administrative Rules on Outbound Investment).

To initiate the approving procedure, the enterprise shall submit the following documents to the Ministry of Commerce or the competent governmental institution for commerce on the provincial level:

(i) Application, which shall contain the information on the name of enterprise in the foreign country, registered capital, amount of investment, scope of business, management term, source of investment capital, investment plan, equity structure, analysis of investment environment as well as the non-existence of circumstances specified in Art. 9 of Administrative Rules on Outbound Investment;

(iii) Articles of association of the enterprise in the foreign country as well as the relevant agreements or contracts;

(iv) Approval or registration document issued by the relevant departments in China;

(v) Early-phase Report on Outbound M & A for outbound investment in M & A; and

(vi) Other documents required by the competent governmental authorities (Art. 12 of Administrative Rules on Outbound Investment).

aa. Approving procedures for outbound investment projects by Ministry of Commerce

With respect to the outbound investment projects to be approved by the Ministry of Commerce on the national level (Art. 6 of Administrative Rules on Outbound Investment), the enterprises under the direct administration of the central government of China should directly submit their outbound investment projects to the Ministry of Commerce for approval, while the enterprises under the direct administration of the local government of China should submit their outbound investment projects to the Ministry of Commerce for approval through their respective competent governmental institutions for commerce on the provincial level (Art. 13 I of Administrative Rules on Outbound Investment).

The respective competent governmental institutions for commerce on the provincial level, after the receipt of the applications for the approval of outbound investment projects from the local enterprises, should, within ten (10) working days, excluding the time to be spent in obtaining the opinions on the relevant investment projects from the relevant Chinese embassies or consulates, conduct the initial examination regarding whether or not the application documentations are true or whether or not the circumstances for prohibition of approval in Art. 9 of Administrative Rules on Outbound Investment are existent, and with their agreement on the said applications, then submit their opinions on the initial examination together with the full application documentations on the relevant outbound investment projects to the Ministry of Commerce for final approval (Art. 13 II of Administrative Rules on Outbound Investment).

The Ministry of Commerce, after the receipt of the applications for the approval of outbound investment projects either from the respective competent governmental institutions for commerce on the provincial level or directly from the enterprises under the direct administration of the central government of China, will decide, within five (5) working days, whether or not the relevant applications are to be accepted, whereby the relevant applicants will be duly informed of the incompleteness of the application documentations and/or inconsistence of the application documentations with the legally required forms within five (5) working days, and after the acceptance of the relevant applications, should decide, within fifteen (15) working days, excluding the time to be spent in obtaining the opinions on the relevant investment projects from the relevant Chinese embassies or consulates, whether or not the approvals are to be granted to the relevant applications for the outbound investment projects (Art. 13 III of Administrative Rules on Outbound Investment).

bb. Approving procedures for outbound investment projects by provincial governmental institutions for commerce

With respect to the outbound investment projects to be approved by the provincial governmental institutions for commerce (Art. 7 of Administrative Rules on Outbound Investment), the applications of outbound investment projects for approval are to be submitted to the respective competent governmental institutions for commerce on the provincial level (Art. 14 I of Administrative Rules on Outbound Investment). And the said provincial governmental institutions for commerce, after the receipt of the applications for the approval of outbound investment projects directly from the enterprises, will decide, within five (5) working days, whether or not the relevant applications are to be accepted, whereby the relevant applicants will be duly informed of the incompleteness of the application documentations and/or inconsistence of the application documentations with the legally required forms within five (5) working days, and after the acceptance of the relevant applications, should decide, within fifteen (15) working days, excluding the time to be spent in obtaining the opinions on the relevant investment projects from the relevant Chinese embassies or consulates, whether or not the approvals are to be granted to the relevant applications for the outbound investment projects (Art. 14 II of Administrative Rules on Outbound Investment).

If the approvals are to be granted to the relevant outbound investment projects specified in Artt. 6, 7 of Administrative Rules on Outbound Investment, then, the written decisions on approval should be made and the Enterprise Outbound Investment Certificates should be granted by either the Ministry of Commerce or the relevant competent provincial governmental institutions for commerce, and if the approvals cannot be granted by the either the Ministry of Commerce or the relevant competent provincial governmental institutions for commerce , then, the written notices with the relevant statement of grounds will be given to the relevant enterprises, whereby the relevant enterprises will be informed of their rights in putting forth administrative reviews or administrative claims against such governmental decisions (Art. 15 of Administrative Rules on Outbound Investment).

dd. Simple approving procedures for other kinds of outbound investment projects

With respect to the other kinds of outbound investment projects that do not belong to those specified in Artt. 6, 7 of Administrative Rules on Outbound Investment, the enterprises under the direct administration of the central government of China should submit the Application for Outbound Investment for their respective outbound investment projects through the “Outbound Investment Administration System” to the Ministry of Commerce for the approving procedure, and the enterprises under the direct administration of the local government of China should submit the Application for Outbound Investment for their respective outbound investment projects through the “Outbound Investment Administration System” to the competent provincial governmental institutions for commerce for the approving procedure (Artt. 8, 16 I of Administrative Rules on Outbound Investment). The Ministry of Commerce and the competent provincial governmental institutions for commerce, will respectively conduct the examination of the Application for Outbound Investments submitted, within three (3) working days after their receipt, and grant the Enterprise Outbound Investment Certificates when the Application for Outbound Investments are completely fulfilled and consistent with the legally prescribed form (Art. 16 II of Administrative Rules on Outbound Investment).

After one outbound investment project has been duly approved, for which the Enterprise Outbound Investment Certificate has been granted, the rest of the necessary formalities with respect to the foreign exchange, banking, the customs and the like are to be further handled.

3. Administrative formalities for outbound investment under foreign exchange control

With the official approval – the Enterprise Outbound Investment Certificate – being granted for an outbound investment project, the relevant legal formalities with respect to the foreign exchange are to be further fulfilled according to the Administration Rules on Foreign Exchange in the Outbound Direct Investment by Domestic Institutions (hereinafter called “Foreign Exchange Rules on Outbound Direct Investment”) by State Administration of Foreign Exchange, which have come into full force and effect on August 1, 2009.

The said Foreign Exchange Rules on Outbound Direct Investment, which are based upon the Administration Regulations on the Foreign Exchange of the People’s Republic of China, are to promote and facilitate the outbound direct investment by domestic institutions, regulate the administration of foreign exchange in the outbound direct investment, and advance the balance of international payments (Art. 1 of Foreign Exchange Rules on Outbound Direct Investment), whereby the supervision and administration of foreign exchange payments and foreign exchange registration will be implemented by the State Administration of Foreign Exchange as well as its branches (Art. 3 of Foreign Exchange Rules on Outbound Direct Investment), for which the system of foreign exchange registration and record for the outbound direct investment as well as its assets and relevant interests created by such outbound direct investment (Art. 6 I of Foreign Exchange Rules on Outbound Direct Investment).

With the official approval being granted to one outbound direct investment project, the domestic institutions should go to the local State Administration of Foreign Exchange for the sake of handling the foreign exchange registration for outbound direct investment, for which the following documents to be submitted:

(i) Written application as well as completion of Application for Registration of Foreign Exchange for Outbound Direct Investment;

(iii) Effective business license or registration certificate as well as organization code certificate for the domestic institution;

(iv) Approving document or certificate by the competent authorities for outbound direct investment for the said outbound investment project;

(v) Relevant explanatory documents and remittance certificate for the remittance of existing initial expenses; and

(vi) Other documents required by the relevant State Administration of Foreign Exchange (Artt. 6 II, 7 I of Foreign Exchange Rules on Outbound Direct Investment).

The registration of the relevant circumstances on the outbound direct investment is to be done in the relevant business system when the aforesaid documents are examined and proved to be correct by the relevant State Administration of Foreign Exchange, based upon which the certificate of foreign exchange registration for outbound direct investment is to be granted to the relevant domestic institution, with which the domestic institution can process the relevant payments of foreign exchange for its outbound direct investment (Art. 7 II of Foreign Exchange Rules on Outbound Direct Investment).

aa. Payments of foreign exchange for outbound direct investment from inside China

With the enterprise outbound investment certificate (as discussed before) and the certificate of foreign exchange registration for outbound direct investment (as discussed before), the payments of foreign exchange for the outbound investment projects from inside China can be made in the banks designated for handling foreign exchange, where the aforesaid documents will be examined and the relevant payments in foreign exchange will be made from inside China based upon the authenticity of the said documents (Art. 8 I of Foreign Exchange Rules on Outbound Direct Investment), whereby the total amount of payments from inside China for one outbound investment project shall not exceed the total amount of outbound direct investment in foreign exchange registered in the relevant State Administration of Foreign Exchange (Art. 8 II of Foreign Exchange Rules on Outbound Direct Investment).

The payment of the initial expenses for outbound direct investment, which include, but not limited to, (i) the guarantee based upon the legal requirements of project country or upon the request of seller for the sake of buying the equity rights or asset interests of foreign enterprise, (ii) the bidding guarantee required for participation in the bidding process for the relevant projects in a foreign country, (iii) the costs for market survey, office premises, equipment, employees and for agency services (Art. 13 of Foreign Exchange Rules on Outbound Direct Investment), shall normally not exceed fifteen percent (15%) of the total amount of outbound direct investment in foreign exchange registered in the relevant State Administration of Foreign Exchange, for which the following application documents shall be submitted to the local State Administration of Foreign Exchange (Art. 14 I of Foreign Exchange Rules on Outbound Direct Investment):

(i) Written application (including total amount of outbound direct investment, amount of contribution by the respective parties, way of capital contribution, as well as the amount, use and sources of the initial expenses, and the like);

(ii) Effective business license or registration certificate and organization code certificate;

(iii) Relevant documents from domestic institutions for bidding, M&A or equity cooperation (including the letter of intent, the memorandum of understanding or the framework agreement by both domestic and foreign parties, etc.);

(iv) Written application submitted by the domestic institutions to the approving authorities for outbound direct investment;

(v) Written letter of undertaking for the use of initial expenses by the domestic institutions; and

However, if the initial expenses for outbound direct investment exceed the aforesaid limit of fifteen percent (15%), then, the domestic institution shall make the relevant applications with the aforesaid documents to the branch State Administration of Foreign Exchange (Art. 14 II of Foreign Exchange Rules on Outbound Direct Investment).

The amount of payments made in foreign exchange for the outbound direct investment, including the payments of initial expenses therefor, shall be included in the total amount of outbound direct investment in foreign exchange registered in the relevant State Administration of Foreign Exchange (Art. 15 of Foreign Exchange Rules on Outbound Direct Investment).

bb. Payments of foreign exchange for outbound direct investment from outside China

If the approving procedure for the outbound direct investment has not been finished within six (6) months starting from the date on which the initial expenses in foreign exchange has been made for the said outbound direct investment project, then, the rest of capital in the foreign bank account shall be transferred back to the foreign exchange account from which the original payment has been made, and the aforesaid six-month period can be extended to the maximum of twelve (12) months due to the necessity of the business operation, for which the approval from the original relevant State Administration of Foreign Exchange is required (Art. 16 of Foreign Exchange Rules on Outbound Direct Investment).

With respect to the profits made in the outbound direct investment projects, the domestic institution can transfer them from outside China to its current account in foreign exchange or implement the settlement of foreign exchange for them in China, for which the relevant bank designed for handling the foreign exchange shall process the payments for the domestic institution after examining the certificate of foreign exchange registration for outbound direct investment, the relevant financial reports of foreign enterprise, the decision on the profit disposal by foreign enterprise, the annual examination report of the last year for the domestic institution and the like (Art. 17 of Foreign Exchange Rules on Outbound Direct Investment).

The income in foreign exchange resulting from the reduction of registered capital, share transfer, liquidation and the like in the foreign enterprise established by the domestic institution shall be transferred from outside China into the special account in foreign exchange for converting assets into cash, and the establishment of the said special account as well as the payments into this special account shall be duly approved by the relevant State Administration of Foreign Exchange (Art. 18 of Foreign Exchange Rules on Outbound Direct Investment).

In case that one domestic institution transfers the complete or partial equity interests of foreign enterprise that has been created by the outbound direct investment to another domestic institution, the relevant payments shall be made in RMB in China, for which the relevant domestic institution shall make changes to or cancel the certificate of foreign exchange registration in the relevant State Administration of Foreign Exchange while the other relevant domestic institution shall fulfill the formalities of foreign exchange registration in the relevant State Administration of Foreign Exchange (Art. 19 of Foreign Exchange Rules on Outbound Direct Investment).

4. Taxation issues relative to outbound direct investments from China in foreign countries

The taxation issues related to the Chinese outbound investments in foreign countries belong to the field of international taxation laws in China, i.e., the Chinese taxation laws with foreign elements, for which there is no specific legislation in China, rather the relevant legal provisions are to be mainly found in the Enterprise Income Tax Law[4] and its relevant implementation rules[5]. The Chinese taxation laws, the taxation laws in the specific country where the outbound direct investment is to be made as well as the treaty on avoidance of double taxation between China and the specific foreign country are to be comprehensively considered for the sake of implementing the relevant international taxation laws in China, whereby the following three (3) aspects will be further discussed, namely, the enterprise income tax, the international taxation treaty and the exemption from taxation for the outbound direct investment with physical objects.

The enterprises are classified into resident enterprises and non-resident enterprise, whereby a resident enterprise refers to an enterprise that is incorporated within the territory of China or that is incorporated in a foreign country/region, yet its actual management institution is located within the territory of China, while a non-resident enterprise refers to an enterprise that is incorporated according to the laws of the specific foreign country/region and its actual management institution is not within the territory of China, yet its institution or business office is established within the territory of China, though there is no such institution or business office established in China, there is income originating from within China (Art. 2 of Enterprise Income Tax Law).

The normal rate of enterprise income tax is twenty-five percent (25%), while the reduced rate of enterprise income tax is twenty percent (20%), which applies to the income originating from within China by a non-resident enterprise that has not established any institution or business office within China or that has established its institution or business office within China yet the income gained has no actual relationship to its institution or business office within China (Art. 3 III and Art. 4 of Enterprise Income Tax Law).

The amount of income that is to be taxed, namely the taxable amount of income, refers to the rest amount of the total amount of income in each taxation year, from which the income that is free from taxation, the income for which the taxation is exempted, various deductions as well as the amount of losses in the previous years that are allowed to be made up, are respectively deducted (Art. 5 of Enterprise Income Tax Law).

The amount of tax that is to be paid by an enterprise refers to the rest amount of the taxable amount of income times the applicable tax rate, from which the amounts of tax to be reduced, exempted and/or offset are to be deducted (Art. 22 of Enterprise Income Tax Law).

In calculating the taxable amount of income, the costs for foreign investment by an enterprise are not allowed to be deducted (Art. 14 of Enterprise Income Tax Law). A resident enterprise in China shall pay the enterprise income tax for its income gained from inside and outside China (Art. 3 of Enterprise Income Tax Law). The losses made by the foreign business entities of one enterprise are not allowed to offset the profits made by its domestic business entities in paying the enterprise income tax by way of total calculation (Art. 17 of Enterprise Income Tax Law).

The income tax, which has been paid in the foreign country for the taxable amount of income originating from outside China, can be deducted from the amount of tax that is to be paid by an enterprise in the present taxation period, for which the deduction limit is the amount of tax that is to be paid for the said income originating from outside China based upon the Enterprise Income Tax Law. The amount of income tax paid in the foreign country that is beyond the deduction limit can be further deducted in the five (5) years thereafter from the rest amount of the yearly amount of tax to be deducted subtracting the yearly deduction limit (Art. 23 of Enterprise Income Tax Law).

For the sake of avoiding double taxations, China has entered into more than eighty (80) international taxation treaties with the relevant foreign countries and regions, including the Agreement between the People’s Republic of China and the Federal Republic of Germany for the Avoidance of Double Taxation with respect to Taxes on Income and Capital has been entered into by and between China and Germany on June 10, 1985 (hereinafter called “Double Taxation Avoidance Agreement”).

The (i) personal income tax, (ii) enterprise income tax for sino-foreign joint ventures, (iii) income tax for foreign enterprises and (iv) local income tax in China, as well as the (i) personal income tax, (ii) company income tax, (ii) property tax and (iv) business tax in Germany are covered in the Double Taxation Avoidance Agreement (Art. 3 of Double Taxation Avoidance Agreement).

The profits of one enterprise in the one contracting state shall only be taxed in the said contracting state, unless the enterprise has conducted its business through the standing institution located in the other contracting state, for which the profits gained by the standing institution can be taxed in the other contracting state (Art. 7 of Double Taxation Avoidance Agreement).

The dividends paid by the resident company of the one contracting state to the resident of the other contracting state can be taxed in the other contracting state; however, the said dividends can also be taxed in the one contracting state based upon the laws therein (Art. 10 No. 1,2 of Double Taxation Avoidance Agreement). And if the recipient of the payment is the beneficiary of the dividends, then, the tax to be levied shall not be more than ten percent (10%) of the total dividends (Art. 10 No. 2 of Double Taxation Avoidance Agreement).

The interests originating from the one contracting state paid to the resident of the other contracting state can be taxed in the other contracting state, while the interests can also be taxed in the one contracting state based upon the laws therein (Art. 11 No.1, 2 of Double Taxation Avoidance Agreement). And if the recipient of the interests is the beneficiary of the interests, then, the tax to be levied shall not be more than ten percent (10%) of the total interests (Art. 11 No. 2 of Double Taxation Avoidance Agreement).

The interests originating from Germany paid to the government of the People’s Republic of China, to the People’s Bank of China, the Agricultural Bank of China, the Construction Bank of China, the Investment Bank of China, the Industry and Commerce Bank of China, to the loans given or guaranteed by the Bank of China or the International Trust & Investment Corporation of China, or to other governmental financial institutions of China recognized by the competent authorities of the contracting states, shall be free from tax in Germany; while the interests originating from China paid to the government of Federal Republic of Germany, to the Deutsche Bank, the Loan Bank for Reconstruction, the Investment & Finance Corporations in the developing countries, to the loans given or guaranteed by Hermes Guarantee Company, or to the governmental financial institutions of Germany recognized by the competent authorities of the contracting states (Art. 11 No. 3 of Double Taxation Avoidance Agreement).

As far as a resident in China is concerned, the tax to be paid for the income gained in Germany based upon the provisions of this Agreement is to be deducted from the tax in China to be paid by the resident, for which the deduction limit is the tax for the said income from Germany based upon the relevant taxation laws in China; the tax levied in Germany for the dividends paid by the resident company of Germany to the resident company of China, whereby the resident company of China owns at least ten percent (10%) of the shares of the resident company of Germany, shall be deducted from the tax paid in China (Art. 24 No. 1 of Double Taxation Avoidance Agreement).

As far as a resident in Germany is concerned, except for those income to be covered below in subparagraph b, as long as the tax for the income originating from China and the properties located in China can be levied in China based upon this Agreement, the relevant taxation in Germany therefor will be exempted, yet the income or the properties that are exempted from tax will be considered in ascertaining the tax rate in Germany, while the dividends concerned herein refer to the those paid by the resident company of China to the resident company of Germany (not a partnership enterprise), whereby the resident company of Germany owns at least ten percent (10%) of capital of the resident company of China (Art. 24 No. 2 subparagraph a of Double Taxation Avoidance Agreement).

The personal income tax and company income tax paid by German residents in China for (i) the dividends that do not belong to the subparagraph a herein, (ii) the interests, (iii) the royalties, (iv) the proceeds from transferring immovable properties, transferring the movable properties and profits in the standing institutions, transferring the transportation tools and other financial properties in China, (v) the payments for acting as director or supervisor, (vi) the income gained by German artists and sportsmen in China, as well as (vii) other income in China, will be deducted accordingly in Germany (Art. 24 No. 2 subparagraph b of Double Taxation Avoidance Agreement).

The export tax exemption or tax rebate will be applied to the outbound investment with physical objects, which includes the processing and assembly project with materials coming from China, the foreign engineering construction project, whereby the value-added tax or consumption tax paid therefor will be returned, for which the customs declaration, the value-added tax invoice, the official approval certificate and the like are to be presented to the taxation authorities in China.

[1]The legislation on the Chinese outbound investment is, like the legislation on any other aspect of life in China, rather concentrated on one aspect by one competent governmental authority, thus, a few governing legal provisions by different approving authorities are co-existing, while a unified legislation on the Chinese outbound investment still does not exist, which should be the trend of future legislation on this aspect. Besides, the relevant legal provisions on the Chinese outbound investment are undergoing constant changes nowadays, and this article is rather based upon such relevant provisions till April 19, 2012. It has been reported that the formal legislation on the outbound investment – Administrative Regulations on Outbound Investment – is in the process of being made, whereby the present Administrative Rules on Outbound Investment will be further improved, so that a rather formal legislation on the definition of outbound investment, approval procedures, personnel entry and exit, capital financing, sources of human power, profit distribution, profit investment, taxation policies and the like will be made in the due course, which will lay the foundation for the Law on the Promotion of Outbound Investment in the future. Details therefor please see http://www.oofiness.cn/news/view/id-58907.

[2] The reform in the finance sector of China is going on steadily, with many new administrative rules of reform nature being probed either in certain financial centers in China, such as in Shenzhen, Tianjin, Shanghai and the like, with respect to the foreign exchange control, stock exchange and the like, or on the national level such as the further changes to the RMB exchange rate recently done on April 17, 2012. [3] The Interim Measures of Supervision and Management for Outbound Investments by Enterprises of Central Government has been passed by the 113^thoffice director meeting of the Supervision and Management Commission for State Assets of the State Council and have come into full force and effect on May 1, 2012, which has been latest legislation on the outbound investments by China.

[4] The Enterprise Income Tax Law of People’s Republic of China (hereinafter called “Enterprise Income Tax Law”), promulgated on March 16, 2007, has come into full force and effect on January 1, 2008.

[5] The Implementation Rules for Enterprise Income Tax Law of People’s Republic of China (hereinafter called “Implementation Rules for Enterprise Income Tax”), promulgated on December 6, 2007, have come into full force and effect on January 1, 2008.