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Encouraging and guiding offshore investments from Mainland private enterprises

On 29th June 2012, a joint notice, "The notice on issues encouraging and guiding private enterprises to actively implement offshore investment advice关于印发鼓励和引导民营企业积极开展境外投资的实施意见的通知"(Fagaiwaizi [2012] No.1905) ("Joint Notice") which took effect on the same day, was issued by 13 government departments including the National Development and Reform Commission (NDRC), the Ministry of Foreign Affairs, the People's Bank of China and the State Administration of Foreign Exchange (SAFE). The purpose of the Joint Notice is to implement the earlier consultation draft on the same issue to encourage offshore investment by private enterprises.

1) Policy Support to invest offshore

The Joint Notice sets out several suggestions to effectively strengthen the policy support for Chinese private enterprises to make offshore investments.

  • Finance and taxation policies are to be better implemented and perfected. In particular, policy granting tax credit to enterprises which are required to pay income tax offshore should be actively implemented to encourage private companies to invest abroad.
  • Chinese banks are encouraged to provide working capital loans, syndicated loans, export credits and loans financing mergers and acquisitions to private enterprises enabling offshore investments. Financial institutions should also explore the feasibility of taking securities over acquired offshore equity interest or assets for project financing.
  • Financial institutions should develop different means of fund raising for private enterprises' offshore investment, support selected enterprises to issue bonds in Renminbi and foreign currencies abroad, encourage qualified enterprises to be listed on Mainland or offshore stock exchange and guide and facilitate potential enterprises and institutions to establish offshore investment funds in order to promote offshore investment.

2) Simplify and systemize foreign exchange control measures on offshore investments

The Joint Notice also suggests simplifying and systemizing the foreign exchange control measures on offshore investment by private enterprises. The policies provided under the Joint Notice correspond to those set out in an earlier notice issued by SAFE(国家外汇管理局关于鼓励和引导民间投资健康发展有关外汇管理问题的通知 汇发[2012]33号), and aim at simplifying the outbound and inbound remittance of foreign exchange in offshore investments.

  • The difference between the total outbound investment amount and the offshore registered capital remitted out of China by a private enterprise can now be remitted back to China after registration with SAFE without undergoing the normal capital reduction or cancellation procedures.
  • A private enterprise can use loan proceeds in foreign currency (whether such loans are obtained inside or outside China) to grant loans offshore. In the past, the enterprise would need to comply with various payment and remittance approval procedures before arranging for each inbound or outbound remittance of an offshore loan and its repayment. With the new policy, the enterprise can apply to the local branch of SAFE for the verification of an offshore loan quota, complete the relevant registration formalities and open a special account at the designated bank to facilitate any inbound and outbound payment.
  • In order to facilitate private enterprises to obtain financing to invest offshore, Chinese individuals are allowed to be a co-guarantor with a corporate guarantor that issued guarantee or security for an offshore invested enterprise in the latter's offshore financing. The Chinese individual guarantor should entrust the corporate guarantor to apply to the local SAFE for approving the granting of the guarantee or security to an offshore entity. If SAFE approves the corporate guarantor to provide the guarantee or security to the offshore entity, the Chinese individual may register such guarantee or security granted to the offshore entity at the same time when the corporate guarantor arranges for the registration of its guarantee or security with SAFE.

3) Protection offered to offshore investments

Another aspect of the Joint Notice is to promote better protection to private enterprises which make offshore investments. Among other various other protections mentioned under the Joint Notice, it may be worth focusing on the tax and intellectual property protection.

  • It was provided that the bilateral and multilateral investment protection mechanisms are to be improved. Among others, private enterprises which are investing offshore and have paid income tax in other jurisdictions should be exempted from double taxation in China. China will continue to expand its treaty network with other countries in order to broaden the scope of bilateral investment protection agreements and agreements for avoidance of double taxation.
  • Private enterprises should be guided to implement trademark internationalization strategies. Private enterprises are encouraged to establish and develop international well-known trademarks, and strengthen their protection on trademarks.

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