Cross Border Holding Company Structuring for China Direct Investment
Cross border holding structures require physical operational substance in intermediate jurisdictions to secure tax treaty dividend reductions and exit protections.
Foreign Exchange Capital Settlement Circular 19
Meaning
Monetary regulations for foreign invested enterprises define how offshore equity injections are converted into local currency. The foreign exchange capital settlement circular 19 introduced a system where companies can choose the timing of their currency conversion. It allows firms to hold funds in a foreign currency account and settle them into RMB based on their actual operational needs.
This regulation applies to the registered capital of all foreign invested companies.
Conversion Liberty
Enterprises no longer need to provide invoices to the bank before converting their capital into RMB. Under the foreign exchange capital settlement circular 19, the settlement is based on a declaration of intended use. This gives the finance team more flexibility to manage exchange rate risks.
Negative List
Settled funds cannot be used for purposes that fall outside the authorized business scope of the company. The foreign exchange capital settlement circular 19 specifically prohibits the purchase of speculative financial products or the lending of capital to other entities. Violating these restrictions leads to the suspension of the conversion privilege.
Disbursement Verification
Banks perform a post settlement review to ensure the money was spent as declared. Although the foreign exchange capital settlement circular 19 simplifies the initial conversion, the company must still provide invoices for the actual payments later. Failure to pass this verification results in a lower credit rating with the foreign exchange bureau.