Our China lawyers have seen a spike in queries from foreign companies encountering problems getting paid by Chinese companies. I’m talking mostly about private Chinese companies without affiliates or assets abroad.
An excuse commonly offered to the foreigner by the Chinese company is that the rules have recently changed so foreign payments are no longer possible or practicable. Another one is that the Chinese company is simply not allowed to send more that $50,000 at a time or even $50,000 in total each year.
The underlying regulations have not changed and there is no limit on the amount that can be remitted abroad by a compliant Chinese company. But Chinese banks are becoming much stricter with certain types of remittances in an effort to limit fraudulent capital outflows and to make sure taxes are paid in China before money leaves the country.
Chinese law generally requires a Chinese company to obtain a “tax certificate” from its local tax bureau before more than $50,000 worth of RMB can be converted into a foreign currency and remitted abroad. As the name might suggest, the certificate confirms the Chinese company has made all necessary tax payments or has some kind of exemption for the money. To obtain the certificate the Chinese company needs to submit copies of the relevant contracts (and oftentimes invoices) and provide particulars of the transaction. The tax certificate must be presented to the foreign exchange bank before the payment transaction occurs.
The regulations provide for a blanket $50,000 exemption from approval. No proof or justification is required, up to the $50,000 limit. However, in June of last year, Chinese banks began arbitrarily denying requests for RMB conversion of amounts below the $50,000 limit.
Sometimes, problem with getting money out stems from the Chinese company being unable to get a tax certificate and sometimes it stems from the Chinese company not wanting to get a tax certificate because that would require it pay tax it wasn’t planning on paying. To be fair, problems sometimes arise when the Chinese company genuinely wants to make a remittance and is prepared to pay the applicable taxes. These problems vary depending on the type of payment. They mostly affect payments for services, royalty payments and Foreign FDI or M&A payments.
Payments for purchasing of goods are usually less complicated, so long as the foreign side has its own paperwork in order as well.