Sending funds abroad: an indirect approach

Against a background where exchange policy relating to cross-border investment has tightened, a Shenzhen investment company (company A) proposed to invest US$6 million in a US company (company B), and executed an investment agreement in December 2016. Company A was established in December 2015 with registered capital of RMB5 million (US$727,000).

When Company A applied to the Economy, Trade and Information Commission (ETIC) of Shenzhen municipality for recordal of an offshore investment project, the ETIC refused to accept on the grounds that the company’s name and scope of business contained the word “investment”. Following inquiries, the authors were able to confirm that even if the application was changed to a suitable investment entity (one that was established for a relatively long period of time, had registered capital greater than US$6 million, and did not have the word “investment” in its name and scope of business), the amount of time required for approval by the ETIC was uncertain.

Against this background, domestic enterprises are encountering some obstacles in the course of cross-border investment, and where funds cannot be sent abroad directly, an increasing number of offshore investments have turned to “foreign loans secured by domestic security” as an indirect means of doing so. In simple language, a foreign loan secured by domestic security involves a domestic entity providing security for a foreign borrower, and when the foreign borrower is unable to repay the foreign debt, the domestic guarantor is required to perform its security obligations, remitting funds abroad to be used to repay the foreign debt to the foreign lender.

Rao Xiaomin is a partner and Zhou Jun is an associate at Zhong Lun Law Firm in Shenzhen