INTRODUCTION

China imposes a strict control system on foreign currency. Foreign invested enterprises (FIEs) are only allowed to apply foreign currency loan for operation purposes.Foreign currency loan is categorized as capital account item. It requires approval from the State Administration of Foreign Exchange (SAFE).

TWO BASIC RESTRICTIONS

There are two basic restrictions for foreign currency loan application:

1. RESTRICTION ON THE LOAN AMOUNT
   The loan should not exceed the difference between total investment and registered capital approved by the authorities .
   
2. RESTRICTION ON THE PAY-BACK TERM
   The pay-back term should not exceed the operation period stated in business license.

FOREIGN CURRENCY LOAN APPLICATION PROCEDURES

• Prepare foreign currency loan agreement with lenders’ details.
• Submit the foreign currency loan agreement to the SAFE for its review and approval.
• Obtain Foreign Currency Loan Registration Certificate from the SAFE.
• Open a Special Foreign Currency Loan Account with the designated foreign exchange bank upon the SAFE’s approval.
• Remit the loan to the Special Foreign Currency Loan Account.

REPAYMENT OF PRINCIPAL AND INTEREST

Like the foreign currency loan application procedures, applicants must obtain approval from the SAFE before repayments of principal. The principal amount can be repaid at the designated foreign exchange bank.

The payment of interest on foreign currency loan is permitted. The interest must be repaid through the Special Foreign Currency Loan Account, which is indicated in the foreign currency loan agreement that is registered with the SAFE.

TAX IMPLICATION ON DEBTORS AND CREDITORS

For debtors
The interest paid by debtors to creditors is deductible from the borrowers’ taxable income when calculating the corporate income tax (CIT). However this interest must not exceed the interest rate of China domestic financial institutions at the same period.

For creditors
The interest, which is deemed as the revenue sourced from China, is subject to 5% of Chinese business tax and 10% of CIT. For countries that had signed tax treaties with China, their CIT rate may be different, such as companies that based in Hong Kong are subjected to 7% of CIT.

The debtor in China is responsible to withhold both the taxes mentioned above. They should withhold the business tax and CIT pay to the Chinese tax authority on behalf of creditors, before paying the net amounts to the overseas creditors.