1. Are there any restrictions in relation to the type of borrower who may borrow foreign currency or in relation to the term of foreign currency and/or the amount of foreign currency borrowed by local entities?
On 12 January 2017, the People's Bank of China (PBOC), the central bank of the PRC, further revised the macroprudential administrative regime ("2017 Regime") in relation to inbound financing on a nationwide basis, which came into effect on the same date.
An entity incorporated in the PRC (whether a PRC domestic enterprise or a foreign-invested enterprise (FIE), i.e., a company that is not wholly owned by PRC nationals or entities) may obtain inbound financing from offshore lenders without any prior approval from the PBOC or the State Administration of Foreign Exchange (SAFE), the PRC exchange control authority.
Under the 2017 Regime, a borrower may obtain inbound financing provided that the "outstanding" may not exceed the "ceiling".
"Outstanding" means, in respect of the borrower, the sum of the amount drawn but not yet repaid under each of its inbound financings (loans, trade finance, certain contingent liabilities, etc.) with risks pertaining to the tenor, type and exchange rate of each inbound financing taken into account.
"Ceiling" means the maximum amount of "outstanding" permitted under the 2017 Regime, which is calculated based on the borrower's net asset value (if the borrower is not a financial institution), or tier one capital (if the borrower is a banking financial institution) or paid-up capital plus capital reserve (if the borrower is a nonbanking financial institution) multiplied by the leverage ratio and the macroprudential adjustment multiplier, each as determined by the PBOC.
The PBOC may adjust the relevant multipliers and calculation methods from time to time, either generally or with respect to a particular enterprise or industry.
Under the 2017 Regime, where the borrower is not a financial institution, the borrower should perform the following:
For any change to its audited net assets value or certain terms of the financing agreement (such as an offshore creditor, the tenor of the loan, amount and interest rate), the borrower should promptly update the SAFE.
If the borrower is a FIE, it may elect to continue to follow the rules applicable to the existing foreign debt regime by relying on the borrowing gap available (in the case of a FIE borrower) in calculating the amount of foreign debt that it may incur ("Foreign Debt Regime") or the 2017 Regime.
Under the Foreign Debt Regime, the borrower must effect a "foreign debt registration" with the local branch/sub-branch of the SAFE. As long as the borrower has registered its foreign debts with the SAFE and the aggregate amount of its foreign debts does not exceed its so-called borrowing gap, it may freely borrow from non-Chinese lenders.
The borrower must obtain a Certificate of Approval and Registration (in Chinese, 审核登记证明) from the National Development and Reform Commission (NDRC) before incurring any foreign debt with a tenor of over one year.
Different local regulations apply to some specific regions, such as the free trade zones. This guide does not cover the different regulatory registration, filing or reporting requirements under those local regulations.
2. Are there any restrictions on the rate of interest or default interest that may be charged?There is no regulatory restriction on the interest rate or default interest rate that may be charged on foreign debt. However, the interest rate is part of the information required for SAFE registration. The SAFE can refuse to register a loan if the interest rate is not deemed acceptable. Usually, the interest rate will be acceptable to the SAFE if it is in line with the market interest rate (e.g., by reference to SOFR, Term SOFR or any other replacement benchmark rate commonly adopted in the market in the case of a USD foreign loan).
3. Are there any restrictions on particular lenders or classes of lender entering into credit transactions with borrowers?
No, there is no regulatory restriction of this type. A foreign lender may be a foreign financial institution, a company (whether or not it is a related company of the borrower) or a foreign citizen.
4. Are there any exchange controls that will apply to payments to be made in foreign currencies or to foreign lenders?
Please refer to the answer to question 1 of this section.
The borrower should use the loan proceeds for its manufacturing and business operations.
After the completion of foreign debt registration with the SAFE, the borrower must open a designated foreign debt account with a bank in the PRC, which will be used to receive the loan proceeds. The loan proceeds must be remitted into the foreign debt account. They may only be used for the borrower's operation within its scope of business, i.e., the specific scope of business that is recorded in its business license.
For foreign debt with a tenor over one year, the loan proceeds may only be used for purposes recorded on the Certificate of Approval and Registration (in Chinese, 审核登记证明) issued by the NDRC. In particular, the use of such foreign debt shall not:
5. Is there any requirement to deduct or withhold tax from any amounts to be paid or repaid to a lender (whether domestic or foreign)? If so, at what rate must tax be deducted and from what kinds of payment?
A foreign company without any presence in the PRC but receives profits, interest, rent, royalties or other income from sources in the PRC is subject to withholding tax on that income. The withholding tax rate is 10%, unless the foreign company is from a jurisdiction with which China has entered into a tax treaty that allows a preferential rate.
6. Are there any “thin capitalization” or other rules that may limit the extent to which interest payments may be deducted for tax purposes?
According to the PRCs thin capitalization rules, interest for debts in excess of the prescribed debt-to-equity ratio (i.e., 5:1 for financial enterprises and 2:1 for other enterprises) is not deductible unless the borrower is able to prove that borrowings from a related lender are on arm's length terms or that the actual tax burden of the domestic borrower is no higher than its domestic related lender.
In this answer, reference to "thin capitalization" is not a reference to a company's borrowing capacity (in the PRC, the expression is sometimes used in that context).
7. Are there any registration, notarization, translation or reporting requirements in relation to the loan documents?
Other than the cross-border financing filing and foreign debt registration with the SAFE or the NDRC, there are no other registration, reporting or notarization requirements in relation to the loan agreement. Further, the loan agreement and other relevant transaction documents will need to be translated if such documents are to be submitted to a PRC court in legal proceedings. Please refer to the answers to question 8 of the "If things go wrong" section.
However, there are governmental approval and registration requirements in relation to certain security documents. Please refer to the answers to questions 11 and 12 of the "If taking security" section.
8. Are there any stamp, documentary, registration, notarization or other taxes, duties or fees chargeable in relation to the loan documents? If yes, what are the amounts and when are they payable?
Stamp duty is levied on categories of dutiable documents that have legal effect in the PRC and that are "protected under PRC law." The categories of dutiable documents are exhaustive so that any document that does not fall within these categories is not subject to stamp duty in the PRC.
For dutiable documents, stamp duty is due on the execution of the documents if the documents are executed in the PRC. However, if a document is executed outside the PRC but is used in the PRC, stamp duty will be payable.
A loan agreement is subject to stamp duty. Each party to the loan agreement must pay stamp duty at the rate of 0.005% of the principal amount (e.g., 5,000 out of 100 million). However, there is debate on whether it is the foreign party's obligation to pay the stamp duty in the case of a foreign debt agreement. The issue is whether the stamp duty applies to a foreign lender. Failure to pay the required stamp duty will trigger sanctions by the tax authority (such as a penalty), but it will not affect the validity, legality or enforceability of the agreement itself and it will not prevent the admission of the loan agreement as evidence in court.
Effective from 1 May 2016, VAT at the rate of 6% is charged on income derived by a foreign entity for providing a service in the PRC.
There are no other documentary, registration or other similar taxes, duties or fees chargeable in respect of a loan agreement.
Foreign debt registration with the SAFE and the NDRC is free of charge.
For security documents, please refer to the answers to questions 11 and 12 of the "If taking security" section.
9. Does the law recognize the subordination of the debt that a debtor owes to one creditor to that which the debtor owes to another creditor? If yes, how is this usually effected?
PRC law recognizes the concept of subordination. Subordination is usually effected by way of a contractual arrangement among the senior creditor, the subordinated creditor and the debtor.
10. Are there any classes of unsecured and unsubordinated creditor whose claims against a debtor would rank equally with or above those of the debtor’s other unsecured and unsubordinated creditors (e.g., the claims of employees and tax authorities or the claims of creditors under particular kinds of instrument)? If yes, what classes of creditors are preferred?
The PRC Enterprise Bankruptcy Law sets out a hierarchy of debts to determine payment priority. The following claims rank above those of general (or "common") unsecured and unsubordinated creditors, and they must be paid in the following descending order of priority:
If the property available for distribution in the bankruptcy is insufficient to discharge all of the debts within a particular rank of debts, the discharge of the debts within that rank will be effected on a pro rata basis.
11. Are there any consumer protection or similar laws that apply if credit is made available to individuals or other classes of debtor? If yes, what laws are applicable?
Currently, PRC nationals are not allowed to borrow money from outside the PRC. The PRC consumer protection regime is therefore not relevant.
12. Are there any prohibitions or limitations on the extent to which a company can give financial assistance for the purchase of: (a) its own shares or those of any affiliated company; or (b) assets owned by it or any affiliated company?
There is no concept of "financial assistance" in the PRC and therefore, there is no particular prohibition on a PRC company providing security or giving a guarantee to a third party. Nevertheless, the PRC Company Law contains a general restriction on PRC companies providing security on behalf of its shareholders or de facto controllers. Where a PRC company provides security to secure the liabilities of any of its shareholders or a person who actually controls the PRC company, the security must be approved by its shareholders. Approval must be in the form of a shareholders' resolution passed by the shareholders with more than half of the voting rights of all the shareholders present at the relevant shareholders' meeting. Shareholders whose debts are being secured by the company and any shareholders controlled by the de facto controller are not entitled to vote.