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Further Foreign Exchange Restrictions on Foreign Investment in the Real Property Sector in China
As a measure to curb the heated property market in China, Jian Zhu Fang [2006] 171 ("Circular 171") was issued in July to impose restrictions on foreign investment in the real property sector (please refer to News Flash Issue 14 for details). The State Administration of Foreign Exchange ("SAFE") then issued Hui Fa [2006] 47 ("Circular 47") on 1 September 2006 to set out the foreign exchange control related requirements and detailed application and registration procedures. The requirements and procedures apply to real property investment by branches and representative offices of foreign enterprises (collectively referred to as "foreign enterprises") as well as foreign individuals. The circular also sets out certain foreign exchange related administrative procedures for foreign invested real property enterprises.
Purchase of Real Property by Foreign Enterprises
To purchase a commodity property for self-use using foreign currency remitted from overseas or from a domestic foreign currency account, a foreign enterprise is required to undergo an application procedure with the bank by submitting the following documents:
- Sale or pre-sale contract for the commodity property;
- Set-up approval and registration certificate of the foreign enterprise;
- Registration of the purchase with the in-charge property administration authority; and
- Written declaration of the subject property's usage.
Upon completion of the application, the relevant funds should be converted into RMB and directly transferred to the RMB account of the property developer.
Meanwhile, it has clearly stipulated that foreign currency funds of representative offices which are categorised under the current account items for foreign exchange administration purposes should not be used for property purchase in China.
Purchase of Real Property by Foreign Individuals
Likewise, purchase of commodity property by foreign individual should undergo a similar application procedure and the following documents are required. The relevant funds should also be directly transferred to the RMB account of the property developer.
- Sale or pre-sale contract for the commodity property;
- Written proof of personal identity such as passport or identity card;
- Registration of the purchase with the in-charge property administration authority; and
- Written proof of 1-year stay in China for the reason of employment or study.
Similar requirements apply to Hong Kong, Macao and Taiwanese individuals except that the requirement for proof of 1-year stay is waived.
Return of Purchase Consideration Due to Cancellation of the Transaction
For whatever reason, if the transaction is cancelled and the relevant consideration is to be returned, the foreign enterprise or foreign individual has to apply with the bank which has previously processed the remittance and conversion for remitting the money out. The following documents are required for the application:
- Application letter detailing the reason for failure of completion of the transaction;
- Documentation of the previous foreign currency conversion;
- Written proof from the property developer to evidence the cancellation of the sale and purchase contract; and
- Written proof from the in-charge property administration authority to evidence the cancellation of the property transaction.
Outward Remittance of Sales Proceeds
Upon disposal of a property in China, foreign enterprise or foreign individual has to submit the following documents to the in-charge branch of SAFE for verification before remitting the relevant sales proceeds outside China:
- Application letter for purchase of foreign currency;
- Contract for the property transfer; and
- Tax clearance certificate for the property transfer.
Reporting Requirements
After processing the applications mentioned above, banks are required to summarise and report the transactions on a monthly basis to SAFE.
Other Restrictions for Real Property Enterprises
As an obligation to assist SAFE to implement the aforesaid application and registration procedures, property developer is not allowed to keep any overseas remittance made by foreign enterprise or foreign individual for property purchase. In other words, all such overseas funds have to go through banks where the aforesaid application procedures will apply.
Separately, to echo the restrictions imposed in Circular 171, Circular 47 provides that foreign investment real property enterprises are not allowed to raise foreign loans if any one of the below conditions is not met:
- Fully paid up registered capital;
- Obtained certificate for land use right; or
- Injected capital for the concerned project reaching 35% of the total investment of the project.
SAFE, as the administration authority will deny foreign investment real property enterprise of any foreign loan registration and foreign currency conversion applications.
Meanwhile, SAFE may decline to proceed with foreign exchange registration or other formalities if any of the below events happens:
- As regards merger and acquisition of real property enterprise in China, transfer consideration cannot be fully paid in one lump sum; or
- In case of real property JV, there is any guarantee on a fixed return or similar clauses in JV contract or articles of association.
To further control the funding of real property enterprise, Circular 47 states that funds kept in a foreign investor's special account, for use in contracted projects or venture investment, merger and acquisition, disbursement of expenses in pre-establishment stage and guarantee of investment, are not allowed to be used in real property business. |
