Background and Current Situation  

As the foreign exchange control of China's capital account has not been fully liberalized, domestic enterprises will be directly or indirectly supervised by the foreign exchange control department when they convert RMB into foreign currencies and make overseas payments. In accordance with the Administrative Regulations of the People's Republic of China on Foreign Exchange and other regulations related to foreign exchange, domestic enterprises making overseas payments under different transaction structures shall be subject to different degrees of supervision. A domestic enterprise may generally make overseas payments according to the following transactions: service fees, payments for goods or dividend, overseas lending and overseas investment by the enterprise, overseas loans secured by domestic guarantee, etc.

     In addition, a foreign investor may also remit its funds abroad by way of capital reduction in the domestic company. Shanghai Veritas Law Corporation recently successfully assisted a foreign investor in the capital reduction of its domestic subsidiary.  Our relevant experience is summarized as follows:

Capitals Reduction Processes and Points to Note for FIE

In general, capital reduction of FIE may be divided into eight steps: 

（1）The board of directors formulates a capital reduction plan, which should list out the following items: the total amount of the reduced registered capital of the company; the amount of registered capital reduced by the relevant shareholder(s); the equity structure after the capital reduction; arrangements on protecting creditors’ interests;

（2）The finance department of the subject company prepares an up to date asset inventory and balance sheet; 

（3）To hold shareholders' meeting on adopting resolution on the capital reduction; 

（4） The Company notifies creditors of the Company's capital reduction within ten (10) days from the date on which the resolution is adopted; 

（5）The Company publishes an announcement regarding the capital reduction on a newspaper within thirty (30) days from the date on which the resolution is adopted;

（6）Settles outstanding debts or provides security within 45 days upon the publication of the announcement on capital reduction；

（7）Applies to relevant local AMR for registration；

（8）Applyies for changes of foreign exchange status with the bank in which the capital account is opened.

    In order to carry out the capital reduction procedure smoothly and reduce the legal risks to shareholders, a number of matters on the actual process require attention.  First and foremost, in order to avoid the risk of illegal capital reduction, the subject company must strictly follow the statutory deadlines on notifying creditors and making an announcement; further, some materials that are not required to be submitted to the AMR for examination (such as the balance sheet and the list of assets) should also be prepared in accordance with relevant regulations . In addition, the signatory of capital reduction materials should be the same person as the one listed on the record of the AMR, failing which the newly authorized signatory shall have to be notarized and legalized. Lastly, when a FIE reduces its capital, it is required to adjust its total investment amount accordingly, although the new Foreign Investment Law does not contain provisions regulating total investment amount, yet in actual practice, the item of total investment still remains in the AMR system.