Author: Franki Cheung
Service Area: China Trade & Investment
Date: September 2013
Country: Hong Kong


China Legal Update
Issue 6 of 2013: September


Deacons awarded "Hong Kong Firm of the Year" at 7th China Law & Practice Awards

On 12 September 2013, Deacons was awarded "Hong Kong Firm of the Year" at the 7th China Law & Practice Awards ceremony held in Beijing.

China Law & Practice (CLP), a member of the Euromoney Institutional Investors' Legal Media Group, annuallly reveals the top deals and top law firms in China in key practice areas at the China Law & Practice Awards. The winners are judged on their professional accomplishments as well as advocacy and influence within their fields over the last 12 months.

This is the third award of a similar nature Deacons has won this year following the award of the "Hong Kong National Law Firm of the Year", Chambers China Awards in February and "Hong Kong Law Firm of the Year", Asian Legal Business China Law Awards in March. It is unprecedented to receive such prestigious awards of the same kind from three different major legal media groups in a year.

"These awards are a testament to the strong commitment and hard work of every member of the firm, without which all these awards would not have been possible." said Franki Cheung, Head of China Offices.

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Shanghai Plans to Lure Foreign Investors to Its New Free Trade Zone
by Myles Seto ( and
Rainbow Shen (

At the meeting on July 3 2013, the State Council of China passed the Overall Scheme of China - Shanghai Free Trade Pilot Zone ("Scheme"). According to the press, the Scheme could contain as many as 21 separate initiatives, will be a template for the potential nationwide roll-out of structural economic reform and liberalisation. At present, the implementing regulations of the Scheme are yet to be promulgated, and it is expected that the Scheme will consist of new policies, covering industries from financial services to shipping and transport, as part of its plan to create a Hong Kong-like free-trade zone in Shanghai.

The pilot zone will situate on the current Shanghai Free Trade Zones (上海综合保税区), which is a combination of the three bonded zones in Shanghai, namely, the Waigaoqiao port, the Yangshan deepwater port and Pudong International Airport with an area of 28.78 square kilometres. The latest news from the media is that the Shanghai Free Trade Pilot Zone will officially be established around the end of September.

While the implementing regulations of the Scheme are pending finalization, it was reported that the Scheme will cover trials on free currency exchange, management innovation, trade-related financial services and other measures.

The Scheme seems to be one of the biggest to attract foreign investors since China entered the World Trade Organisation in 2001. In order to attract foreign investment into the new pilot zone, Shanghai, subject to approval by the relevant supervising authorities, plans implement the followings:

  • The Scheme will provide convenient access to foreign banks for setting up subsidiaries or joint ventures;

  • Permission will be granted to foreign commodities exchanges for owning and operating warehouses in the free-trade zone;

  • Subject to qualification requirements, foreign investors will be allowed to set up wholly owned healthcare insurance operations and foreign shipping firms will be able to set up cargo joint ventures;

  • Overseas human resources and recruitment firms will, subject to approval, be permitted to set up Sino-foreign joint ventures to engage in human resources and recruitment business, and the foreign investors will be allowed to own up to 70 per cent of the equity interest in such joint ventures;

  • Subject to approval, foreign travel agencies will be allowed to set up joint ventures to provide international travel and holiday services (excluding Taiwan) to customers from Mainland China.

The Scheme is probably the central government's latest initiative to promote Shanghai's ambitions as a global business hub and international financial centre. If the Scheme works well in Shanghai, it is expected that similar projects will be copied around the country. Therefore the Scheme will eventually have a significant impact on the business environment for foreign investors in the entire country.

The new Shanghai Free Trade Pilot Zone will be developed in line with the other three areas namely Nansha (南沙), Qianhai (前海), Hengqin (横琴) in the Guangdong Province to look for economic breakthrough. We will continue to pay attention to the development of Shanghai New Free Trade Pilot Zone which is regarded by the senior government officials as a snapshot of an "upgraded Chinese economy".

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SAFE's New Rules Simplify Foreign Exchange Receipts and Payments for the Service Trade
by Edwarde Webre ( and
Lynn Lin (

On 18 July 2013, the State Administration of Foreign Exchange (SAFE) of China released the Circular Regarding Foreign Exchange Administration of Service Trade (Huifa [2013] No. 30) ("Circular"), which includes Guidelines for the Administration of Foreign Exchange Under Service Trade and Detailed Rules for the Implementation of the Guidelines for the Administration of Foreign Exchange Under Service Trade, as well as a list of 49 SAFE regulations to be abolished. The Circular became effective on 1 September 2013. The Circular marks a significant relaxation of China's foreign exchange controls and facilitates the making of service trade related foreign exchange payments.

The Circular applies to foreign exchange receipts and payments ("FERP") related to trade in services, including service fees, dividends, royalties, profits, expense reimbursements and other current account matters other than trade in goods ("Service Trade"). It relaxes regulatory restrictions and simplifies procedures related to the Service Trade FERP for legitimate transactions and eliminates the need to provide supporting documentation for service related remittances of USD 50,000 or less.

The Circular cancels SAFE approval requirements for Service Trade FERP. The relevant financial institution involved in the remittance, normally an onshore commercial bank in China, now has the authority to directly process Service Trade FERP without SAFE's pre-approval. While a prompt report of the remittance to SAFE is still required, SAFE action is not required for the remittance. SAFE will continue monitor Service Trade FERP via the foreign exchange monitoring system and will have the authority to conduct on and off site verification or inspection of abnormal FERPs. The onshore institutions/individuals and the financial institutions involved must comply with the relevant regulatory requirements and will be responsible for timeliness, completeness and accuracy of the submitted information.

Transaction documents ("交易单证") will no longer be required to be submitted to the relevant financial institution for review or verification for a single Service Trade FERP in an amount of USD 50,000 or less, unless the source of FERP funds is unclear or the remittance is suspicious, in which case the financial institution shall require the relevant onshore institution/individual to submit transaction documents for review. Based on the SAFE statistics, almost 88% FERP transactions involve less than USD 50,000. This should significantly ease the remittance process.

The transaction, however, needs to be legitimately under the threshold. The Circular explicitly prohibits the intentional splitting of single transactions into multiple transactions to avoid the threshold. Such illegitimate splitting will be subject to aggregation, and SAFE may impose a fine up to 30% of the foreign exchange remittance amount. In serious cases, which are not clearly defined, SAFE may impose a fine of between 30% to 100% of the said remittance amount.

In contrast, when handling a single FERP transaction related to Service Trade in an amount over USD 50,000, the financial institution shall review, verify and retain transaction documents, which are required to be compliant with PRC laws, regulations and prevailing business practices. The required documentation may include a contract, invoice/settlement list and special documents based on the nature of the service transactions. Chinese translations of any foreign language transaction documents will be required.

The Circular also cancels many pre-approval and pre-registration requirements. It is no longer necessary to produce the relevant tax payment certificate to arrange the outbound remittances of over USD 50,000, but the onshore payer shall make recordal filing with the state tax bureau through the submission of the duly-stamped contract or relevant transaction documents (with Chinese translations). Standard Tax Recordal Filing Form of External Payments under Trade in Services and Other Items will normally need to be submitted with certain exceptions as specified in the Announcement of the State Administration of Taxation and the SAFE on Taxation Record-filing of External Payments under Trade in Services and Other Accounts (Announcement 2013 No. 40 of the State Administration of Taxation and the SAFE) released on 9 July 2013. A Standard form will be returned affixed with the chop of the state tax bureau to the payer for filing with the financial institution.

SAFE has also relaxed its restrictions on the offshore deposit of the foreign exchange income. An onshore institution (exclusive of any onshore individual) in service trade may retain its service trade foreign exchange income in an offshore foreign exchange deposit account ("Offshore Deposit Account") and use it to receive payments from its offshore payers. Nevertheless, an onshore institution must satisfy certain conditions in order to open such an account (i.e. the onshore institution must be engaged in the service trade, have service trade foreign exchange income and ongoing payment and settlement needs overseas, and be free of violations of SAFE's regulations for the prior two years, etc.) and, the opening of such an account is subject to SAFE approval. Deposits in an Offshore Deposit Account are not permitted to exceed 50% of the account holder's total service trade related foreign exchange income for the last year.

These changes should greatly facilitate the handling of foreign exchange service payments. The simplification of the procedures for remittances of USD 50,000 or less should be particularly welcome as should the elimination of the tax pre-payment requirement, although the taxes themselves will remain applicable.

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Whilst every effort has been made to ensure the accuracy of this publication, it is for general guidance only and should not be treated as a substitute for specific advice.