New Options for Shareholder Loans

Loans provided by an overseas shareholder to its subsidiary (or joint venture) in China belong to the category of cross-border capital account transactions. Such transactions are generally subject to approval by SAFE (State Administration of Foreign Exchange). The maximum amount of overseas borrowing is limited by specific regulations. After the “Macro-prudential Management of Full-covered Cross-border Financing” (“Circular No. 9”) were issued in May 2017, there are currently two different options, when registering a cross border borrowing agreement:

1. Old method – can still be chosen during a transition period after the implementation of Circular No. 9. Currently it is not known, how long the transition period will last.

Within 15 working days after signing the loan agreement, the borrower in China has to submit the loan agreement and other application documents to SAFE for the approval and registration of the shareholder loan.

The maximum amount of all shareholder loans ever obtained is limited by the gap between the total investment amount (as stated in the Articles of Association) and the registered capital (as per business license). It is required that the registered capital has been paid in in accordance with the schedule in the Articles of Association. SAFE may require an audited capital verification report for the application procedure. If a shareholder loan with term longer than one year is (partially) repaid, such repayment will not increase the limit available for new loans. Repayment of short-term shareholder loans (term not exceeding one year) will however free up the respective amount in the limit.

Example:
ABC China is a 100% subsidiary of ABC Germany, with a total investment of 1 Mio EUR and a registered capital of 700 TEUR, which has been completely paid in. The maximum amount of a shareholder loan is therefore 300 TRMB. If ABC China borrows 200 TEUR for 3 years with repayment of 100 TEUR after 2 years and 100 TEUR after 3 years, the total amount of further shareholder loans possible under the “Old method” will be 100 TEUR (300 TEUR – 200 TEUR).

2. New method, based on (“Circular No. 9”), available since May 2017.

After signing the loan agreement and at least 3 days before the disbursement of the loan, the borrower in China has to submit the loan agreement and other application documents to SAFE for registration of the shareholder loan.

Under the new method, the maximum outstanding of all shareholder loans is calculated from the applicant’s equity (based on the latest audited financial statements), the currency and the term of the loans according to the following scheme:

Max cross border borrowing
(in multiples of net equity)
Term of the loan
up to 1 year > 1 year
RMB foreign currency RMB foreign currency
Max cross border borrowing
(in multiples of net equity)
1.33 1 2 1.33

Existing loans taken out before the application according to the old or the new method will be deducted from the available limit. After switching to the new method, it is not possible to switch back to the old method later.

Example:
ABC China has a net equity of 850 TRMB per audited financial statements of 31-Dec-2017. The maximum amount for shareholder loans in EUR with term > 1 year would be the equivalent of 1.33 * 850 = 1,133 TRMB = 151 TEUR (at exchange rate 7.5). ABC China has already received a 5-year loan in EUR from its shareholder ABC Germany, the remaining outstanding amount of this loan is 80 TEUR. Therefore, the upper limit for additional borrowing of EUR with term > 1 year would be 151 – 80 =71 TEUR

It should be noted that the approval procedures and criteria applied by the regional SAFE bureaus may differ from the principles outlined above. Before making any decision with regard to shareholder loans, we recommend to contact the SAFE bureau in charge in advance.