SAFE Issues Circular 29 to Ease the Approval Requirements for Cross-Border Guarantees

by Akin Gump Strauss Hauer & Feld LLP
Contact

On May 19, 2014, the State Administration of Foreign Exchange (“SAFE”) released provisions aiming to simplify the existing process and ease approval requirements for foreign guarantees in China and further broaden the scope and circumstances for the provision of foreign guarantees in cross-border transactions. According to the Notice on Issuing the Provisions of Foreign Exchange Administration of Cross-Border Guarantees (“Circular 29”), the Provisions of Foreign Exchange Administration of Cross-Border Guarantees (the “Provisions”) and Practice Guidance of Foreign Exchange Administration of Cross-Border Guarantees (the “Guidance”) will take effect as of June 1, 2014, and 12 regulations and rules regarding the current foreign guarantee regime in China will be abolished at the same time.  However, Measures for the Administration of Foreign Guarantees by Institutions within China, which were promulgated in 1996, will remain effective.

Below are the key changes under the Provisions and the Guidance:

A. Main Changes and Updates of Foreign Guarantee Regime in China

  1. New Concept of “Cross-Border Guarantee.”
    This is the first time for SAFE to introduce a concept of “Cross-Border Guarantee” (“CBG) which is broader than a foreign guarantee under rules adopted previously in China. When the following two requirements are satisfied, the guarantee under a guarantee agreement will be regarded as CBG:
    • the guarantor (which includes both entities and individuals) commits to the creditor in writing that the guarantor is legally bound to perform the obligations of payment pursuant to the guarantee agreement; and
    • cross-border payment and receipt of funds or cross-border transfer of the ownership of certain assets may take place due to the performance of the above-mentioned commitment by the guarantor.

Specifically, Cross-Border Guarantee covers the following three types of guarantee:

  1. Onshore guarantee for offshore debt where the guarantor is incorporated within China while both the debtor and the creditor are incorporated outside China.
  2. Offshore guarantee for onshore debts where the guarantor is incorporated outside China while both the debtor and the creditor are incorporated within China.
  3. Other CBG include but are not limited to the following:
    1. onshore guarantor with the debtor and the creditor being onshore or offshore respectively;
    2. offshore guarantor with the debtor and the creditor being onshore or offshore respectively;
    3. onshore guarantor, debtor and creditor with the collateral registered offshore; and
    4. offshore guarantor, debtor and creditor with the collateral registered onshore.
  1. Prior SAFE Approval is Eliminated and only Postregistration is Needed in Certain Circumstances.

    Subject to Section 3 below, the execution and performance of the guarantee agreement for CBG will not be subject to SAFE’s prior approval. Instead, postregistration with SAFE will be the main administrative measure for the CBG. Circular 29 makes it clear that SAFE’s approval, registration, filing or other administration requirement shall not be a condition precedent for the CBG contract to take effect.

        Below are the detailed filing requirements for the different types of CBG:

  1. In the case of onshore guarantee for offshore debt, the onshore guarantor shall register with SAFE within 15 working days upon the occurrence of any of the following:
    • execution of the guarantee contract;
    • execution of certain amendments to the guarantee contract or to the key clauses in the underlying debt contract (such as the extension of the contract, the debt/secured amount, debt/guarantee period or change to the creditor, etc.); and
    • guarantor’s performance of its guarantee obligation.
  2. In the case of offshore guarantee for onshore debt, the creditor must be an offshore financial institution and the debtor must be an onshore nonfinancial institution.

    Upon the performance of the guarantee obligation by the offshore guarantor in favor of the onshore creditor, the onshore debtor will consequently incur foreign debt owed to the offshore guarantor. Thereafter, the onshore debtor shall register with SAFE for the short-term foreign debt1 and file the relevant information with SAFE within 15 business days upon the performance of the guarantee obligation. The unpaid principal of foreign debt arising from the performance of the guarantee agreement owed by the onshore debtor is not allowed to exceed the onshore debtor’s audited net assets in the previous year; if exceeded, the exceeded amount shall use up part of the foreign debt quota of the onshore debtor; if the foreign debt quota is not enough, the exceeded portion will be deemed and handled as foreign debt without SAFE’s approval.
  3. In the case of other CBG:

    There is no registration requirement for the guarantee agreement with respect to such other CBR nor for the performance of it if the CBG is in compliance with other applicable rules and regulations.
  1. Limited Situations Requiring SAFE Approval
  1. In the case of onshore guarantee for offshore debt:

    When the onshore guarantor is a nonbank institution, after it has performed its obligation under the guarantee agreement and before the offshore debtor has fully paid off the debt owed to the onshore guarantor, the onshore guarantor is not allowed to enter into a new guarantee agreement for onshore guarantee for offshore debt without SAFE’s approval.  This restriction does not apply to an onshore bank guarantor.
  2. In the case of offshore guarantee for onshore debt:

    To avoid any onshore debtor taking advantage of the arrangement of offshore guarantee for onshore debt and remitting onshore funds to the offshore guarantor, especially under the circumstances that the onshore debtor and the offshore guarantor are affiliates and the onshore debtor deliberately defaults, the Provisions also specify certain restrictions where SAFE approval is required.

    After the guaranty obligation under the guarantee agreement has been performed by the offshore guarantor and before the onshore debtor has fully paid off the debt owed to the offshore guarantor, without SAFE’s approval, (a) the onshore debtor is not allowed to enter into a new agreement which is backed up by an offshore guarantee for such debtor’s onshore debt; or, (b) if the new offshore guarantee for such debtor’s onshore debt has been entered into yet the funds have not been fully withdrawn by such an onshore debtor,  such an onshore debtor shall temporarily suspend the withdrawal of any funds under that loan agreement.
  1. Other Noteworthy Points Under the Provisions and the Guidance
  1. Special Guarantor in the Case of Onshore Guarantee for Offshore Debt
    • Individual guarantor
      The Provisions suggest that onshore individuals may be able to independently provide the onshore guarantee. (Currently, onshore individuals may only provide joint guarantee together with an onshore corporate guarantor.)
    • Multiple guarantors
      In the case of multiple onshore guarantors for the same onshore guarantee for offshore debt, the parties may freely agree on any of the guarantors to deal with the registration with local SAFE in the place where such guarantor is located.
  2. Restrictions on the Use of the Offshore Loan Backed Up by Onshore Guarantee in the Case Of Onshore Guarantee for Offshore Debt
    • The debtor is not allowed to directly or indirectly transfer such offshore funds back to China by way of the arrangement of loan, equity investment or security investment within China.
    • The offshore loans are not allowed to be used by offshore entities or offshore individuals to directly or indirectly make equity investment or debt investment in a PRC onshore entity. Such forbidden investment includes but is not limited to the following:
      1. the debtor directly or indirectly uses the offshore loan for equity or debt investment in onshore entities;
      2. the offshore loan is used by the debtor to directly or indirectly acquire the equity in an offshore company if more than 50 percent of such offshore company’s assets are located within China;
      3. the offshore loan is used to repay the debts of the debtor or the debts of other offshore entities if the previous funds had been directly or indirectly transferred back to China by way of equity investment or debt investment; or
      4. the debtor uses the offshore loans to prepay the goods or service trading fees to onshore entities and the payment is made more than one year ahead of the provision of the goods or service and the total prepaid amount exceeds USD one million or 30 percent of the total purchase price.

Specific approval by SAFE is required if the debtor plans to use the offshore loan for any of the above-mentioned restricted purposes.

 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Akin Gump Strauss Hauer & Feld LLP | Attorney Advertising

Written by:

Akin Gump Strauss Hauer & Feld LLP
Contact
more
less

Akin Gump Strauss Hauer & Feld LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.