Please make sure that your transaction can be paid by your Chinese counter-party due to the control of the foreign exchange in China. As we all know that the Chinese currency (Renminbi) is still not free convertible. If a Chinese company wants to wire transfer Euro currency or any other foreign currency from China mainland to a foreign company abroad, it needs to get the Chinese currency converted first. Such step may take a long time due to the foreign exchange control in China. The State Administration of Foreign Exchange (SAFE) is the controlling authority and has its purpose to prevent capital from illegally leaving China. This control is strictly applied to the transaction which price is more than USD 50.000$, whether it is about sale of products or services, technology licensing contract or M&A transaction. So don´t be surprised if the payment delays or does not come at all, because your Chinese counter-party fails to go through the control.
According to the relevant regulations of SAFE, a Chinese company can only get the money transferred, if it can specify the intended purpose of the payment, prove there is a legitimate underlying transaction for the payment (contract, invoice and their Chinese translation) and get the tax related paid in China. For the payment of technology license royalty, it may be required in some case to get the contract registered. The requirements could be varied from case to case.
Therefore, in order to avoid any unexpected outcome, a foreign company must clarify upfront that its Chinese counter-party is willing and capable to go through the aforementioned formalities and take the following preventive measures especially for the transaction more than USD 50.000$ worth:
- Let the Chinese counter-party consult to a competent local bank for foreign exchange during the contract negotiation, in order to get the concrete requirements for the payment and the estimated timetable to fulfill the requirements;
- Include the requirements as obligation of the Chinese counter-party in the contract;
- Take only the net worth of the transaction price into the contract; and
- Write expressly payment before performance in the contract.
Some of these clauses may sound rude and hard to your Chinese counter-party. But please tell him openly: Please don´t take it personally. The only reason for that is the foreign exchange control.
