Laws of the People's Republic of China

The Ministry of Finance, the State Administration of Foreign Exchange

Circular of the Ministry of Finance (MOF) and the State Administration of Foreign Exchange (SAFE) on Further Strengthening the Verification of Payment of Legal Capital by Investors of Enterprises with Foreign Investment and Perfecting Foreign Exchange Registration of Foreign Direct Investment (FDI)

CaiKuai [2002] No.1017

March 15, 2002

Financial departments in all provinces, autonomous regions, municipalities directly under the Central Government, SAFE branches in all provinces, autonomous regions, and municipalities directly under the Central Government, exchange administration offices, SAFE branches in the cities of Shenzhen, Dalian, Qingdao, Xiamen and Ningbo, all designated Chinese-funded foreign exchange banks:

In order to further strengthen the verification of payment of legal capital by investors of enterprises with foreign investment, perfect foreign exchange registration of FDI, ensure rational and sound foreign exchange flows, and promote healthy development of FDI, a circular is hereby given on issues related to the procedure of the verification of foreign investor's payment of legal capital and involved foreign exchange registration of FDI.

1.

When verifying the payment of legal capital by investors of enterprises with foreign investment, the certified public accountant (CPA) shall abide by the Independent Audit Practice Announcement No.1-Verification of Legal Capital Payment and the Operational Norm Guidance for Chinese CPAs No.3-Verification of Legal Capital Payment (Experimental), and follow methods listed below in accordance with specific conditions:

1.1

If a foreign investor pays legal capital in foreign exchange, the CPA shall check the Certificate of Foreign Exchange Registration of the invested enterprise with foreign investment to see whether foreign exchange funds have been entered in the paid-in legal capital account which had been opened upon the approval of a SAFE branch, subbranch or exchange administration office (hereinafter referred to as SAFE office for all). The CPA shall also mail to in quire the account opening bank.

1.2

Under any of the following circumstances, the CPA shall check the original of Certificate of Approval of the SAFE for Foreign Exchange Business under Capital Account presented by the enterprise to see whether its behavior is in accordance with the approval of the SAFE office;

1.2.1

A foreign investor pays legal capital with cash from net profit of another domestic enterprise with foreign investment, and proceeds from domestic liquidation, share transfer, recoup of previous investment ahead of other investors, and withdrawal of previous investment;

1.2.2

An enterprise with foreign investment pays its legal capital with its capital provisions, earning provisions, retained earnings, registered external debt and payable dividend;

1.2.3

The foreign investor reduces payment of legal capital;

1.2.4

Other kinds of payment which shall be reported to the SAFE office for approval in accordance with legal provisions.

1.3

If a foreign investor makes payment in kind, the CPA shall check the customs declaration form of import to see whether subject goods are shipped from overseas.

1.4

In the case of the enterprises with foreign investment whose foreign investor makes payment by means listed from Clause 1.1 to 1.3, the CPA shall send a letter of inquiry to the local SAFE office in the locality where the enterprises with foreign investment resides, enclose the duplicate of bank's reply to inquiry, certificate of approval for foreign exchange business under capital account, or customs declaration form of import, in accordance with foreign investor's mode of payment, to verify whether the documents are authentic and legitimate.

In case a foreign investor makes payment in foreign exchange with domestic foreign exchange transfer involved, the CPA shall check whether the transfer has been approved by the SAFE office.

2.

All designated foreign exchange banks shall vigorously cooperate with CPAs. After receiving a letter of inquiry, the bank shall check related data, make clear comments, affix a valid seal to the letter, and send it back to the CPA within 5 working days after receiving the inquiry.

If the CPA directly goes to the designated foreign exchange bank to inquire, the latter shall make a reply on the same day.

3.

After receiving a letter of inquiry about foreign investor's payment of legal capital, the SAFE office shall verify the authenticity and legitimacy of attached documents in accordance with relevant regulations.

If attached documents are authentic and legitimate, the SAFE office shall register subject FDI in accordance with Article 6 of this circular, write off subject customs declaration form of import from the network, and fill in the reply to inquiry with a serial number of foreign exchange registration of FDI. If attached documents are false or illegal, the SAFE office shall not register subject FDI, and give an explanation in the reply to inquiry.

The SAFE office shall affix the special seal for foreign exchange business under capital account to the reply to inquiry, and send the reply to the CPA within 5 working days after receiving the inquiry.

4.

Only after receiving the reply to inquiry, can the CPA issue a verification report of payment of legal capital upon the reply where a serial number of foreign exchange registration is clearly recorded. The CPA shall send a duplicate of the reply to the enterprise for record.

In case the SAFE office indicates the attached documents are false and illegal, the CPA shall not issue a verification report of payment of legal capital.

If the CPA does not issue a verification report of payment of legal capital due to some change of circumstances after receiving a reply to inquiry clearly indicating a serial number of foreign exchange registration, he/she shall inform the SAFE office of the change in written form. The SAFE office shall then write off the serial number in good time.

5.

When handling foreign exchange business at the SAFE office and designated foreign exchange bank or being inspected, the enterprise with foreign investment shall present the verification report of payment of legal capital and the duplicate of the reply to Inquiry about the payment of legal capital in accordance with legal provisions.

6.

The SAFE office shall book the foreign exchange registration of FDI, record the enterprise name, times of payment, serial number of foreign exchange registration of FDI, means of payment, amount, and date of payment in accordance with the letter of inquiry, and file the duplicate of the reply to inquiry and attached documents.

7.

SAFE offices shall check the circumstances of foreign exchange registration of FDI in the previous year through the annual joint inspection on enterprises with foreign investment.

8.

Financial departments and SAFE offices at all levels shall strengthen the regulation of the work related to verification of payment of legal capital carried out by accountant firms and CPAs, and of foreign exchange registration of FDI in accordance with their respective duty and authority. An accountant firm or a CPA that issues a false verification report of payment of legal capital against operational norms and relevant regulations, or an enterprise that has acquired registration by presenting false documents or by other fraudulent means shall be punished in accordance with relevant laws and regulations.

9.

If a designated foreign exchange bank or a SAFE office fails to reply the letter of inquiry in accordance with this circular, the CPA may report it to the SAFE or the relevant SAFE branch or sub-branch, or to the Association of CPAs.

10.

This circular shall enter into force as of May 1, 2002.

Attachment:

1. Letter of Inquiry to Bank (omitted)

2. Letter of Inquiry about Foreign Investor's Payment of Legal Capital (omitted)

3. Certificate of Approval by the SAFE for Foreign Exchange Business under Capital Account (omitted)