Intercompany Loans Now Possible in China

Under the General Provisions on Lending issued by the People’s Bank of China (“PBOC”) on 28 June 1996, intercompany loans between two PRC non-financial entities are not permitted. In the past, any lending between companies had to be structured as so-called “entrustment loan” arrangement. I.e. a bank was entrusted to act as agent to assist in granting and recovering the loan. The entrusted bank only received a commission fee but did not bear the loan risk. The Reply on Late Return of the Principal of Intercompany Loans (Fa Fu 1996 [No.15]) (“1996 Reply”) of the PRC Supreme People's Court ("SPC") of 23 September 1996 also confirmed that intercompany loan contracts are invalid.

On 6 August 2015, the SPC now promulgated the Provisions on Several Issues concerning the Application of Law in the Trial of Private Lending Cases (the "2015 Provisions"). The 2015 Provisions entered into effect on 1 September 2015 and brought a breakthrough for intercompany loans.

Please click the Source Link to read the most significant changes.