On April 28, 2013, the (Chinese) State Administration of Foreign Exchange (the “SAFE”) promulgated the Administrative Measures of Registration of Foreign Debts (the “Foreign Debt Measures”) together with the detailed Operational Guidelines of Administration of Foreign Debt Registration (the “Guidelines”). Both will be implemented from May 13, 2013. The Foreign Debt Measures and the Guidelines clarify certain uncertainties in the PRC foreign debt regime. We set out below the main content of the new regulations.
1. Under PRC law, if a company in the PRC takes out a loan from abroad, the relevant loan agreement shall be registered with the competent SAFE. Without the registration, the loan agreement is not valid and no remittance can be made abroad for repayment of the loan. In addition to registration of the foreign debt loan agreement, the Foreign Debt Measures and the Guidelines also explicitly require that
(1) an alteration registration shall be filed with the competent SAFE, if there are any amendments to the registered foreign debt loan agreement; and
(2) a cancellation of foreign debt registration shall be made to the competent SAFE when the balance of the unpaid foreign debt becomes zero and the debtor will not draw any funds under the loan agreement any more.
2. The SAFE Circular Haifa  No. 74, which requires registration of deferred payments under import contracts as foreign debts, nowadays already has not been implemented by the local counterparts of the SAFE for quite some time. The Foreign Debt Measures officially abolished such circular. Any trading credit between a foreign company and a company in the PRC is no longer required to be registered as foreign debt under the Foreign Debt Measures.
3. Pursuant to the Guidelines, if a foreign invested enterprise (“FIE”) intends to take out a loan from abroad, its foreign shareholder must have at least made the first installment of the capital contribution and also have duly made its capital contribution(s) to the FIE in accordance with the payment schedule stipulated in the Articles of Association. The following formula is adopted by the Guidelines to determine the foreign debt quota of an FIE, in case its registered capital has not yet been fully paid in:
The foreign debt quota of an FIE = (its total amount of investment – its registered capital) * (the amount of the registered capital already paid by its foreign investor / the amount of the registered capital payable by its foreign investor).
Before issuance of the Guidelines, in our experiences, in such case the foreign quota had to be reduced on a pro rata basis according to the ratio between the paid-in registered capital by all the parties (not only by the foreign party) and the entire registered capital.
4. For FIEs whose total amount of investment and registered capital are the same or which do not have a total amount of investment, they shall apply for approval by the competent Development and Reform Commission for taking out medium and long term loans from abroad or approval by the competent SAFE for taking out short term loans from abroad. Therefore, in order to avoid seeking the abovementioned approvals (which are usually difficult to be obtained by FIEs), it is advisable that
(1) an FIE in the form of a limited liability company shall apply for the statutory maximum amount of its total amount of investment at the time of its initial establishment and subsequent capital increase; and
(2) an FIE in the form of a company limited by shares (which does not have a total amount of investment) shall separately apply to the competent examination and approval authority for a verified total amount of investment.
5. If a borrower takes out a loan from abroad but fails to register the relevant loan agreement, the Guidelines allow such borrower to make up the foreign debt registration. However, in such case the foreign debt amount which can be registered is only limited to the actually disbursed and not yet repaid amount as verified by the competent SAFE. The said registration can only be made up after the relevant penalties on failure to make the foreign debt registration on time have been imposed by the competent SAFE on the borrower.
The Foreign Debt Measures and the Guidelines provide for very detailed requirements on the registration matters pertinent to foreign debts. According to the Foreign Debt Measures, in case of discrepancies between any previous SAFE regulations and the Foreign Debt Measures and the Guidelines, the latter shall prevail.