How to ensure compliant repatriation of funds for Web3 startups going overseas?
One method of capital repatriation is through foreign direct investment (FDI).Author: Jin Jianzhi, Mankun Blockchain
A common dilemma for Web3 entrepreneurs is that most of the company's operating income is in overseas companies, or the financing received can only be exchanged for legal currency overseas in a compliant manner. However, the main team of the company is located in the mainland, and the operating expenses are primarily in the mainland. In this context, how can the legally obtained operating income and financing from overseas companies be repatriated to the mainland? One method is through Foreign Direct Investment (FDI).
What is FDI?
According to the Foreign Investment Law of the People's Republic of China and other relevant regulations, FDI can be understood as investment activities directly conducted by foreign natural persons, enterprises, or other organizations (hereinafter referred to as foreign investors) in China using foreign currency, physical goods, technology, etc. Common scenarios of FDI include:
(1) Foreign investors establishing foreign-invested enterprises in China alone or jointly with other investors;
(2) Foreign investors acquiring shares, equity, property shares, or other similar rights in enterprises within China.
Currently, China implements a pre-entry national treatment and negative list management system for FDI. In short, except for certain specific fields where the state implements special management measures, foreign investors and mainland investors enjoy the same rights and obligations for other foreign investments.
In the information transmission, software, and information technology service industries, only "telecommunications companies: limited to telecommunications services opened under China's WTO commitments, the foreign shareholding ratio in value-added telecommunications services shall not exceed 50% (excluding e-commerce, domestic multi-party communication, storage and forwarding, call centers), and basic telecommunications services must be controlled by Chinese parties." and "investment in internet news information services, online publishing services, online audio-visual program services, internet cultural operations (excluding music), internet public information release services (excluding content already opened under China's WTO commitments)" are restricted in the Special Management Measures for Foreign Investment Access (Negative List) (2021 Edition). For other fields, there are no restrictions in the mainland.
In short, common entrepreneurial fields for Web3 entrepreneurs, such as public chain development, cross-chain technology, DAPP, DID, or other on-chain infrastructure construction, can safely apply FDI.
How to Conduct FDI?
Taking the establishment of a foreign-invested enterprise as an example. Based on the policy orientation of expanding openness, with the implementation of the Foreign Investment Law on January 1, 2020, the original approval and filing management system for the establishment and change of foreign-invested enterprises has been canceled, and foreign-invested enterprises only need to conduct information reporting. The establishment of foreign-invested enterprises has become more convenient.
Similar to the establishment procedures for mainland companies, after submitting the registration materials required by the market supervision and management department (it should be noted that since the shareholders are foreign companies, the submission of shareholder qualification certificates or identity proofs should be notarized by the notary authority of the respective country and certified by the Chinese embassy or consulate in that country), the establishment registration of the foreign-invested enterprise can be completed. The subsequent process is roughly: FDI foreign exchange registration → opening capital account → capital remittance → account registration → settlement and use → profit remittance → cancellation registration. FDI foreign exchange registration and subsequent capital account opening, capital remittance, etc., can be directly handled at the bank.
How to Use the Funds?
The capital remitted from abroad cannot be used directly after being recorded. It is necessary to complete the international balance of payments declaration according to the bank's requirements, and then fill out the "Application Form for Registration of Currency Contribution for Domestic Direct Investment" at the bank where the funds are recorded to handle the currency contribution registration, and only after obtaining the "FDI Registration Form" issued by the bank can the capital be used.
The company can freely choose to use the capital within its business scope for payment settlement or voluntary settlement, generally with two settlement methods available:
(1) Payment settlement method: When the enterprise actually has a domestic RMB payment business demand, it handles the settlement and payment, and the settlement amount shall not exceed the payment amount.
(2) Voluntary settlement method: The enterprise's capital can be partially or fully settled first, and the RMB after settlement enters the corresponding settlement waiting payment account, and subsequent applications can be submitted one by one according to actual payment needs. Generally, enterprises need to submit authenticity materials to the bank in advance for each payment of capital.
However, if the enterprise meets the conditions for the facilitation of capital account foreign exchange income payment (excluding non-financial enterprises, real estate enterprises, and government financing platforms, meeting conditions such as no foreign exchange administrative penalties in the past year, and if it is a goods trade foreign exchange income enterprise, its goods trade classification result should be Class A, etc.), it can also enjoy facilitation services. Enterprises included in the facilitation scope do not need to provide authenticity proof materials to the bank in advance for each domestic payment of capital account foreign exchange income and its settled RMB funds, and the enterprises can keep relevant materials for 5 years for future reference.
If the subsequent foreign-invested enterprise decides to distribute dividends from undistributed profits, it can also be handled directly at the bank. According to legal requirements, after extracting public reserves and compensating for losses from previous years, and after the relevant profits are audited by an accounting firm and go through the company's internal resolution procedures, the profits of foreign shareholders can be remitted out after tax payment.
Conclusion
In summary, Web3 entrepreneurs can use FDI to legally repatriate overseas funds to foreign-invested companies in the mainland for paying the operating expenses of the mainland team. If the foreign-invested company subsequently distributes dividends, the funds can also be legally remitted abroad, making it a flexible option. Of course, there are other compliant methods for fund repatriation besides FDI, and you can continue to follow the Mankun series of articles.
