Import & cross border payment solutions with 3rd parties in China – A Case Study

Companies importing products to China often face a complex set of payment rules. We did a case study about a previous clients issues concerning cross border payment.

The Issue:

Company A, which is based in Canada, wanted to start selling its machinery in China. For this reason it found a partner in Dalian, China, Company B. Company B is a Dutch WFOE, which has provided maintenance services for agricultural equipment in the area of Dalian for a long time. However, it never before sold machinery, or imported it. Therefore it had to apply for the necessary permits. Company A needed this machinery in China soon, and couldn’t wait for the set up process to be finished. Since there needed to be a company in China taking on the role of the importer, and its partner Company B didn’t have the necessary licenses yet, it had to ask a Chinese company, Company C, to pretend to be the buyer.

Company A paid all the import fees and duties via Company C, and now wanted Company C to deliver the machines to Company B. For several reasons, for example the risk of fraud, default and legal incompliance, Company A wished the payment for its products to be made directly from Company B, without involving Company C. However, there was no contract between Company A and its Partner B over the purchase of the machines – only one contract between Company A and Company C.

Company A proposed the following: In European law it is possible to make a contract under which Company C delivers the machines to Company B, and instead of taking the payment, cedes the payment obligation it has to Company A to Company B. After Company A accepts this ceding of the obligation, Company B could directly pay the full amount to Company A.

Under Chinese law this however was not possible, because of the strict rules for cross-border payments and transactions.

The Solution:

Since the transaction was an import of goods into China the process was regulated by Chinese law. That meant that Company C, the importer had to withhold the taxes and duties, levied on this transaction. The Foreign Exchange Control Regulations and Policies in effect in the PRC impose strict rules for cross-border payments and transactions. Under two conditions, a direct payment from Company B to Company A, was possible:

1. Company C, the Chinese importer, needed to be an import agent, having a license to import for other companies.
2. Partner Company B needed to be named on the paperwork of the import, the import had to be done “on behalf” of Company B.

If these conditions were met, a direct payment would have been simplified.

Unfortunately the second condition was not met – Company B was not mentioned on the import paperwork. Because only Company C was mentioned in the paperwork, the machines were its assets, and according to the Foreign Exchange Control Regulations and Policies only Company C could pay Company A. The ceding of the obligation as proposed by our client, Company A, to solve the problem, is difficult under Chinese law, whereas ECOVIS Beijing recommended another solution. To mitigate the risk from a large onetime payment, we set up an additional contract between Company B and Company C, in which Company C delivers the machines to Company B and in return receives a series of smaller payments of about 10% of the total amount. Another contract between Company C and Company A obligated Company C to immediately pay any payments received from Company B to Company A – giving Company B the possibility to always stop payments if any problems arose. This was a relatively safe and cheap solution for this problem.

Although we found a good solution, we recommend you to come to us before starting to import into China – in this case a small change on the paperwork could have saved a lot of trouble in terms of money and time.

	Richard Hoffmann is a partner at ECOVIS Beijing China. Richard obtained an honors degree in law and worked in Germany, America and China for various prestigious law firms prior to joining ECOVIS. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: richard.hoffmann@ecovis.com
Ecovis Beijing is the trusted tax and legal advisor of several embassies and official institutions in China. It specializes in mid-sized international companies and is focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up to our Newsletter, give us a call +86 10-65616609 (ext 811/806) or contact us directly via Beijing@ecovis.com.