Transferring Assets Abroad

By Fang Yuanyuan

The key aspects are the proper identification of the applicant and determining the legitimacy of the ownership of the assets.

E mboldened by repeated surpluses in the international balance of payments, strong foreign exchange reserves in the years immediately after China's entry into the World Trade Organization, and the rising needs of individual property rights protection, in 2004 the People's Bank of China unveiled the Announcement for the Administration of Purchase and Payment of Foreign Exchanges Due to Transfer of Individual Properties to the Outside of China [PBOC Announcement No. 16, (2004) ], providing a legal channel for individuals to transfer their assets outside of China.

From the perspective of policy implementation, the key aspect of managing foreign exchange transfers related to individual assets is the proper identification of the applicant and the legitimacy of the ownership of the assets. The following article examines some typical issues regarding the transfer of assets offshore.

Determining Immigrant Status

Case #1.Individual A is a shareholder in a company in China. The same individual obtained a Hong Kong permanent identity card in 2007 and mainland travel permits for Hong Kong and Macau residents in 2017. The same person now hopes to remit dividends obtained between 2011 and 2017 to Hong Kong via a bank transfer.

The Notice of the People's Bank of China on Improving Individual Bank Account Services and Strengthening Account Management [PBOC Document, No. 392 (2015) ] states the following as to determining identification: “When opening an individual bank account for the account opening applicant, the bank shall require the applicant to provide his or her own valid identity certificate...If it is still difficult for the bank to determine the identity of the account opening applicant through the valid identity certificate, the bank shall require the applicant to provide supplementary identification materials.” It goes on to say that “a valid identity certificate includes...the mainland travel permit for Hong Kong or Macau residents, if the applicant is a resident in the Hong Kong Special Administrative Region or Macau Special Administrative Region... Supplementary identification materials shall include, but not be limited to the resident identity card of the Hong Kong Special Administrative Region or the Macau Special Administrative Region, if the applicant is a resident in the respective region...” On this basis, a mainland travel permit for Hong Kong or Macau residents is recognized as a valid identity certificate, while the resident identity card of Hong Kong or Macau is considered supplementary identification material.

Therefore, a bank should be able to handle A's property transfer application based on the travel permit alone.

Suggestions

The mainland travel permit for Hong Kong and Macau residents, also known as a home-visit permit, is issued by the Exit-Entry Administration of the Ministry of Public Security of the People's Republic of China. It is used by Hong Kong and Macau residents to travel to the mainland. To apply for this permit, applicants need only submit photos and ID cards. Document No. 392 considers a travel permit as a valid identity certificate. However, regarding property transfers, it is more reasonable to use the Hong Kong permanent resident identity card to determine an applicant's residency status.

Transferring Insurance Payments Abroad

Case #2.Individual B, who purchased personal accident insurance in 2018, made his or her son X as the beneficiary (X obtained permanent residency abroad in 2017). B died in an accident and insurance benefits were paid to X by the insurance company. X then wanted to remit this sum abroad.

Case #3.Individual C, who purchased health insurance in 2004, made his or her daughter Y as the beneficiary (Y obtained foreign nationality in 2019). In 2018, individual C received treatment in hospital for an illness. The insurance company paid Y a sum of insurance benefits, which Y hoped to remit abroad.

Case #4.Individual D bought life insurance in 2002 and made his or her daughter Z as the beneficiary (Z obtained foreign nationality in 2015). Individual D died in 2019, and an insurance benefit was paid to Z, who hoped to remit the funds abroad.

Foreign exchange management divides insurance into two categories: one is service trade transactions, such as personal accident insurance and medical insurance. The other is financial and capital transactions, which covers life insurance and insurance with investment returns. Thus, the insurance benefits paid to X under personal accident insurance in Case #2 is considered service trade income, and therefore can be remitted abroad through a bank. Z's insurance benefits paid under a life insurance policy belongs to financial and capital account earnings. For Y in Case #3, whose benefits come from health insurance, the insurance type should be further verified to determine the remittance method: if it is a non-refundable insurance, the benefits are considered service trade income, and can be remitted abroad directly. If they are from a refundable insurance, then the benefits would be considered as financial and capital account income.

How to determine the time of receipt of benefits is a key issue in transferring financial and capital account income abroad. If we define the time of obtaining benefits as when the purchase of the insurance was made, both Y and Z in Cases #3 and #4 have the right to remit these funds abroad. However, if we define the time of obtaining the benefits as when the payment was made, then Z is not eligible for immigration transfer since her foreign nationality - which was obtained in 2015 - predates the 2019 payment. Additionally, since Z is the direct beneficiary of the insurance, this case is not treated as an inheritance and there is no reasonable basis for Z to transfer this sum of money.

Suggestions

The China Insurance Regulatory Commission and the China Banking Regulatory Commission have strict regulatory requirements on insurance products and sales. Insurance companies normally use standardized contracts and follow a well-established claim compensation process. It is not possible for the insurer to collude with the insured individuals or beneficiaries in a fraudulent scheme. Insurance is therefore less likely to be a channel for improper property transfers. To ensure overseas insurance benefits transfers can be made smoothly, it is suggested that, if both the insured and the beneficiary are domestic residents, and the premiums are paid in China, authorities should further clarify the policy as soon as possible and take the time of the purchase of insurance as the effective time of the benefits.

Funds from the Sale of a Home

Case #5.Individual E, who owned domestic real estate before immigration, sold the property and hoped to remit the proceeds overseas. However, there is no buyer's signature on the online contract.

Let's take sales of existing homes in Beijing as an example. The buyer and seller in a transaction will first sign a Beijing Stock House Sale and Purchase Contract with a broker. After it is determined that the transaction is between qualified parties, the buyer and seller sign a Beijing Stock House Sale and Purchase Contract and complete online filing (normally referred to as “online signing”). Next, after payment (including taxes) is made, the transfer of the property is recorded and the buyer receives a property ownership certificate. Since the “online signing” is filed with a government department, authorities normally consider this as real estate transfer evidence when handling property transfers. However, in some cases, buyer and seller sign only a paper contract, which is then scanned and uploaded to the government website by a broker. The online contract can be printed by brokers anytime they want, but this does not have the signatures of either the buyer or the seller. At this point the real estate transfer has already been completed, and in most cases the buyer would prefer not to sign any further confirmation documents. That could cause problems for the seller such as individual E in Case #5.

Suggestions

In a real estate deal, the tax certificate issued by authorities contains basic information on the buyer and the seller, as well as the property's location and the transaction price. The property ownership certificate also proves that the property transfer has been completed. It is suggested that the online signing be used as supplementary material, as it is not necessary to be provided when the fact can be proved by the other materials as mentioned above.

Inheritance Transfers and Permanent Residents

Case #6.Individual F, who obtained permanent residency in another territory in 2010, inherited a house in China and sold it in 2018. He or she hopes to transfer the proceeds from the sale abroad.

According to the Interim Measures, inheritance transfers apply to “foreign citizens or residents of the Hong Kong and Macau Special Administrative Regions of China” though those who are permanent residents, but not yet foreign citizens are not covered. Since individual F has not acquired a foreign nationality, he or she is not eligible for an inheritance transfer. Policy obstacles will make it difficult for F to transfer the funds abroad.

Suggestions

Let's look at China's administrative measures as they pertain to foreigners applying for Chinese nationality. After obtaining a permanent residence permit in China, individuals from other countries are eligible to apply for Chinese citizenship. Nationality policies in many countries are basically the same as that of China. For those who need to transfer inherited funds, it would be easy for them to apply after obtaining foreign nationality.

Determining Status of Public Officials

Case #7.Individual G, who worked at a university before emigrating, declared that he or she was not a public official when registering a property transfer.

Individual H, who worked in a hospital before emigrating, declared that he or she was a public official when making a property transfer.

According to current regulations, foreign exchange authorities need to confirm with relevant authorities when public officials or their immediate relatives make a property transfer of over 1 million yuan. Thus, individuals who apply for property transfer need to declare whether they or an immediate relative is a public official. The problem is, “public official” is not a standard legal term and is easily confused with “staff of a state entity” or “state personnel”.

Suggestions

The scope of this designation can be determined by referring to the Supervision Law of the People's Republic of China implemented in 2018. This includes public servants and personnel managed by the Civil Servant Law of the People's Republic of China, personnel engaged in public affairs at organizations managing public affairs upon authorization by laws or regulations or lawful entrustment by state organs; managers of state-owned enterprises; personnel engaged in management in public entities in education, scientific research, culture, health care, and sports, among others; personnel engaged in management at basic-level self-governing mass organizations and other personnel who perform public duties in accordance with law.

Suspicious Property Transactions

In Case #8.Individual I, who obtained permanent residency in another territory, plans to remit funds from the sale of more than 10 homes. The properties were acquired before he

2004

The first departmental-level regulations establishing procedures for transferring individual-owned assets out of China.

Interim Measures for the Administration of Foreign Exchange Sales and Payments in Transferring Individual-Owned Assets Abroad (2004)

2004

SAFE Circular on Printing and Distributing the Operational Directions (Trial) of the Interim Measures for Administration of Foreign Exchange Sales and Payments in Transferring Individual-Owned Assets Abroad (2004)

Branches of SAFE are temporarily not authorized to conduct document verification;

Foreign exchange business exceeding 500,000 yuan must be reported by local authorities to SAFE for approval;

Under “Emigration Asset Transfers,” funds should be remitted outwards in separate batches;

Separate applications must be made for transferring assets inherited from different decedents.

Five separate government departments have separate responsibilities in the regulation of foreign exchange business.

2005

Joint Circular of SAFE, the Ministry of Foreign Affairs, the Ministry of Public Security, the Ministry of Supervision and the Ministry of Justice on the Implementation of the “Interim Measures for Administration of Foreign Exchange Sales and Payments in Transferring Individual-Owned Assets Abroad” (2005)

The Circular of the State Taxation Administration and SAFE on Issues Concerning the Submission of Tax Certificate or Tax Clearance Certificate for Transferring Individual-Owned Assets Abroad (2005)

2005

This circular clarifies tax issues related to outbound transfers of assets owned by individuals.

Additional authority was delegated to

SAFE branches;

This eliminated the requirement that business of more than 500,000 yuan must

be report to SAFE;

This removed the requirement that funds remitted outwards under “Emigration

Transfers of Assets” should be remitted in separate batches;

This eliminated the requirement that separate applications be made for the outward transfers of assets inherited from different decedents;This removed a requirement for a notarized certificate of property ownership and a principal-agent agreement.

2014

SAFE Circular on Further Improving and Adjusting Foreign Exchange Regulation under the Capital Account (2014)

Circular of the General Affairs Department of SAFE on Printing and Distributing the Operation Directions of the Foreign Exchange Business

under the Capital Account (2017)

2017

For overseas transfers of assets worth less than US$500,000, the applicant should state the source of the assets. There is no need to submit a certificate of income source or documents proving property ownership.or she obtained immigrant status in another country.

This case involves a large sum of money. To verify the legitimacy and authenticity of the source of the property, the foreign exchange authority must coordinate with multiple departments, such as public security, judicial and supervision departments. However, due to the absence of a reliable information exchange mechanism among these departments, there will be information asymmetry. For instance, pending lawsuits and legal cases would not be known by the foreign exchange authorities. Therefore, it is difficult to put into practice the provision that “property transfers involving domestic criminal cases or civil lawsuits shall not be accepted until the legal issue is settled.”

Suggestions

In 2005, five regulatory bodies jointly issued the Notice of the State Administration of Foreign Exchange, the Ministry of Foreign Affairs, the Ministry of Public Security, the Ministry of Supervision, and Ministry of Justice on Relevant Issues concerning the Implementation of the Interim Measures for the Administration of Purchase and Payment of Foreign Exchanges Due to Transfer of Individual Properties to Foreign Countries [SAFE Document, No. 9, (2005)]. This document stated that the importance of establishing an effective mechanism of communications and coordination, so as to prevent risk. The details include:

first, establish an information notification mechanism. The supervisory agency shall, on a regular basis, provide foreign exchange authorities the relevant materials of the individuals who are already restricted for foreign property transfer. Second, there is a need for a mechanism to assist in investigations. For applications involving suspicious properties or suspected illegal transfers involving large sums, foreign exchange authorities shall verify the details of the case with public security and judicial departments. Replies to inquires shall be made within 10 working days. With the increasing number of individual property transfers, as well as under the serious effort to prevent money laundering, terrorist financing and tax evasion, information notification channels become particularly important.