Ship finance leasing in China FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE, MINING AND COMMODITIES TRANSPORT TECHNOLOGY AND INNOVATION PHARMACEUTICALS AND LIFE SCIENCES Jonathan Silver Of Counsel, Norton Rose Hong Kong Marine Money, Shanghai 17 November 2011
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Finance leasing in China First introduced in the PRC in the 1980s The leasing industry has grown rapidly since the 1990s due to strong domestic demand Cross-border finance leasing within the PRC has not witnessed the same growth as the domestic market, particularly for ships The financial leasing industry is set to grow given the tightening of US$ liquidity in the China banking market. Finance leasing is seen as an alternative to difficult-toaccess (and costly) bank debt 3
Existing regulatory regime Previously, no unified legislation specifically relating to domestic finance leasing in the PRC Legislation in 2005, 2007 and 2009 has attempted to address the finance leasing regulatory regime Finance leasing companies (FLCs) are now governed by (i) the China Banking Regulatory Commission (CBRC) and (ii) the Ministry of Commerce (MOFCOM) 4
MOFCOM FLCs vs. CBRC FLCs MOFCOM Foreign FLC MOFCOM domestic FLC CBRC FLC Investor eligibility Low (only for total asset) Low (only for total asset) Principal investor or Ordinary investor Registered capital US$10 million RMB170 million RMB100 million Government regulation and intervention Lightly regulated Lightly regulated Heavily regulated and supervised 5
Offshore finance leasing in China Governance Governed by: Interim Measures for the Administration of Examination and Approval of the Overseas Investment Projects issued by the National Development and Reform Commission (NDRC) (effective 9 October 2004) Supplemental rules (effective 8 June 2009) Administrative Measures for Overseas Investment issued by MOFCOM (effective 1 May 2009) 6
Offshore finance leasing in China Structure Biggest single issue relates to the structure of the lease arrangements (including the jurisdiction of the parties) A common way for many domestic PRC lessors when structuring offshore or cross-border lease finance transactions is through a trusted relationship However: Establishment of an offshore entity by an onshore PRC entity would be a highly regulated overseas investment Domestic FLCs must obtain approvals from the regulatory bodies before establishing wholly-owned offshore leasing companies Capital injection into the offshore lessor by onshore FLC may be prohibited under PRC s foreign exchange regime 7
Treatment of a finance lease in China Restrictions Some Big Ticket assets which are to be the subject of a cross-border finance lease may not be permitted to be imported into China under a finance lease There are restrictions on the ability of onshore lessees to obtain an operating licence for certain types of machinery from the relevant regulatory bodies, including ships Operating a ship (by an onshore lessee) which is not under China flag may not be permitted under PRC regulations and may attract taxes and duties 8
Treatment of a finance lease in China (offshore lessor and onshore lessee) Payment of US$ denominated rentals by a PRC entity (as onshore lessee) to an offshore entity (as offshore lessor) may attract withholding tax This may increase its cost of financing the acquisition of the asset Registration with or approval from S.A.F.E. and/or NDRC approval may be required depending on the type of onshore lessee and the length of the finance lease S.A.F.E registration is required: if financial leases from an offshore lessor to an onshore lessee is regarded as a foreign debt; in circumstances where an onshore lessee guarantees the obligations of an offshore party 9
Treatment of a finance leases in China (onshore lessor and offshore lessee) It remains unclear whether an onshore FLC is permitted to provide lease finance products to an offshore lessee under the current regulations, in all instances Some equipment manufacturers have established their own financial leasing companies in offshore locations, thus being able to provide finance to offshore customers in the form of finance leases From 2010, CBRC allowed FLCs to set up SPVs in bonded areas of China to provide finance leases to offshore lessees. This is the way things appear to be going 10
Time for change? Current regulatory framework needs clarification How the cross-border payments of charter hire will be treated under the current foreign exchange control regime? Restrictions make it difficult for FLCs to register rights over aircraft, ships and other Big Ticket assets There have been some recent positive developments. State Tax Bureau issued two notices in 2010 and 2011 respectively, providing, if FLC sells the ship to the offshore lessee under a financial lease, FLC may enjoy (i) exemption of VAT when FLC exports the ship to the offshore lessee, and (ii) return of VAT paid by FLC for purchasing the (leased) ship. 11
Registration On 20 July, 2009, the Finance Lease Registration System introduced by the Credit Reference Centre of The People's Bank of China (PBOC) and the International Finance Corporation (IFC). It is an online registration system Regarded as a unified public platform to announce a lessor's ownership over the leased assets Reduces credit risk and the operational risk for leasing companies Provides transparency and protection for the owners of the security interests Problematic in that to register a bareboat charter in China, the flag of the ship must be China and if not registered, creditors of the onshore lessee in China may have access to the ship if it is in Chinese waters 12
Contact Details Jonathan Silver Of Counsel Norton Rose Hong Kong 38/F Jardine House 1 Connaught Place Central, Hong Kong Telephone: +852 3405 2321 Fax: +852 2523 6399 E-mail: jonathan.silver@nortonrose.com 13
Disclaimer The purpose of this presentation is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Norton Rose Hong Kong on the points of law discussed. No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any constituent part of Norton Rose Group (whether or not such individual is described as a partner ) accepts or assumes responsibility, or has any liability, to any person in respect of this presentation. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of, as the case may be, Norton Rose LLP or Norton Rose Australia or Norton Rose OR LLP or Norton Rose South Africa (incorporated as Deneys Reitz Inc) or of one of their respective affiliates. 14