Forum invests in China through real estate companies that have capitalized a parent entity offshore and moved the money to onshore entities holding each property.
These parent companies are either private or public (listed in Singapore, Hong Kong or New York). We do not put money directly into China under the Forum name – instead we use an established company set up to do business in China.
The money flows down through various entities to the project company. Excess cash from the project companies is then moved upstream and offshore through dividend payments, back-to-back loans with banks or intercompany shareholder loans, described below.
The two main ways to repatriate renminbi (RMB) out of China are dividend payments and back-to-back loans with banks. The third method, intercompany shareholder loans, was used for a number of Forum’s early FARI II deals.
Subsidiaries in China can pay out positive retained earnings as dividends once a year with the approval of the regulators. The dividends are subject to a withholding tax of 5%-20% based on the domicile of the offshore holding entity and must not exceed the retained earnings balance.
Back-to-back loans with banks can be used for repatriation when banks have a presence in China as well as an offshore jurisdiction (e.g. China Construction Bank, ICBC). In this case, an onshore company in China makes a RMB payment to an onshore branch. The offshore branch then pays out the same amount to the offshore holding entity. This is subject to a quota decided annually by the Chinese authorities for each bank.
The third method, intercompany shareholder loans, was used until a regulatory change in mid-2007. An offshore entity would make direct intercompany shareholder loans to its China subsidiary. The repayment of this loan allowed repatriation of RMB from China to the offshore entity. In 2007, the regulators banned this structure for any new investments for real estate companies with offshore holding companies.
If we invest in the form of equity or a convertible and the company is public or goes public, we can exit in the open market. The company can use other offshore proceeds from an initial public offering or a debt offering to pay us back. In such cases, money is raised offshore and we do not face any repatriation issues.