In recent years, China has seen an increasing number of Chinese purchasing property in foreign countries as private investments. However, some misconduct might be deemed as illegal actions, lending itself subject to extra attention to the legality of outbound remittance.
For any purchase of overseas property, the premise is to transfer money overseas. However, China has now enforced strict limitations for the purpose of foreign exchange during practice. For example, the most updated Individual Foreign Exchange Purchase Instructions specifically list the prohibition against the purposes of foreign exchange, including overseas investment in housing, securities investment, purchase of life insurance and investment return dividend insurance, etc.
In order to bypass the above-mentioned barriers, transferring money through an “underground money house” has become a common trick for business. In this way, some overseas estate agents and developers will help buyers transfer large sums of money to foreign countries and charge certain fees in the process. However, it comes as no surprise that such transferring of money in order to avoid legal supervision would give rise to significant risks.
According to Article 2 of The Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues concerning the Application of Law in the Handling of Criminal Cases regarding Illegal Fund Payment and Settlement Business and Illegal Trading in Foreign Exchange, which comes into force on February 1, 2019, it clearly stipulates that, whoever, in violation of the state provisions, commits fraudulent purchase and selling of foreign exchange, trading of foreign exchange in disguise, and other acts of illegal trading in foreign exchange, which disturbs the financial market order and when the circumstances are serious, shall be punished for the crime of illegal business in accordance with the provisions of item (4) of Article 225 of the Criminal Law.
The so-called “trading of foreign exchange in disguise” is the exchange of funds between domestic and overseas that does not involve the direct outflow of funds. Generally speaking, these transactions are more concealed, and the amount is even larger, underground banks are prevalent in this category.
For example, a mainland Chinese resident intends to purchase Canadian properties, which would not be feasible according to the current foreign exchange management system causing the purchase of foreign exchange in order to buy overseas housing as expressly prohibited. If an underground bank is employed for the exchange of dollars, then then he/she will be subject to legal consequences for committing illegal foreign exchange trading.
This does not mean that all overseas purchases would be suspected of illegal foreign exchange trading. The restrictions on the purchase of foreign exchange are only imposed on mainland Chinese citizens, whereas overseas residents as well as residents of Hong Kong, Macao and Taiwan are not affected. In addition, if you already own overseas assets or receive overseas income, you are capable of legally purchasing houses in foreign countries with funds therefrom.
Should you opt for some overseas asset allocation, DP shall be pleased to help keep your money working for you around the globe.