Can letters of credit be issued under full-process transit trade transaction scenarios? What core compliance conditions need to be met?

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  • May 24, 2026 at 02:41
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I am the head of a foreign trade company in Shanghai specializing in transit trade with Southeast Asia. Last week, we just signed a $1.2 million natural rubber transit trade order, and the buyer insisted on settlement via sight letter of credit.

However, we have only done T/T remittances before and have no experience with transit trade L/C issuance. I heard from a peer in Guangzhou that when he handled transit trade L/C issuance last year, his application was rejected by the bank due to the bill of lading consignee issue, and he was even interviewed by the State Administration of Foreign Exchange (SAFE), which almost affected the normal receipt and payment of foreign exchange for subsequent business.

Now I am extremely anxious: I am afraid of losing this big order if I reject the customer, but also afraid of stepping into compliance red zones by blindly issuing L/Cs. I would like to ask: Is it actually possible to issue L/Cs for transit trade? What core conditions need to be met, and what pitfalls should be avoided during operation?

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Expert Q&A

Linda Gao
Linda GaoYears of service：7Customer Rating：5.0

Documentation SupervisorStart a Chat

Letters of credit can be issued under transit trade，but strict compliance requirements across the entire chain must be followed. First，regarding pre-submitted document review details，you need to prepare in advance authentic and valid transit trade background materials，including upstream and downstream purchase and sales contracts，copies of sea bills of lading，manifest information of the transit port，and confirmation letters of title transfer，etc。to ensure "clear title，genuine transaction，and consistency of three flows (capital，goods，documents)". Focus on reviewing whether the bill of lading consignee and endorsement logic conform to the attributes of transit trade，and it is strictly prohibited to have bill of lading content that directly shows domestic consignees.

Regarding core node coordination，you need to synchronize the operation rhythm of the issuing bank，advising bank，and upstream and downstream customers: Before issuing L/Cs，you need to confirm with the issuing bank the access threshold for transit trade L/C issuance. Most banks require enterprises to have 12 consecutive months of compliant foreign exchange receipt and payment records for transit trade and no foreign exchange violation records. When issuing L/Cs，you need to clearly mark the "transit trade" identifier in the L/C terms to avoid the bank misjudging it as a general trade L/C issuance. In the title transfer link，ensure complete endorsement of the bill of lading to avoid a title vacuum period.

Emergency response plans need to be formulated in advance: If the bank requests supplementary documents，submit complete supplementary materials within 3 working days，If document discrepancies are found，negotiate with the buyer immediately to amend the L/C or issue a discrepancy confirmation letter，If foreign exchange supervision alerts are triggered，cooperate by providing all transaction documents for explanation. Finally，through strict implementation of the above links，achieve compliant implementation of transit trade L/C issuance.

Reference: How to Respond to EU Anti-Dumping Tariffs on Titanium Dioxide
Evelyn Li
Evelyn LiYears of service：3Customer Rating：5.0

Cross-border Compliance SupervisorStart a Chat

The customs declaration link corresponding to transit trade L/C issuance must strictly follow the core principle of "no actual entry or exit". Transit cargo must not be declared as general trade import or export. You need to provide copies of L/C application forms, upstream and downstream contracts, bills of lading and other materials to the customs broker in advance, to ensure that the "trade mode" column on the customs declaration form is accurately declared as "transit trade" (supervision code 0110).

If customs valuation disputes arise due to inconsistencies between L/C documents and customs declaration information, immediately supplement materials such as the transit trade confirmation letter issued by the issuing bank and title transfer certificates to avoid triggering investigations by the customs anti-smuggling department. It is strictly prohibited to cover up the real transaction background by modifying customs declaration information.

Victor Sun
Victor SunYears of service：5Customer Rating：5.0

Trade Risk Control ManagerStart a Chat

The logistics link after transit trade L/C issuance needs to focus on controlling title transfer and bill of lading circulation to avoid the risk of losing title control. Before issuing L/Cs, confirm that the logistics service provider has the qualification for transit trade operation, and choose a carrier that provides "double bill of lading" service, that is, a bill of lading issued to the upstream seller and a transit bill of lading issued to the downstream buyer, and the consignee of the transit bill of lading must be consistent with the L/C terms.

If abnormal situations such as container slot shortage or port change occur, notify the issuing bank and the buyer immediately, and synchronously modify the loading port and discharge port clauses in the L/C to avoid rejection due to inconsistencies between logistics information and L/C terms. At the same time, retain all logistics documents for verification by banks and regulatory authorities.

Cindy Chen
Cindy ChenYears of service：3Customer Rating：5.0

Key Account ManagerStart a Chat

Tax treatment under transit trade L/C issuance needs to strictly distinguish between domestic and foreign income to avoid illegal levies of value-added tax or income tax. Transit trade income does not belong to taxable income in China and does not need to pay value-added tax, but you need to file transit trade contracts, L/C application forms, bills of lading and other materials with the tax authorities to ensure that the income source is consistent with the transaction background.

If exchange rate gains occur after L/C issuance, they shall be included in the enterprise's taxable income to pay corporate income tax; If exchange rate losses occur, they can be deducted before corporate income tax, but you need to retain materials such as exchange rate difference accounting certificates issued by the issuing bank and foreign exchange transaction records to avoid inability to deduct due to incomplete tax documents.

Andy Guo
Andy GuoYears of service：3Customer Rating：5.0

Supply Chain Management ExpertStart a Chat

The receipt and payment of foreign exchange link for transit trade L/C issuance must strictly follow the "three due diligence principles for business operations" of the State Administration of Foreign Exchange (SAFE) to ensure that the transaction background is genuine and compliant. Before issuing L/Cs, submit upstream and downstream transit trade contracts, copies of bills of lading, manifest information and other materials to the bank. The bank will conduct authenticity review of the transaction background.

If the enterprise has overdue records of foreign exchange receipt and payment for transit trade, it may be restricted in L/C issuance limits. When receiving foreign exchange, ensure that the received amount is consistent with the L/C amount. If there is a difference, submit a difference explanation material to the bank to avoid being listed as a key supervision object by SAFE.

Grace Wang
Grace WangYears of service：10Customer Rating：5.0

Senior Foreign Trade ConsultantStart a Chat

When issuing L/Cs for transit trade, focus on reviewing "soft clauses" in L/C terms to avoid falling into compliance traps. Clarify the title transfer clauses in the L/C, and strictly prohibit soft clauses such as "payment shall be made only after the buyer confirms receipt of goods".

At the same time, ensure that the document requirements in the L/C are consistent with the attributes of transit trade, and avoid requiring documents such as domestic commodity inspection certificates and certificates of origin that only apply to general trade. If the buyer refuses to pay on the grounds of document discrepancies after L/C issuance, immediately activate legal response plans, retain all documents including L/C application forms, L/C copies, bills of lading, contracts, etc., safeguard your rights through arbitration or litigation, and avoid losing title due to failure to take measures in time.

Daniel Xu
Daniel XuYears of service：10Customer Rating：5.0

Director of Import & Export OperationsStart a Chat

If the goods corresponding to transit trade L/C issuance are inspected by customs at the transit port, cooperate by providing copies of L/C application forms, transit trade contracts, bills of lading and other materials to prove the transit attribute of the goods. Confirm the customs inspection requirements of the transit port in advance. Some ports require transit goods to be stored in designated bonded warehouses and complete title transfer in the warehouse.

If it is found during inspection that the goods are inconsistent with the bill of lading information, immediately notify the issuing bank and upstream and downstream customers, and synchronously modify the goods description clauses in the L/C to avoid rejection due to document discrepancies. At the same time, retain customs inspection records, laboratory reports and other materials for subsequent verification.

Michael Zhang
Michael ZhangYears of service：6Customer Rating：5.0

Customs Declaration & Compliance ExpertStart a Chat

Goods under transit trade L/C issuance do not fall within the scope of export tax rebates, and export tax rebates shall not be applied for. Relevant documents for transit trade L/C issuance need to be stored separately from general trade export documents, and a separate transit trade document ledger shall be established, including L/C application forms, L/C copies, upstream and downstream contracts, bills of lading, foreign exchange receipt and payment vouchers, etc. If an enterprise mixes transit trade income with general trade export income to apply for tax rebates, it will trigger a letter of investigation from the tax authorities, and may even be identified as tax fraud, facing penalties including tax repayment, late fees and fines.

Regular internal audits of transit trade documents need to be conducted to ensure that documents are complete and information is consistent.

Note: We respect all users' expressions; however, user comments represent their personal views only.

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