State Administration of Foreign Exchange, Issues Relevant to Registration Regarding Offshore Investments of Individual Domestic Residents and Foreign Exchange Registration Regarding Mergers and Acquisitions by Foreign Investors Circular

Issued: April 8 2005
Effective: as of date of issue

Main contents: For individual domestic residents who have carried out foreign exchange registration for offshore investments for the offshore enterprises in which they have shareholdings, all the branches and offices of the State Administration of Foreign Exchange may handle registration of foreign capital and foreign exchange for merger and acquisition transactions of domestic enterprises by such offshore enterprises that took place before January 24 2005 (Article 3). The Circular clarifies that the term "foreign exchange registration in respect of a foreign-invested enterprise established through a merger or acquisition by a foreign investor" in Article 3 of the Issues Relevant to Improving the Foreign Exchange Administration Regarding Mergers and Acquisitions by Foreign Investors Circular and the term "foreign exchange registration regarding mergers and acquisitions by foreign investors" in Article 1 and Article 3 of the Circular refer to the following circumstances: (1) where a foreign investor is under an agreement to purchase the equity interest of the Chinese party of a Chinese-invested enterprise in China and converts the domestic enterprise into a foreign-invested enterprise, the concerned foreign-invested enterprise shall carry out foreign exchange registration, and the foreign investor shall carry out registration of foreign capital and foreign exchange in respect of receipts of foreign exchange from the equity transfer;
(2) where a foreign investor is under an agreement to purchase the equity interest of the Chinese party of a foreign-invested enterprise in China, the original foreign-invested enterprise shall carry out a foreign exchange registration amendment and the foreign investor shall carry out registration of foreign capital and foreign exchange in respect of receipts of foreign exchange from the equity transfer;
(3) where a foreign investor increases its capital contribution in a domestic enterprise, the domestic enterprise shall carry out a foreign exchange registration for the foreign-invested enterprise or foreign exchange registration amendment;
(4) where a foreign investor establishes a foreign-invested enterprise in China and, through such enterprise, is under an agreement to purchase assets of a domestic enterprise and operate such assets, or where a foreign investor is under an agreement to purchase assets of a domestic enterprise in China and invests such assets in the establishment of a foreign-invested enterprise to operate such assets, the newly established foreign-invested enterprise shall carry out foreign exchange registration; or
(5) where a foreign investor establishes a new foreign-invested enterprise in China and, through such enterprise, is under an agreement to control the rights to proceeds and franchising rights of other enterprises or a certain asset in China, the newly established foreign-invested enterprise shall carry out foreign exchange registration (Section Four).
The Circular also states that except for offshore-listed enterprises, special purpose companies may not retain foreign exchange revenue. The term "special purpose companies" refers to an offshore enterprise directly or indirectly controlled by an individual domestic resident for the purpose of raising funds outside China for the rights and interests of the domestic enterprise in which he has actual controlling power (Section Eight).
Related legislation: Issues Relevant to Improving the Foreign Exchange Administration Regarding Mergers and Acquisitions by Foreign Investors Circular, Jan 24 2005, CLP 2005 No.3 p36