Circular on Issues Relevant to Foreign Exchange Control with Respect to the Round-trip Investment of Funds Raised by Domestic Residents Through Offshore Special Purpose Companies

Repealed on July 04 2014: http://www.chinalawandpractice.com/Article/3379499/Circular-on-Issues-Relevant-to-Exchange-Control-in.html

(Issued by the State Administration of Foreign Exchange on October 21 2005 and effective as of November 1 2005.)

Hui Fa [2005] No.75

Branches and offices of the State Administration of Foreign Exchange of each province, autonomous region and municipality directly under the central government and the Shenzhen, Dalian, Qingdao, Xiamen and Ningbo municipal branches of the State Administration of Foreign Exchange:

With a view to encouraging, supporting and guiding the development of non-publicly owned economic sectors, further improving the venture investment policy support system and regulating cross border capital transactions involved in the investment and financing activities conducted through offshore special purpose companies by domestic residents, and pursuant to the PRC Foreign Exchange Control Regulations, the Measures for Exchange Control for Investments Outside China and the Tentative Provisions for Acquisition of Domestic Enterprises by Foreign Investors, we hereby notify you on issues relevant to foreign exchange control in respect of the round-trip investment of proceeds derived by domestic residents from equity financing exercises conducted through offshore special purpose companies as follows:

1. For the purposes of this Circular, the term 'special purpose company' means an offshore enterprise directly established or indirectly controlled by a domestic resident legal person or a domestic resident natural person for the purpose of conducting offshore equity financing (including convertible bond financing) exercises with the domestic enterprise assets or equity interest that it/he/she owns.

For the purposes of this Circular, the term 'round-trip investment' means direct investment activities in China conducted by a domestic resident via a special purpose company, and includes but is not limited to the following methods: purchasing or swapping for the equity of a Chinese party in a domestic enterprise, establishing a foreign-invested enterprise in China and through such enterprise purchasing or reaching agreement to control domestic assets, purchasing through agreement domestic assets and using such assets to invest in and establish a foreign-invested enterprise, or increasing the capital of a domestic enterprise.

For the purposes of this Circular, the term 'domestic resident legal person' means an enterprise or institution legal person or other economic organization established in China in accordance with the law. The term 'domestic resident natural person' means a natural person holding a lawful identification document, such as a resident ID card or passport of the People's Republic of China, or a natural person who, although not having legal status in China, is nonetheless normally resident in China due to economic interests.

For the purposes of this Circular, the term 'control' means the right to operate, the right to the benefits from or the right to decide the policies of a special purpose company or domestic enterprise obtained by a domestic resident through such means as a takeover, trust, holding on behalf of another, voting rights, buyback, convertible bonds, etc.

2. Before a domestic resident establishes or takes control of an offshore special purpose company, it/he/she shall carry out the procedures for offshore investment related foreign exchange registration with the branch or office of the State Administration of Foreign Exchange (SAFE Branch) of the place where it/he/she is located on the strength of the following materials:

(1) a written application (which shall detail the basic particulars of the domestic enterprise, the equity structure of the offshore special purpose company and the offshore financing arrangement);

(2) the domestic registration document, in the case of a domestic resident legal person, or proof of identity, in the case of a domestic resident natural person;

(3) the commercial plan for the offshore financing exercise;

(4) the official reply approving the source of the foreign exchange funds (assets) of a domestic resident legal person and the approval document from the department in charge of offshore investment;

(5) the Offshore Investment Related Foreign Exchange Registration Certificate completed by the domestic resident legal person or the Form for Offshore Investment Related Foreign Exchange Registration of a Domestic Resident Individual (see the Attachment) completed by a domestic resident natural person; and

(6) other supporting materials on truthfulness.

After examining the aforementioned materials and determining that they are in good order, the SAFE Branch shall affix its designated seal for foreign exchange transactions for capital account items to the Offshore Investment Related Foreign Exchange Registration Certificate or the Form for Offshore Investment Related Foreign Exchange Registration of a Domestic Resident Individual.

3. When a domestic resident injects into a special purpose company a domestic enterprise's assets or equity that it/he/she holds or when it/he/she conducts an offshore equity financing exercise after injecting the assets or equity into a special purpose company, it/he/she shall carry out the procedures for the amendment of offshore investment related foreign exchange registration in respect of its/his/her interest in the net assets of the special purpose company and any changes to such interest. When carrying out such procedures, the following materials shall be submitted:

(1) a written application (which details the process of the change in the shareholders and equity structure of the domestic enterprise and special purpose company and the method of pricing the assets or equity of the domestic enterprise and the special purpose company);

(2) the Offshore Investment Related Foreign Exchange Registration Certificate completed by the domestic resident legal person or the Form for Offshore Investment Related Foreign Exchange Registration of a Domestic Resident Individual completed by a domestic resident natural person;

(3) the approval document or record filing document from the department in charge of foreign investment for the round-trip investment;

(4) if state-owned assets are involved, the document from the state-owned asset administrative department confirming the value of the domestic enterprise's assets or equity;

(5) the supporting documents of the special purpose company, such as its offshore registration, business licence, etc.; and

(6) other supporting materials on truthfulness.

4. Once a special purpose company has completed its offshore financing exercise, the domestic resident may remit back to China those proceeds destined for use in China in accordance with its/his/her commercial plan or the plan for the use of the proceeds included in the prospectus.

5. When a special purpose company uses the proceeds from its offshore financing exercise for a round-trip investment or to provide a shareholder loan or other debt funds to a domestic enterprise, the relevant domestic enterprise shall carry out the relevant foreign exchange control procedures in accordance with current laws and regulations governing the administration of the use of foreign investment and foreign debt. When the SAFE Branch carries out the procedures for the domestic enterprise with respect to the registration of the establishment of a foreign-invested enterprise, the amendment of such registration, and foreign debt registration or carries out the procedures for a special purpose company for registration of foreign capital and foreign exchange in respect of foreign exchange received from the equity transfer, it shall examine the Offshore Investment Related Foreign Exchange Registration Certificate or the Form for Offshore Investment Related Foreign Exchange Registration of a Domestic Resident Individual.

6. After a domestic resident has carried out the procedures for offshore investment related foreign exchange registration or those for the amendment of such registration, remittance may be made to the Special Purpose Company of items such as profits, dividends, liquidation proceeds, equity transfer proceeds, capital reduction proceeds, etc.

The profits, dividends and foreign exchange revenues derived from changes in capital that a domestic resident obtains from a special purpose company shall be remitted back to China within 180 days of the date of obtaining the same. Profits or dividends may be deposited into a foreign exchange account for current account items or settled, and, subject to the approval of the SAFE Branch, foreign exchange revenues derived from changes in capital may be retained after opening a dedicated account for capital account items or, subject to the approval of the SAFE Branch, may be settled.

7. In the event that a material change in the capital of a special purpose company occurs, such as a capital increase or reduction, equity transfer or swap, merger or division, long-term equity or debt investment, provision of security to a third party, etc., without any round-trip investment being made, the domestic resident shall carry out the procedures for the amendment of offshore investment related foreign exchange registration or record filing procedures with the foreign exchange bureau within 30 days of the date of the occurrence of the material matter.

8. If a domestic resident established or took control of a special purpose company and completed a round-trip investment before the implementation of this Circular, but failed to carry out the procedures for offshore investment related foreign exchange registration, it/he/she shall do so with the SAFE Branch of the place where it/he/she is located in accordance with this Circular by March 31 2006. After the domestic resident carries out such procedures, the SAFE Branch may carry out the foreign investment and foreign debt related foreign exchange registration procedures for the relevant domestic enterprise.

9. Domestic venture investment enterprises may establish special purpose companies abroad with reference to this Circular to engage in venture investment activities.

10. If a control matter mentioned above involves more than one domestic resident, the relevant domestic residents shall issue a power of attorney appointing one or two among them to carry out the relevant foreign exchange control procedures.

11. Any matters not covered in this Circular shall be handled in accordance with current foreign exchange control regulations relating to foreign investment and offshore investment.

12. If a domestic resident violates this Circular and such violation constitutes an evasion of foreign exchange controls or other violation of foreign exchange control regulations, the SAFE Branch shall impose penalties in accordance with the PRC Foreign Exchange Control Regulations and relevant provisions.

13. This Circular shall be effective as of November 1 2005. The implementation of the Circular on Issues Relevant to Improving the Foreign Exchange Administration Regarding Mergers and Acquisitions by Foreign Investors (ref. Hui Fa [2005] No.11) and the Circular on Issues Relevant to Registration Regarding Offshore Investments of Individual Domestic Residents and Foreign Exchange Registration in Respect of Mergers and Acquisitions by Foreign Investors (ref. Hui Fa [2005] No.29) shall be halted simultaneously.

Appendix: Form for Offshore Investment Related Foreign Exchange Registration of a Domestic Resident Individual