Circular on Further Strengthening and Standardizing the Examination, Approval and Regulation of Direct Investment in Real Property by Foreign Investors

(Issued by the Ministry of Commerce and State Administration of Foreign Exchange on May 23 2007.)

Shang Zi Han [2007] No.50

Departments in charge of commerce and foreign exchange control departments of the provinces, autonomous regions, municipalities directly under the central government, cities with independent development plans and the Xinjiang Construction and Production Corps:

With a view to regulating the entry of foreign capital into the real property market and the administration thereof, six departments of the State Council jointly issued the Opinions on Regulating the Entry of Foreign Investment into the Real Property Market and the Administration Thereof (Jian Zhu Fang [2006] No.171, hereinafter referred to as the "Opinions"). In duly implementing the provisions and requirements of the Opinions, the various regions and departments have achieved substantial results. However, certain problems continue to exist in a few regions. Pursuant to laws and regulations on foreign investment and the Opinions, we hereby notify you on matters relating to further strengthening and standardizing the examination, approval, record filing and regulation of foreign investment in real property as follows:

1. The department in charge of commerce of each region shall strictly implement the Opinions and the General Office of the Ministry of Commerce, Circular on Issues Relevant to Thoroughly Implementing the Opinions on Regulating the Entry of Foreign Investment into the Real Property Market and the Administration Thereof (Shang Zi Zi [2006] No.192), strengthen in accordance with the law the examination, approval and regulation of foreign-invested real property enterprises and strictly control foreign investment in high-end real properties.

2. A foreign investor that invests and engages in real property development and dealings shall comply with project company principles.

(1) If an application to establish a real property company is to be made, the leasehold, and real property and building ownership shall first be obtained or a preliminary grant/purchase agreement for the leasehold or real property title shall have been entered into with the land administration department or land developer/real property and building owner. If the foregoing requirements are not satisfied, the examination and approval department will not grant its approval.

(2) If an established foreign-invested enterprise is to additionally engage in real property development or dealings, or if a foreign-invested real property enterprise is to engage in the development and dealing of a new real property project, it shall carry out the relevant procedures to increase its scope of business or expand the scale of its operations with the examination and approval department in accordance with relevant laws and regulations on foreign investment.

3. The acquisition of, or investment in, domestic real property enterprises through the round tripping of investment (including by the same de facto controller) shall be strictly controlled. An offshore investor may not evade the examination and approval of foreign investment in real property by way of changing the de facto controller of a domestic real property enterprise. If a foreign exchange control department discovers that a foreign-invested real property enterprise was illegally established by taking measures to intentionally avoid examination and approval, providing false statements, etc., it shall pursue its liability for evading exchange control in respect of its unauthorized outward remittance of capital and the returns thereon.

4. An offshore investor that engages in real property development or dealings in China shall comply with the principal of having a commercial presence by applying in accordance with the law to establish a foreign-invested real property enterprise, and shall engage in relevant business within its approved scope of business. The Chinese and foreign investors to a foreign-invested real property enterprise may not set terms in any manner whatsoever that guarantee fixed returns or fixed returns in a disguised manner to any party.

5. When a local examination and approval department approves the establishment of a foreign-invested real property enterprise, it shall promptly report the same to the Ministry of Commerce for the record in accordance with the law.

6. The foreign exchange control department or the designated foreign exchange bank shall not carry out procedures for the settlement and sale of foreign exchange on the capital account for a foreign-invested real property enterprise that has not completed record filing procedures with the Ministry of Commerce or has not passed the joint annual inspection of foreign-invested enterprises.

7. The Ministry of Commerce will investigate, deal with and rectify approvals of foreign-invested real property enterprises in violation of regulations by local examination and approval departments, and the foreign exchange control department shall not carry out foreign exchange registration and other such procedures for foreign-invested real property enterprises established in violation of regulations.