Opinion: SAFE clears the way for round-trip investors

A new regime that adds clarity to investments by Chinese persons in offshore special purpose vehicles (SPVs) is now in place. The State Administration of Foreign Exchange (SAFE) issued the Circular on Issues Relevant to Exchange Control in Connection with Offshore Investment/Financing and Round-trip Investment by Residents in China Through SPVs (国家外汇管理局关于境内居民通过特殊目的公司境外投融资及返程投资外汇管理有关问题的通知) (Circular 37), which went into effect on July 14 2014 and replaced more cumbersome rules that had been in place for many years. The coverage of Circular 37 is more expansive than the prior rules, so additional SAFE registrations will be required. Nonetheless, Circular 37 does clarify several significant matters.

Sources of funding for a covered SPV can now include funds and property lawfully held outside China. The old rules only permitted the use of Chinese funds or property remitted out of China for the purpose of creating a SPV. Moreover, while continuing to cover investments back into China in the form of foreign invested enterprises, additional transactions appear to be covered as well. Although practice has yet to develop under Circular 37, it does capture other transactions which give rise to contractual rights in China.

Circular 37 also streamlines registration formalities to an extent. In particular, its rules governing where registration is needed have rationalised the system. Registration location generally mirrors the location where other filings and registrations for the related foreign investment would be made. If multiple investments are involved, the location of the principal assets is the place for registration. In addition, Circular 37 registration appears to apply only to the SPV directly held by the Chinese resident, and not any of its affiliates or subsidiaries. If this is borne out in practice, downstream financings may not require another registration. This would of course be a welcome benefit that reduces transaction costs and increases execution speed.

There are a number of other improvements as well, including a reduction in the paperwork needed to complete a registration. Specifically, the submission of a business plan is no longer required, and changes in registrations are applicable in the case of material changes in shareholdings or assets. Overall, the thrust of Circular 37 seems to be a move toward rationalisation and ease of implementation. Practice across the various SAFE offices may of course somewhat differ, but hopefully Circular 37 will aid round-trip investors. One small boost, perhaps, is the elimination of the 180-day time limit for remittance back into China of dividends and distributions received by the investor from the SPV.

Equity incentive plans are also now expressly covered for the first time. Circular 37 permits registration of equity incentive plans which cover directors, officers and employees of domestic Chinese affiliates. Before the Circular, there was no effective way to register equity incentive plans based on the equity of the SPV or its controlled affiliates, unless the equity was already traded on a recognised stock exchange.

Lastly, Circular 37 provides for retroactive registrations for those who had previously failed to register under the prior regime. The supporting documentation required to effect a retroactive registration is now less onerous. Evidence of no violation of SAFE regulations is no longer expressly required, and an audit report showing capital flows between the SPV and its Chinese affiliates does not need to be submitted. These changes may indicate a greater willingness to accept retroactive registrations, although Circular 37, understandably, does not impair SAFE's ability to impose sanctions in appropriate cases.

Circular 37 heralds welcome changes to the rules regarding registration requirements for Chinese residents who organise SPVs outside China to invest back into the country. If carried through, the new regime may significantly ease the registration burden of investors, and in doing so, also indirectly enable more flexibility for offshore financing and fund investments. A well-administered Circular 37 programme, applied consistently across SAFE offices, will also bolster one of the regulator's core missions – to accurately and completely gather information about these types of cross-border capital flows. A more rational and streamlined registration system is now in place, although how it is implemented in practice will be the crucible in which long-lasting benefits for investors and cross-border transactions are forged.


Shuangjuan Wei, Yan Kang and Michael Hickman, Haiwen & Partners, Beijing and Shanghai


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