On May 20, China’s State Administration of Foreign Exchange (SAFE) issued the “Operating Instructions on Foreign Exchange Administration for Domestic Residents Engaging in Financing and Round-tripping Investment via Overseas Special Purpose Vehicles” (Circular 19), which came into effect on July 1. As an implementing guidance to further clarify Circular 75,1 Circular 19 consists of three major sections detailing registration procedures and requirements in relation to (i) the establishment of special purpose vehicle (SPV) and other offshore entities by domestic resident individuals and round-trip investment by such SPVs and offshore entities, (ii) foreign-invested enterprises, and (iii) outbound investment by domestic entities. In this LawFlash, we will focus on the major changes to the registration procedures, requirements, and policies concerning round-trip investment.

According to Circular 75, domestic resident individuals have to register with SAFE before they set up offshore entities with the purpose of acquiring onshore assets or equity in a company established under the Chinese laws through such offshore entities. In 2007, SAFE issued Circular 1062 as an implementing guidance of Circular 75, tightening the regulatory environment for round-trip investments. Following the release of Circular 773 in 2009, SAFE stopped registering certain investments; for instance, conversion into an SPV of an offshore company set up by domestic residents that did not fall into Circular 75’s definition of an SPV (and so would be considered a Non-SPV, which is generally a company that has substantial operations), as well as the retroactive registration for an existing but unregistered SPV for the purpose of round-trip investment. Circular 19 overrides Circular 77 to the extent of any inconsistency, and provides more transparent and practical guidance for foreign exchange registration. Below are the major points.