On 21 October 2005, SAFE issued a new circular on "Relevant Issues Concerning Foreign Exchange Control on Domestic Residents' Corporate Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles" ("Circular 75"), effective 1 November 2005.  At the same time SAFE Circulars 11 and 29 which were the subject of our July 2005 China Update have ceased to be implemented.

On 23 October 2005, SAFE also issued a news release about the issuance of its Circular 75 (the "SAFE News Release").  In the SAFE News Release, SAFE makes it clear that the efforts by Chinese private companies and high technology companies to obtain offshore financing are being encouraged by China’s national policies.  Circular 75 confirms that the use of offshore special purpose vehicles ("SPVs") as holding companies for PRC investments are permitted so long as proper foreign exchange registrations are made with SAFE. 

Change of perspective – Lightening of the regulatory burden

In Circulars 11 and 29, SAFE was perceived by the market as seriously impacting the widespread practice of "round tripping". This is the process of PRC residents effectively moving ownership or control of PRC-based assets to an offshore holding company by transferring those assets to a Foreign Invested Enterprise (FIE) that is held by the SPV.

In contrast, in Circular 75, and in the SAFE News Release, in particular, SAFE now describes the practice of PRC residents obtaining offshore equity financing through establishing SPVs and roundtrip investments in PRC companies as part of the development of the private sector that will be "encouraged, supported and guided". This marks a significant step towards a more transparent structure in the traditionally grey area of overseas investments by PRC residents.

Before Circular 75, Circular 11 expressly required SAFE’s approval in order for any PRC resident to directly or indirectly establish or obtain control of a foreign company.  SAFE’s approval was also required for any PRC resident to exchange domestic assets or equity interest for stock or assets of a foreign company.  Such approvals, however, have only rarely been given. In addition, the two ambiguous regulations had created regulatory uncertainty and thereby suppressed M&A activity.

In a major change of position, SAFE now only requires PRC residents to register with SAFE rather than obtain SAFE's approval.  This appears to more effectively reflect its role as managing foreign exchange activities rather than regulating investment control.

Major changes and improvements of Circular 75

The key points of Circular 75 are the following :-

1. Removal of prior approval requirement for individuals

Under Article 2 of the Circular, before establishing (or gaining control of) an SPV for the purpose of offshore equity financing, a PRC resident must file at least 6 required documents with local SAFE for foreign exchange registration in connection with the proposed offshore investment. Among others, a resident is required to submit a business plan detailing the offshore financing arrangements.

The registration may now take place at local SAFE branches and not at SAFE headquarters in Beijing as previously required.

There is no specific mention of SAFE's having approval authority over offshore restructurings, but the regulations do require PRC residents to provide SAFE with evidence that the restructuring is for legitimate capital-raising purposes.

2. Definitions of key terms

Some of the key terms are defined in the Circular :-

  • "Special Purpose Vehicle" (SPV) is defined as an offshore entity directly established or indirectly controlled by PRC residents for the purpose of conducting offshore equity financing by use of their domestic enterprise assets or interests.
  • "Domestic resident individual" seems to include both a resident with a PRC passport / ID card and an individual that "habitually" resides in the PRC even without legal status.
  • "Round trip investment" is defined as direct investment activities made in China by residents through offshore SPVs including (but not limited to) the purchase and swap of assets held by Chinese parties in domestic enterprises, establishment of FIEs in China, controlling assets through contract, or purchasing domestic assets and using such assets to establish FIEs or increase the registered capital of domestic enterprises.
  • "Control" is defined as the obtaining by PRC residents of operating rights, rights to receive profits and decision-making rights through several methods as defined in the Circular.

3. Definitions of key terms

  • Elimination of the requirement for individuals to submit documentation certifying the legitimate source of their funds for offshore investments. The removal of this requirement eliminates regulatory scrutiny of personal funds.
  • The new rules allow a PRC subsidiary to make dividend payments and other distributions to its offshore parent company, but require PRC residents to repatriate any proceeds they ultimately receive from the offshore parent within 180 days.
  • The valuation of assets in cases not involving state-owned assets is no longer required.
  • PRC residents must comply with the new regulations by 31 March 2006 (rather than the previous deadline of 31 December 2005).


Compared to other circulars, Circular 75 sets out the application procedures and required information in greater detail. However, while Circular 75 should be welcomed for the increased transparency and stronger framework it introduces, further clarification is still needed for several parts of the regulation.

First, the definition of control is much broader than former definitions. However, it does not refer to the 10% actual "control" threshold in SAFE’s interpretation of earlier circulars. It thus remains unclear whether a PRC resident holding only a smaller stake in an offshore vehicle must register with SAFE. Second, the definition of "domestic resident individual" may be too broad and may need further revising in the future. In addition, the SPV registration process is still untested and therefore the time and effort required in the registration process are still unknown. Finally, SAFE retains the right to ask applicants for further and unspecified materials to prove the authenticity of transactions.

For all the above stated reasons, PRC residents may still be deterred from submitting their registrations, at least for some time.

Further information

For more information on the above issues, or if you have any questions in relation to other China related matters, please contact our China Practice Group.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.