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China – New Regulation On Round-Trip Investment: Circular 37.

18 July, 2014



For the purpose of simplifying the approval process, and for the promotion of the cross-border investment, the State Administration of Foreign Exchange (“SAFE”) promulgated the Circular on the Management of Offshore Investment and Financing and Round-Trip Investment by Domestic Residents through Special Purpose Vehicles on July 14, 2014 (No. 37 [2014], “Circular 37”). Circular 37 supersedes the Circular on the Management of Offshore Financing and Round-Trip Investment by Domestic Residents through Special Purpose Vehicles dated November 1, 2005 (No. 76 [2005], “Circular 75”), and revises and regulates the relevant matters involving foreign exchange registration for round-trip investment. 

Circular 37 clearly indicates the current attitude of SAFE on the regulation of round-trip investment, which is “the cross-border capital flow-out shall be treated as overseas direct investment (ODI), and the cross-border capital flow-in shall be treated as foreign direct investment (FDI)”, and re-defines the range and scope of the administration of foreign exchange on domestic resident round-trip investment. As the round-trip foreign exchange registration has always been a hot topic and difficult issue in the offshore private equity placement and offshore red-chip listing, soon after its promulgation, Circular 37 has attracted the attention of the capital market industry, and it will also exert substantial impact on the services provided by the onshore private enterprises, offshore private equity funds and the intermediaries. Below are the major characteristics of Circular 37 that are worth noting: 

I. Expansion Of The Regulatory Scope 

Circular 37 has expanded the range of definition in relation to the round-trip investment by domestic resident under Circular 75, and the major changes are as follows: 

1. Special Purpose Vehicle 

The Special Purpose Vehicle (“SPV”) under Circular 75 was defined as “offshore enterprise directly established or indirectly controlled by the domestic resident legal person or domestic natural person with their legally owned assets and equity of the domestic enterprise, for the purpose of offshore equity financing (including financing through the convertible bond)”. 

Under Circular 37, the SPV is defined as “offshore enterprise directly established or indirectly controlled by the domestic resident (including domestic institution and individual resident) with their legally owned assets and equity of the domestic enterprise, or legally owned offshore assets or equity, for the purpose of offshore investment and financing”.

The current definition under Circular 37 has expanded the “purpose” of the SPV established by domestic resident from the original “equity financing” to “investment and financing”. Such change not only widens the scope of the SPV, it allows for the SPV to be set up for an offshore investment purpose. 

Before the promulgation of Circular 37, except for the SPV under Circular 75, in practice, the local branch of SAFE will not accept the foreign exchange registration application by domestic natural persons for their direct offshore investment, due to the lack of detailed procedural rules. Under such circumstance, the domestic natural person usually was required to first set up an onshore holding company, and have such onshore holding company to establish an investment vehicle offshore, so as to conclude the offshore investment, and complete the relevant foreign exchange registration in the name of such domestic holding company. As the SPV under Circular 37 also includes companies for the investment purpose, prima facie, it seems that the domestic natural person is no longer required to set up an onshore holding company, and now it is possible for such person to establish the SPV offshore directly and complete the foreign exchange registration for the overseas investment. 

The aim of Circular 75 is to regulate “offshore financing with onshore interest”. Circular 37 has gone a step further and has widened the scope of assets and equity that can be injected into the SPV, so that the domestic resident can set up the SPV with assets and equity either onshore or offshore. 


2. Round-Trip Investment 

Under the Circular 75, “round-trip investment” means the “direct investment activities carried out by a domestic resident via an SPV, including but not limited to the following methods: acquisition or exchange of the equity of the Chinese party to a domestic enterprise; establishment of a foreign-invested enterprise in the PRC and acquisition or contractual control of assets in the PRC via this enterprise; agreement-based acquisition of assets in the PRC and using the investment in the acquired assets to establish a foreign-invested enterprise, and increase capital to a domestic enterprise.” 

On the other hand, under the Circular 37, “round-trip investment” refers to the “direct investment activities carried out within the PRC by a domestic resident directly or indirectly via an SPV, i.e., establishing a foreign-invested enterprise or project within the PRC through a new entity, merger or acquisition and other ways, whilst obtaining ownership, control, operation and management and other rights and interests.” 

Unlike Circular 75, the Circular 37 also includes round-trip “green-field investment” by a domestic resident in the same regulatory system as a round-trip merger and acquisition.
As mentioned above, the core principle of legislation of the Circular 75 is “off-shore financing by taking advantage of on-shore interest”. In other words, the pre-condition for the registration under the Circular 75 is that the domestic resident has existing assets and equity interest in the PRC. Before the promulgation of the Circular 37, it is generally acknowledged that establishing an FIE within the PRC through an offshore SPV does not fall into the category of “round-trip investment” and such arrangement was difficult to register at SAFE in accordance with the Circular 751. In this regard, compared with the Circular 75, the scope of foreign exchange registration required by the Circular 37 is widened in terms of “green-field investment”. Such adjustment reflects SAFE’s change in its mentality in respect of the post-registration supervision of round-trip investment. However, the implementation of the aforesaid principle is yet to be tested in practice.

3. Domestic Resident’s Participation In Equity Incentive Plan Of An SPV Before Listing 

The Circular 37 takes the initiative to regulating the procedure of foreign exchange registration in relation to equity incentive plan (e.g. ESOP) of SPV before listing. In this regard, if a non-listed SPV grants equity incentives to its directors, supervisors, senior officers and employees in its domestic subsidiaries, the relevant domestic individual residents may register with SAFE before exercising their rights. 

Since the previous SAFE Circular on Issues concerning the Administration of Foreign Exchange Used for Domestic Individuals’ Participation in Equity Incentive Plans of Companies Listed Overseas (Hui Fa [2012] No. 7) only applies to the domestic resident who participates in equity incentive plan of an offshore listed company. In practice, some local SAFE required that the equity incentive plan of a pre-listed offshore company can only be registered after such company is listed. As a result, the equity/option incentive plan of an overseas non-listed company participated in by the domestic resident can not actually registered at the foreign exchange authority. The promulgation of the Circular 37 fills the blanks in terms of legislation and supervision in this area with enterprise now having rules to follow when applying for foreign exchange registration of the equity incentive plan before listing. 

II. Relax On The Regulatory Scale 

In addition to the expansion of the regulatory scope, Circular 37 facilitates the cross-border investment, by substantially relaxing the restriction on the foreign exchange registration procedure of round-trip investment by domestic individual residents and the transfer of funds. These supportive measures are mainly manifested in the following aspects: 

1. Allowing Domestic Residents To Provide Funds To SPV 

According to Circular 37, domestic enterprises which are directly or indirectly controlled by domestic residents are allowed to advance loans in compliance with existing regulations to the registered SPV based on real and reasonable demands. From the legislation perspective, Circular 37 is consistent with the SAFE Circular on Further Improving and Adjusting the Policy for Foreign Exchange Control of Capital Accounts (HUI FA No. [2014] 2), which allow a domestic enterprise to advance loans to offshore enterprises that have equity relationship. Circular 37 aims to help the SPV obtain financial support from domestic residents, so as to broaden its capital flow channels. 

2. Abolishing The Requirement On The Repatriation Of Offshore Foreign Exchange Proceeds Back To The PRC Within A Specified Time Period 

According to Circular 75, the offshore profit, dividend and the foreign exchange proceeds from the capital investment shall be repatriated back to the PRC within 180 days after the obtaining of the same by the domestic resident from the SPV. Circular 37 has abolished the aforesaid time limit on the proceeds repatriation, which is consistent with the relevant amendment as made in the Foreign Exchange Administrative Regulation (Order of the State Council No. 532)

It is worth noting that under Circular 37, the repatriation of the profit, dividend obtained by the domestic resident from the SPV shall be conducted in accordance with the foreign exchange administrative regulation on thecurrent account; the repatriation of the proceeds from the capital investment shall be conducted in accordance with the foreign exchange administrative regulation on the capital account. Such provision means that although the requirement on the proceeds repatriation has been removed, SAFE will still supervise the cross-border flow of foreign exchange. Notwithstanding the foregoing, the new regulatory measure will provide SPV with more discretion on the allocation and use of its legally obtained income.

3. Relax On The Time Requirement Of “Change Of Registration” 

According to Circular 37, in the event the change of basic information such as the individual shareholder, name, operation term, etc., or if there is a capital increase, decrease, equity transfer or swap, merge, spin-off or other amendment of the material items, the domestic resident shall complete the change of foreign exchange registration formality for offshore investment. 

With respect to the time requirement for the aforesaid change of registration, Circular 37 only requests the domestic resident to “timely” complete the change of registration formality, and the 30 days period as provided in Circular 75 is no longer applicable. Such amendment is consistent with the legislative spirits as indicated in the implementation rules issued by SAFE after Circular 75. 

In addition, the scope of the change of registration is limited to the change of information in relation to the domestic individual resident, and the capital increase, decrease, equity transfer or swap, etc., by domestic individual resident. Superficially, if the change of the offshore SPV does not involve the domestic individual resident shareholder, there is no need to conduct the change of registration formality. With respect to the offshore financing project with newly established offshore structure, the offshore SPV may only be required to conduct registration prior to the completion of its financing, and therefore, there is no need to conduct the pre-registration and change of registration formalities as required under Circular 75. Such change by Circular 37 will reduce the time for the private placement transaction with offshore structure. 

4. Simplify The Registration Content 

In practice, the offshore financing structure established by a domestic resident normally includes 3 to 4 levels of offshore holding company. Previously, when conducting the Circular 75 registration, the domestic resident is usually required to submit the full-set of offshore financing documents, including the financing proposal, whereby the detail information and the financing transaction of the holding company at each level would be subject to the scrutiny of SAFE. 

According to the procedural guideline as attached to Circular 37, the principle of review on this issue has been changed to “the domestic individual resident is only required to register the SPV directly established or controlled (first level)”. In addition, the offshore financing proposal is removed from the list of documents to be reviewed. With these changes, the registration process is simplified. 

5. Administrative Nature Of Foreign Exchange Registration 

It is specifically “declared” in Circular 37 that the registration of offshore SPV does not prove that its investment and financing activity has complied with all the relevant regulations issued by the competent government authorities. Such declaration set limits on the power of SAFE and the effectiveness of the foreign exchange registration under Circular 37, which means SAFE will no longer conduct a compliance review other than in the foreign exchange aspects. Therefore, under no circumstance, thecompletion of Circular 37 registration will exempt the enterprise’s obligation to obtain the approval from, or complete the filing with the competent industrial regulatory authority (if applicable).

III. Circular 37’s Impact On The Offshore Private Placement And IPO 

Given Circular 75 brought the round-trip investment into the foreign exchange regulatory system, it is one of the most controversial subjects in private enterprises’ offshore private placement and IPO since its promulgation in 2005. Unfortunately, certain provisions of Circular 75 are vague and as a result there are different understandings and criteria among local SAFE. To some extent, the Circular 75 becomes the primary obstacle to private enterprises’ entrance into offshore capital market, increasing the compliance costs of enterprises involved and adversely encouraging various “cross the wall” attempts. The limited legislative efficiency of Circular 75 has always been criticized by the industry. Circular 37 is published in such settings that its effectiveness and implementation will have significant implications on the private enterprises’ offshore financing and red-chip IPO. 

1. Registration Is More Convenient 

Circular 37 simplifies the registration requirement (e.g. only the first level SPV controlled by domestic resident is required to be registered; letter of intent for the financing executed with investor is no longer required; SAFE will not review whether the round-trip investment is subject to the approval of other regulatory authority, etc.), and in the attached procedural guideline, Circular 37 also provides clarity and more concise requirements on the latitude of review by the SAFE. These changes will limit the discretionary power of local SAFE, and uniform administrative practice of SAFE at different locations, so as to make the time and result of foreign exchange registration more predictable. 

2. More Difficult To “Cross The Wall” 

With the expansion of the range of definition such as “Special Purpose Vehicle”, “Round-trip Investment”, and the arrangement such as the foreign exchange registration for the ESOP implemented by the SPV at the pre-IPO stage, Circular 37 put the current prevailing practice for the purpose of circumventing the Circular 75 registration (i.e., establishment of offshore trust, doing a limit explanation of “equity financing”, etc.) under the regulation of SAFE. Pursuant to Circular 37, the round-trip investment by domestic resident through its owned or controlled SPV for investment of financing purpose is subject to the foreign exchange registration requirement; the exercise of the rights under the ESOP by the officers and employees of a pre-listing SPV is also subject to the completion of round-trip investment foreign exchange. With the implementation of these measures, the room for operation in such “grey area” will be substantially reduced. 

3. Increased Punishment for Violation of Regulation

According to Circular 37, if a domestic resident has already made capital contribution to the SPV with his legally owned onshore or offshore assets or interest prior to the promulgation of Circular 37, but failed to complete the foreign exchange registration, the domestic resident shall provide the SAFE with an explanation. SAFE will make the supplementary registration based on the principle of legality and reasonableness. In the event the domestic resident violates the foreign exchange regulations, SAFE may also impose administrative sanction on the violator in accordance with the applicable laws. Such “Sanction first, Registration Later” principle is not the innovation of Circular 37. The same principle has been provided in the various implementation rules of SAFE after the promulgation of Circular 75.


Article 15 of Circular 37 uses a whole paragraph to list the detailed sanctions to be imposed under the Foreign Exchange Administrative Regulation on non-compliant activities. Pursuant to the legislative intent as embodied Circular 37 “relaxing the pre-registration review, and strengthen post-registration supervision”, if the domestic resident still fails to complete the round-trip investment foreign exchange registration in accordance with the requirement of Circular 37 after the relaxed conditions for the registration, the likelihood and scale of the administrative punishment may be greatly increased. 

It should be particularly noted that in defining the “round-trip investment”, Circular 75 clearly covered the “contractual control”. However, the local counterparts of SAFE used different “rulers” when taking applications from domestic residents for foreign exchange registration regarding offshore financing. Particularly, in terms of whether the applicant should faithfully and completely disclose the VIE structure, the practice of local SAFE varies. The terminology of “obtaining ownership, controlling right, operation and management right and other rights and interests” adopted by Circular 37 does not cover “contractual control”. In this regard, in the future, when applying for foreign exchange registration, whether a VIE arrangement shall be fully disclosed and whether the registration can be accepted are yet to be tested. Circular 37 does not repeal the Regulation on the Merger and Acquisition of Domestic Enterprise by Foreign Investor jointly promulgated by six authorities including the Ministry of Commerce (“MOFCOM”) in 2006 (“M&A Rules”). M&A Rules requires “domestic company, enterprise or natural person that intends to acquire its related domestic company with the duly established or controlled offshore company shall obtain the approval from MOFCOM”. However, as during the past eight years, the MOFCOM rarely approves the application for such “related acquisition”. Therefore, M&A Rules has become an insurmountable barrier for the company that intends to conduct offshore financing with an offshore SPV through “related acquisition”. The direct establishment or indirectly control of a “SPV” offshore with the legally owned assets or equity either onshore or offshore by domestic resident (including the domestic institution and individual) is a part of the “related acquisition”. If the restriction under M&A Rules still remains unchanged, the enterprise that intends to conduct offshore financing will not be actually benefited by the registration as contemplated under the Circular 37. Therefore, whether there is any implementation rule to Circular 37 to cure the defect and make up the loop holes, or whether SAFE has reached consensus with MOFCOM on the aforesaid “related acquisition”, or the promulgation of Circular 37 means the approval and practice by MOFCOM in connection with the “related acquisition” are issues worthy of attention.


End Notes:


1 In the Circular 75, “round-trip investment” means the direct investment activities carried out by a domestic resident via an SPV, including but not limited to the following methods: acquisition or exchange of the equity of the Chinese party to a domestic enterprise; establishment of a foreign-invested enterprise in the PRC and acquisition or contractual control of assets in the PRC via this enterprise; agreement-based acquisition of assets in the PRC and investment with the acquired assets to establish a foreign-invested enterprise, and increase capital to a domestic enterprise.


Jun He 4


Chunyang Shao, Partner, Jun He

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Xudong Tao, Partner, Jun He

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Chenliang Li, Partner, Jun He

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Xi Chen, Jun He

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Yu Xia, Jun He

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