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On October 21 2005, the PRC State Administration of Foreign

By Florence Hughes,2014-05-18 03:38
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It should be noted, however, that Circular 75 still contains detailed disclosure requirements for overseas investment by PRC residents which involve

SAFE CIRCULAR 75 A STEP IN THE RIGHT DIRECTION BUT THE

    DEVIL MAY STILL BE IN THE DETAIL

    December 2005

    The issuance of the Circular on Relevant Issues in the Administration of Foreign Exchange regarding Financing and Roundtrip Investment by Domestic Residents through Offshore Special Purpose Companies (“Circular 75”), the third and most recent circular by the PRC State Administration of Foreign Exchange (“SAFE”) on October 21, 2005, represents a step in the right direction for foreign venture capital and private equity. With the implementation of Circular 75 on November 1 2005, Circulars 11 and 29 issued earlier this year and the cause of much concern amongst the venture capital and private equity community, ceased to have effect.

    How, in practice, Circular 75 will be applied remains somewhat unclear. As is often the way with regulatory developments in the PRC, each attempt at clarification also brings with it pockets of uncertainty and potential areas of further concern.

Background

    Venture capital and private equity investments have, very often, relied on the use of offshore special purpose vehicles (“SPV”) located in the British Virgin Islands or the Cayman Islands as their investment vehicles in China. At the core of this structuring is the practice commonly known as “round-tripping”. This involves PRC individuals transferring the

    ownership and control of PRC assets to a wholly foreign owned enterprise (“WFOE”) in exchange for equity in the SPV.

    In issuing Circulars 11 and Circular 29 earlier this year, SAFE essentially brought an abrupt halt to the practice of engaging in round tripping by requiring PRC stakeholders to register and obtain approval from SAFE before acquiring an equity interest in any offshore holding company.

Circular 75

    The essence of Circular 75 is that SAFE has now eliminated the approval requirement as imposed by Circulars 11 and 29, and relaxed foreign exchange rules governing offshore investment by PRC resident individuals and companies. It should be noted, however, that Circular 75 still contains detailed disclosure requirements for overseas investment by PRC residents which involve multiple registrations.

The following is a summary of the key provisions contained in Circular 75:

Under Article 2, before establishing or acquiring control of an offshore SPV, a PRC resident is

    required to file the following documents for registration with the local SAFE:

    1. The application form (setting out in details the basic structure of the PRC company,

    the equity structure of the SPV and the offshore equity financing arrangement);

    2. Domestic registration documents to be provided by the PRC resident company, or

    identity evidence to be provided by the PRC resident individual;

    3. The proposal setting out the offshore investment;

    4. The PRC resident company shall disclose details of the source of its capital and/or

    assets for the foreign exchange, together with any relevant approval documents;

    5. a Certificate of Registration of foreign exchange for offshore investment (to be

    completed by the PRC resident individual), or an Individual Registration Form of

    foreign exchange for offshore investment (to be completed by the PRC resident

    company); and

    6. other supporting documents.

After verifying the above documents, SAFE will affix its chop on the Certificate of

    Registration or the Individual Registration Form.

Under Article 3, when a PRC resident contributes to the SPV any asset or equity interest in a

    PRC company, or proceeds with an offshore equity financing after contributing the assets or

    equity interest into the SPV, the PRC resident is required to file the following documents in

    order to reflect the changes made to the equity of the SPV:

    1. The application form (setting out in details the information of the changes made to

    the equity interest in the PRC company and the SPV, and how the price for the assets

    or equity interest in the PRC company and in the SPV is determined);

    2. a Certificate of Registration of foreign exchange for offshore investment (to be

    completed by the PRC resident individual), or an Individual Registration Form of

    foreign exchange for offshore investment (to be completed by the PRC resident

    company)

    3. All the documents relating to the approval given to the roundtrip investment;

    4. Documents relating to the valuation of the PRC company’s state-owned assets or

    equity interest (if state-owned assets are involved);

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