What is round trip investment? A review of China’s round trip regulations – Circular 75, M&A Rules, Circular 106

Andy Lau has substantial experience representing pe/vc funds, investment banks and startup and growth companies in pe/vc investments, M&A, IPO and capital markets transactions. For a preliminary consultation, please email him at andy@askventure.com.

What is round trip investment?

A round trip investment （返程投资）refers to an investment made by a Chinese resident in a Chinese domestic company through an offshore special purpose vehicle (SPV). For example, where a Chinese resident sets up an offshore holding company (e.g., a Hong Kong SPV or a Cayman Islands SPV) and invests into this SPV to control a Chinese domestic company by either direct acquisition or captive contractual arrangements.

SAFE Circular 75

Circular 75 (Notice on Issues Relating to the Administration of Foreign Exchange in Fund Raising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies) 《国家外汇管理局关于境内居民通过境外特殊目的公司融资及返程投资外汇管理有关问题的通知》(汇发〔2005〕75号) published by SAFE which came into effect on Nov 1, 2005 requires Chinese residents to register with the local SAFE branch before establishing or controlling an offshore SPV that holds the equity or assets of a Chinese domestic company for the purpose of an equity financing.

M&A Rules

The M&A Rules which came into effect on Sep 8, 2006 provides that MOFCOM’s approval is required for round trip investments involving the acquisition of a Chinese domestic company by an offshore holding company. However, since the M&A Rules, almost no such restructuring has been able to obtain approval from MOFCOM. This puts a stop on almost all restructuring of Chinese companies into offshore holding company structures.

SAFE Circular 106

Circular 106 《国家外汇管理局关于境内居民通过境外特殊目的公司融资及返程投资外汇管理有关问题的通知》操作规程的通知（汇综发[2007]106号）published by the General Affairs Department of SAFE which came into effect on May 29, 2007 provides further guidance and requirements on the implementation of Circular 75.

Amongst others, under Circular 106, a registration under Circular 75 for round trip investment requires the submission of three years of financial statements of the domestic target company. This means that the domestic target company must have an operating history of 3 years.

Greenfield Investments

Under Circular 106, even “greenfield” investments by Chinese residents (i.e., investments in offshore companies in which no preexisting domestic company or asset is involved) are also subject to Circular 75 registration. The offshore company must have an operating history of 2 years (or 1 year for R&D companies).

All onshore investments by an offshore company established or controlled by a Chinese resident are now subject to registration under Circular 75.

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