Author: Qiu Jian Zhu Yongchun
The State Administration of Foreign Exchange of China (“SAFE”) recently promulgated the Operational Rules for Foreign Exchange Administration Concerning Domestic Residents’ Financing and Round-trip Investment through Special Purpose Vehicles (Huifa  No. 19, “Circular 19”) which shall come into force on July 1, 2011. Circular 19 has restated, clarified and updated the original approval principles, application materials and approval hierarchies in respect of various scenarios in the implementation of Circular Hui Fa  No.75 (“Circular 75”) and its implementing rules.
Based on our preliminary review of Circular 19, we believe that the following provisions thereof should be worth particular attention of people engaging in the financing and round-trip investment of special purpose vehicles (“SPV”):
1. “Domestic Resident Individuals” shall include, in addition to the individuals having Chinese legitimate identity certification such as Chinese resident identity card, the following persons who have no Chinese legitimate identity but have been habitually resident in China due to economic benefits (regardless of whether they have legitimate identity certification documents of the People’s Republic of China):
（1） a natural person having permanent residency in China, who temporarily leaves such residency due to reasons such as overseas travel, education, health care, work, foreign residency requirements, but returns to such residency upon the disappearance of the same reason;
（2） a natural person owning equity in a domestic enterprise and such equity is identified [by Chinese authorities] as equity owned by domestic people; and
（3） a natural person who once owned domestic equity of domestic enterprises, which was changed into foreign-owned equity by nature but still ultimately owned by the natural person.
2. “Non-SPV Round-trip Investment” refers to the direct investment in China conducted by domestic resident individuals through oversea enterprises not falling into the scope of the SPV as defined in Circular 75. Where a domestic resident individual conducts direct investment in China through non-SPV, the individual is not required to go through the formalities for the SPV registration for the oversea enterprise; however, the concerned foreign exchange authority, which governs the domestic enterprise controlled by such oversea enterprise, shall mark such domestic enterprise as “Non-SPV Round-trip Investment” in the foreign exchange administration information system for direct investment. In case of application for changing such oversea enterprise into SPV, the provisions of Circular 19 shall still apply; however, such oversea enterprise will not be subject to the limitation that no round-trip investment is allowed before the completion of SPV registration (please see to Section 3 for more details).
3. Principle of Registration before Round-trip Investment: a domestic resident individual may first establish an SPV before going through the registration formalities thereof; provided that, prior to the completion of such registration, the SPV may not have any change of substantial capital or equity such as oversea financing, equity change or round-trip investment. This principle confirms in writing the current practice of SAFE in this respect.
4. Venue for Circular 75 Registration: A domestic resident individual shall go through the formalities for Circular 75 registration with the foreign exchange authority where his/her domestic enterprise assets or equity situate. In the event that his/her assets or equity spread in different regions, the individual shall go through all the registration formalities with the foreign exchange authority where his/her major enterprise situates.
5. Principle of Punishment before Registration: Where a domestic resident establishes an oversea SPV or a non-SPV in violation of the PRC law, the resident shall be first subject to punishment by the foreign exchange examination department before going through the registration formalities. During such non-compliance examination, the foreign exchange authority will pay close attention to the following aspects:
（1） for non-SPV round-trip investment, the concerned domestic resident individual shall provide materials evidencing that there is no evasion of foreign exchange, illegal purchase of foreign exchange, arbitrarily changing the usage of foreign exchange and other violations of foreign exchange administrative regulations in the course of the formation of his/her oversea equity;
（2） for SPV round-trip investment, whether substantial capital or equity change has occurred to the oversea SPV;
（3） for the period commencing from November 1, 2005 and ending on the application date, whether any of following matters occurs to the domestic enterprise that is established in or under direct or indirect control of the round-trip investment: profit distribution to overseas shareholder, liquidation, share transfer, capital decrease, capital recoupment, refunding of shareholder loan or payment of relevant interest, domestic re-investment or capital increase with distributed profits; and
（4） whether the foreign enterprise established in the round-trip investment has made any false commitment when handling the foreign exchange registration formalities.
6. The requirements on duration of existence for domestic enterprises as set forth in Circular 75 may be cancelled: According to the current regulations of Circular 75, in principle, a domestic enterprise is required to have been established for a period of no less than three years. In practice, where a domestic enterprise has been in existence for less than three years, while the foreign exchange authority may accept the application of the domestic enterprise’s owner for Circular 75 registration, the application process is usually more time-consuming and costly. Literarily speaking, Circular 19 seems to have cancelled the requirement that domestic enterprise must has been established for a period of no less than three years, though such understanding is subject to confirmation by practice.
7. Registration of Post-Financing Changes: in case of any financing change or oversea direct investment into or indirect control of enterprise by an SPV, the relevant applicant shall file the change with the foreign exchange authority for registration within 30 working days. Where a domestic resident individual obtains any revenue from the capital change of an SPV, the individual shall, prior to repatriation of the same within the prescribed time limit, go through the formalities for change of registration of the SPV and apply to the foreign exchange authority where the SPV originally registers for opening the special account for assets realization to deposit the same.