Notice of the State Administration of Foreign Exchange on Relevant Issues concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing and in Return Investment via Overseas Special Purpose Companies

Promulgation date:	10-21-2005
Effective date:	11-01-2005
Department:	STATE ADMINISTRATION OF FOREIGN EXCHANGE
Subject:	FOREIGN EXCHANGE

Notice of the State Administration of Foreign Exchange on Relevant Issues concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing and in Return Investment via Overseas Special Purpose Companies (No. 75 [2005] of the State Administration of Foreign Exchange, October 21, 2005) The branches and foreign exchange administration departments of the State Administration of Foreign Exchange of all provinces, autonomous regions, and municipalities directly under the Central Government, and the municipal branches of the State Administration of Foreign Exchange of Shenzhen, Dalian, Qingdao, Xiamen and Ningbo: In order to encourage, support and lead the development of the non-public sectors of the economy, further improve the policy support system on venture capital investments, regulate domestic residents to engage in trans-territorial capital transaction involved in investment and financing activities via overseas special purpose companies, we hereby give our notice as follows in accordance with the “Regulation of the People’s Republic of China on Foreign Exchange Administration”, the “Measures for the Foreign Exchange Administration of Overseas Investments” and the “Interim Provisions for Foreign Investors to Merge and Acquire Domestic Enterprises” regarding the relevant foreign exchange administration issues for domestic residents to engage in stock right financing and in return investment via overseas special purpose companies: I. A “special purpose company” as mentioned in this Notice shall refer to an overseas enterprise directly established or indirectly controlled by a domestic resident legal person or domestic resident natural person for the purpose of engaging in stock right financing (including convertible bond financing) abroad with the enterprise assets or interests it/he holds inside China. “Return investment” as mentioned in this Notice shall refer to the direct investment activities carried out inside China by a domestic resident via a special purpose company, including but not limited to the following ways: acquisition or exchange of the stock rights of the Chinese party to a domestic enterprise, establishment of a foreign-funded enterprise inside China and acquisition or agreement-based control of assets inside China via this enterprise, agreement-based acquisition of assets inside China and investment with the acquired assets to establish a foreign-funded enterprise, and increase capital to a domestic enterprise. A “domestic resident legal person” as mentioned in this Notice shall refer to an enterprise or public institution legal person or other economic organization legally established inside China; while a “domestic resident natural person” shall refer to a natural person who holds a resident identity card, a passport or other lawful identity certificate of the People’s Republic of China, or a natural person who has no legal identity inside China but habitually resides inside China due to reasons of economic interests. “Control” as mentioned in this Notice shall refer to the behavior that a domestic resident obtains the rights to carry out business operation of, to gain proceeds from or to make decisions on a special purpose company or a domestic enterprise by means of acquisition, trusteeship, holding shares on behalf of others, voting rights, repurchase, convertible bonds, etc. II. A domestic resident shall, before establishing or controlling an overseas special purpose company, bring the following materials to the local branch or department of foreign exchange administration (hereinafter referred to as “foreign exchange office”) to apply for going through the procedures for foreign exchange registration of overseas investments: (1) a written application (which shall state in detail the basic information of the domestic enterprise, the stock right structure of the overseas special purpose company, and the overseas financing arrangements); (2) the documents on registration of the domestic resident legal person inside China, or the identity certificate in the case of a domestic resident natural person; (3) the letter of commercial plans on overseas financing; (4) the official reply on ratification of the sources of the domestic resident legal person’s foreign exchange funds (assets), and the approval document of the overseas investment administrative department; (5) the “Certificate of Foreign Exchange Registration of Overseas Investments” filled out by the domestic resident legal person, or the “Form of Foreign Exchange Registration of Overseas Investments of the Domestic Individual Resident” filled out by the domestic resident natural person (attachment); (6) other testimonials on the authenticity. The foreign exchange office shall, after examining and checking the abovementioned materials to be inerrant, affix the special seal for foreign exchange business for capital account transactions on the “Certificate of Foreign Exchange Registration of Overseas Investments” or the “Form of Foreign Exchange Registration of Overseas Investments of the Domestic Individual Resident”. III. Where a domestic resident contributes the assets or stock rights of a domestic enterprise it owns into a special purpose company, or engages in stock right financing abroad after contributing assets or stock rights into a special purpose company, it shall go through the procedures for modification of foreign exchange registration of overseas investments with regard to the net asset equities of the special purpose company it holds and the variations thereof, and meanwhile provide the following materials: (1) a written application (which shall state in detail the process of modification of the shareholders and stock rights of the domestic enterprise and the special purpose company, and the way of pricing the assets or stock rights of the domestic enterprise and the special purpose company); (2) the “Certificate of Foreign Exchange Registration of Overseas Investments” filled out by the domestic resident legal person, or the “Form of Foreign Exchange Registration of Overseas Investments of the Domestic Individual Resident” filled out by the domestic resident natural person; (3) the documents on the foreign investment administrative department’s ratification and archival filing of the return investment; (4) if state-owned assets are involved, the documents on confirmation by the state-owned assets administrative department of the value of the domestic enterprise’s assets or stock rights must be provided; (5) the special purpose company’s registration certificate, business license and other testimonials, which are valid abroad; (6) other testimonials on the authenticity. IV. After a special purpose company accomplishes overseas financing, the domestic resident may, according to the plan on use of funds as stated in the letter of commercial plans or the prospectus, transfer the funds which ought to be arranged for use inside China into China. V. Where a special purpose company uses the funds raised from overseas financing for return investment or provides a domestic enterprise with shareholder’s loans or other debt funds, the relevant domestic enterprise shall go through the relevant foreign exchange administration procedures in accordance with the presently applicable laws and regulations for administration of foreign debts and foreign exchange. The foreign exchange office shall, when handling registration of establishment or modification of a foreign-funded enterprise or foreign debt registration for the relevant domestic enterprise, or handling foreign exchange registration of foreign investments in the form of foreign exchange upon assignment of stock rights for the special purpose company, examine and check the “Certificate of Foreign Exchange Registration of Overseas Investments” or the “Form of Foreign Exchange Registration of Overseas Investments of the Domestic Individual Resident”. VI. A domestic resident may, after accomplishing the procedures for foreign exchange registration of overseas investments or for modification thereof in accordance with the legal provisions, pay the profits, dividends, liquidation expenses, stock right assignment expenses, capital decrease expenses, etc. to the special purpose company. The profits, dividends and foreign exchange income from capital variation, which are gained by a domestic resident from a special purpose company, shall be transferred into China within 180 days as of the day when they are gained. The profits or dividends may be transferred into the account of foreign exchange for current account transactions or be put under foreign exchange settlement, while the foreign exchange income from capital variation may, upon ratification of the foreign exchange office, be either preserved in a special account opened for capital account transactions, or put under foreign exchange settlement. VII. Where a special purpose company meets with a major capital modification event such as capital increase or decrease, stock right assignment or exchange, merger or division, investment with long-term stock rights or credits, provision of guaranty to a foreign party, etc., and is not involved in return investment, the domestic resident shall, within 30 days as of the major event, apply to the foreign exchange office for going through the procedures for modification or archival filing of the foreign exchange registration of the overseas investments. VIII. Where, before this Notice comes into force, a domestic resident has established or controlled a special purpose company abroad and has accomplished return investment, but fails to comply with the legal provisions to make foreign exchange registration of the overseas investments, it shall, in accordance with this Notice, go to the local foreign exchange office to make up the foreign exchange registration of the overseas investments by March 31, 2006. After the domestic resident has made up the foreign exchange registration of the overseas investments, the foreign exchange office may handle the procedures for foreign exchange registration of foreign investments or foreign debts for the relevant domestic enterprise. IX. A domestic venture capital investment enterprise may, with reference to this Notice, establish a special purpose company abroad and engage in venture capital investment activities. X. Where the same administrative matter as mentioned above involves more than one domestic resident, the relevant domestic residents shall, by issuing the power of attorney, authorize 1 or 2 domestic residents among them to go through the relevant procedures on foreign exchange administration. XI. Matters not mentioned in this Notice shall be dealt with in accordance with the presently applicable regulations for foreign exchange administration of foreign investments and overseas investments. XII. Where a domestic resident violates the provisions in this Notice and constitutes evasion of foreign exchange or violation of any other rule on foreign exchange administration, the foreign exchange office shall give penalties in accordance with the “Regulation of the People’s Republic of China on Foreign Exchange Administration” and other relevant provisions. XIII. This Notice shall come into force on November 1, 2005. The “Notice concerning the Relevant Issues on Improving Foreign Exchange Administration for Merger and Acquisition with Foreign Investments” (No. 11 [2005] of the SAFE) and the “Notice concerning Relevant Issues on Registration of Overseas Investments Contributed by Domestic Individual Residents and Foreign Exchange Registration of Merger or Acquisition with Foreign Investments” (No. 29 [2005] of the SAFE) shall be ceased from implementation simultaneously. Attachment: Form of Foreign Exchange Registration of Overseas Investments of the Domestic Individual Resident