When domestic enterprises or individuals invest in mainland China through offshore companies, two questions commonly arise: first, whether the arrangement still constitutes round-trip investment where the offshore company is owned by a corporate entity; and second, whether an individual must complete foreign exchange registration for a special purpose vehicle (SPV) where the ultimate controller is a domestic resident individual. This article examines the nature of the investment and the registration obligations separately.
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Identifying Round-Trip Investment
SAFE Circular 37 (Hui Fa [2014] No. 37) defines round-trip investment as direct investment undertaken in mainland China by domestic residents, directly or indirectly through an SPV, through the establishment of new enterprises, acquisitions or similar transactions, with the acquisition of relevant rights and interests. “Domestic residents” encompasses both domestic institutions and domestic resident individuals. Identifying an SPV involves examining its investment and financing purposes, the lawful sources of its assets or interests, and the arrangements under which the offshore enterprise is established and controlled.
Under the Guidelines for Foreign Exchange Business under the Capital Account (2024 Edition), when handling foreign exchange registration for a foreign-invested enterprise, banks must apply a round-trip investment designation if domestic residents directly or indirectly hold shares in or control the foreign investor.
For example, if domestic Company A holds shares in offshore Company B, and Company B conducts business solely overseas, that structure alone is insufficient to establish that round-trip investment has occurred. If Company B subsequently establishes an enterprise or acquires equity in mainland China, the investment activities and control relationships must be assessed together. Ownership by a domestic corporate entity therefore does not, by itself, rule out round-trip investment.
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Round-Trip Investment and the Return of Funds
“Round-trip” does not require the same funds to return through the same route. The focus is on whether domestic residents undertake direct investment in mainland China through an SPV and acquire rights or interests. Where an offshore vehicle uses external financing to invest in mainland China, the transaction structure and relationships must be assessed as a whole.
Profit distributions, settlement of genuine trade transactions and equity contributions are different in nature. An inflow of funds into mainland China alone is therefore insufficient to establish round-trip investment. Where an offshore vehicle provides funding to a domestic entity through a shareholder loan, external debt and other applicable requirements must also be examined in light of the loan arrangements.
Where a foreign investor with domestic shareholding or control reinvests profits lawfully earned in mainland China, there may be no new cross-border remittance. In such cases, the acquisition of rights or interests and the control relationships must still be assessed, and the relevant investment, capital contribution and tax formalities must be checked.
The consideration for an equity acquisition may also be paid to the selling shareholder, while the target company may receive no capital contribution. Changes in shareholdings and the transaction documents should therefore be examined; whether the target company receives funds cannot serve as the sole basis for a conclusion.
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Registration Requirements for Domestic Institutions and Individuals
The PRC Company Law recognizes that a company, as a legal person, has its own independent property. An overseas investment made by a company using its own assets differs from an offshore structure established by a shareholder using personal assets or interests, both in terms of the investing party and the ownership of the assets involved. The applicable registration obligations should therefore be assessed separately.
When a domestic enterprise establishes or acquires an offshore company using its own assets or interests, it must comply with the applicable approval, filing and registration requirements relating to development and reform, commerce and foreign exchange administration under the regime for outbound investment by domestic institutions. Circular 37 itself distinguishes between institutional and individual registration arrangements and expressly provides that domestic institutions must complete outbound investment foreign exchange registration in accordance with SAFE Circular 30 (Hui Fa [2009] No. 30) and other applicable provisions.
Accordingly, in a typical corporate outbound direct investment (ODI) structure, where an offshore subsidiary is funded and owned by a domestic enterprise, the fact that the enterprise’s ultimate controller is a domestic resident individual does not, by itself, mean that the individual must separately complete SPV registration for the same corporate investment. If the individual also has separate arrangements involving direct capital contributions, nominee shareholdings, share swaps or other reorganizations of assets or interests, those specific arrangements must be assessed individually.
Foreign exchange registration for an individual’s SPV is subject to specific eligibility conditions. The 2024 Guidelines bring lawful or potential round-trip investment structures within the scope of the individual registration rules. Where no such structure exists, banks will not accept an application for the corresponding registration. An individual’s ownership of an offshore company does not, in itself, mean that the registration conditions are satisfied.
The timing of registration is particularly easy to overlook. Under the Guidelines, an individual may first establish an SPV offshore. However, before registration is completed, no capital contributions may be made to it other than payment of the incorporation fees. Such contributions include the direct or indirect injection of domestic assets or interests into the SPV. The fact that round-trip investment has not yet occurred does not mean that registration can be deferred until the domestic enterprise is established or funds enter mainland China.
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Coordinating Onshore and Offshore Procedures
On the outbound investment side, projects subject to approval or filing must obtain the relevant documents before implementation, in accordance with the Administrative Measures for Enterprise Outbound Investment. Project implementation includes contributing assets or interests, or providing financing or guarantees; it is not limited to cash remittances abroad. The precise timing requirements must also be assessed with reference to the exceptions specified in the applicable rules.
On the inbound investment side, where an offshore company establishes a new enterprise or undertakes a merger or acquisition, the applicable foreign investment access rules, industry licensing, business registration, investment information reporting and foreign exchange requirements must still be reviewed. An acquisition of a related domestic company through an offshore company must also be examined in light of the provisions of the 2024 Negative List for Foreign Investment Access concerning the application of other relevant rules.
Completion of the corporate ODI procedures does not mean that all compliance requirements for subsequent investment in mainland China have been satisfied. Being classified as round-trip investment does not, in itself, make a transaction unlawful. Whether a particular arrangement can proceed still depends on the applicable market access rules, transaction requirements and completion of the necessary procedures.
The Measures for Reporting of Foreign Investment Information require the initial report to include information on the investor and its actual controller. The offshore shareholder’s registration records, actual control relationships and onshore transaction documents should be consistent with one another.
If an offshore vehicle introduces new investors, changes the layers of its ownership structure or alters its investment method, the parties should reassess whether any approvals, filings, foreign exchange registrations or information reports need to be updated. Completion of one procedure does not replace the need to meet other applicable requirements.
Kaizen recommends that the establishment of the offshore entity, ownership of the investment interests and subsequent investment in mainland China be assessed together when planning a cross-border structure, with the assessment promptly revisited as the transaction changes. The analysis of round-trip investment should focus on the actual investment relationships, the parties responsible for compliance and the specific procedures involved, so that the structure’s design remains consistent with its subsequent implementation.
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