What is round trip investment?

A round trip investment refers to an investment made by a Chinese resident in a Chinese domestic company through an offshore special purpose vehicle (SPV). For example and 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) published by SAFE which came into effect ON Nov 1 and 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 and 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 and 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 published by the General Affairs Department of SAFE which came into effect ON May 29 and 2007 provides further guidance and requirements ON the implementation of Circular 75.

Amongst others and 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 is now subject to registration under Circular 75.