What is round trip investment?
A round trip investment refers to an investment made by a Chinese resident in a Chinese domestic company through a special purpose vehicle (SPV) abroad. For example, when a Chinese resident establishes a holding company abroad (for example, a Hong Kong SPV or a Cayman Islands SPV) and invests in this SPV to control a Chinese domestic company through direct acquisition or captive contractual arrangements .
Circular SAFE 75 – Circular 75 (Notice on issues related to currency management in fundraising and return investment activities of national residents carried out through offshore companies with special purposes) published by SAFE that entered into force on November 1, 2005 requires Chinese residents to register with the local SAFE branch before establishing or controlling an offshore SPV that owns the capital or assets of a Chinese domestic company for the purpose of obtaining equity financing.
Rules of mergers and acquisitions – The Mergers and Acquisitions Rules that came into effect on September 8, 2006 state that MOFCOM approval is required for round-trip investments that involve 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 gain MOFCOM approval. This stops almost all Chinese company restructurings into offshore holding company structures.
Circular SAFE 106 – Circular 106 published by the SAFE General Affairs Department, which entered into force on May 29, 2007, provides further guidance and requirements on the implementation of Circular 75.
Among others, under Circular 106, a registration under Circular 75 for round-trip investment requires the submission of three years of financial statements of the local target company. This means that the national target company must have a 3-year operating history.
Greenfield investments – Under Circular 106, even “brand new” investments by Chinese residents (that is, investments in offshore companies in which no pre-existing domestic companies or assets are involved) are also subject to Circular 75 registration. The offshore company must have a 2-year operating history (or 1 year for R&D companies).
All land investments of an offshore company established or controlled by a Chinese resident are now subject to registration under Circular 75.