Deacons
  April 10, 2006 - Hong Kong

China: Revised Rules on Forex Controls in PRC M&A Transactions

The State Administration of Foreign Exchange (SAFE) issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Round Trip Investment through Special Purpose Companies by Residents Inside China on 21 October 2005. The Notice, which became effective on 1 November 2005, repeals the earlier notices regarding the use of overseas holding companies for round trip investment: the Notice of the State Administration of Foreign Exchange on Relevant Issues in Perfecting Foreign Exchange Control in Mergers and Acquisitions by Foreign Investors and the Notice on Relevant Issues in the Registration of the Offshore Investments of Individual Domestic Residents and Foreign Exchange Registration of Mergers and Acquisitions by Foreign Investors. These earlier Notices required residents of China who, directly or indirectly, invested in the establishment or assumed control of an enterprise outside China for the purpose of making investment in China to carry out approval and registration formalities with the foreign exchange authorities. The new Notice details the procedures relating to the application process including the application documents which need to be submitted for this purpose. New definitions such as "special purpose company", "round trip investment", "legal person resident inside China" and "natural person resident inside China" have been introduced in this Notice to allow investors to determine more accurately whether they fall into the category of people required to register their overseas investment with SAFE. Before a Chinese resident may establish or control a special purpose company outside China, it must register the overseas investment with its local foreign exchange authority. Thereafter a Chinese resident can inject assets or equity of a Chinese enterprise into the special purpose company and then engage in overseas equity financing. Upon completion of the financing, the Chinese resident may repatriate the funds which were earmarked for use inside China in accordance with the planned use of the funds stated in its registration materials.