Out-Law Guide 3 min. read

Chinese offshore special purpose vehicles

This guide was last updated in February 2013.

A special purpose vehicle (SPV) is a legal entity created to fulfil a specific, and often temporary, objective. An SPV is typically used to isolate an individual or corporate investor from risk. It can be owned by one or more individuals or companies.

Chinese shareholders often set up offshore SPVs as a means of financing existing Chinese businesses, allowing them to gain the benefit of certain tax and foreign exchange preferences only available to foreign investors. A Chinese resident investing in a Chinese domestic company through an offshore SPV in this manner is known as a 'round-trip investment'. Since 2005, SPV round-trip investments have been expressly permitted but only under the close scrutiny of the State Administration of Foreign Exchange (SAFE). Round-trip SPVs must be registered with SAFE in order to manage necessary foreign exchange clearance formalities, and must also comply with certain foreign exchange reporting and repatriation requirements.

On 20 May 2011, SAFE issued a new set of operating procedures for handling SPV-related foreign exchange registration matters. These procedures are contained in Circular No. 19. Circular No. 19 also contains detailed procedures and requirements for foreign exchange registration for inbound and outbound investments generally.

Given the financial and reputational risks of not complying with the rules, and the increased likelihood of detection, foreign investors and purchasers must take particular care to ensure that they have complied in full with all relevant SAFE registration requirements.

In clarifying SAFE's position on round-trip SPVs, Circular No. 19 both increases and decreases the burdens of compliance.

Registration timing

Circular No. 19 provides that Chinese residents can set up an offshore SPV before obtaining SAFE registration, rather than having to apply first. However they cannot undertake overseas financing, round-trip investments or major capital or share changes in the SPV before SAFE registration.

New category of 'Non-SPV Round-trip Investor'

Non-SPV round-trip investors are now exempt from the registration requirements. This occurs where an offshore company, set up by Chinese residents for a purpose other than as a financing vehicle for round-trip investments, invests in a foreign-controlled company based in mainland China. This could be, for example, a company which has undertaken standard overseas investments and operations but which has then incidentally made a re-investment back onshore.

However, this status is not granted automatically. These companies must report and apply to SAFE in order to receive recognition as non-SPV round-trip investors and so qualify for exemption. A company must be able to prove that it was initially properly approved for offshore investment (if set up by a Chinese company), or that its source of funds and establishment did not violate Chinese foreign exchange laws (if established by a Chinese individual). Circular No. 19 does not spell out the criteria for acceptable proof, leaving significant uncertainty in this regard.

Circular No. 19 also does not provide any deadlines for these companies to report. They will ultimately have to do so under the new declaration requirements below if their circumstances change.

Remedial registration for non-compliant SPVs

The new rules make registration possible for round-trip SPVs that have previously failed to register, but also indicate that SAFE should penalise these offenders. The penalties could be significant. Penalties can include a percentage of all funds remitted by the onshore investor to the SPV after 1 November 2005 and possible criminal prosecution. Other than in cases of extremely pressing need it is unlikely that these penalties will encourage companies to comply, however under the new declaration requirements below the risk of discovery will increase over time.

New declaration requirements for foreign-controlled companies

Circular No. 19 introduces a new requirement to help SAFE identify round-trip investments. At the time of foreign exchange registration companies with foreign shareholders (foreign invested enterprises or FIEs) are now required to make a declaration as to what type of investor those foreign shareholders are. As a result, eventually all FIEs will have to declare their foreign investors' status. Self-declaration is currently required for:

  • setting up a new FIE;
  • when a foreign party acquires equity in or assets belonging to a Chinese company;
  • equity transfer in an existing FIE;
  • capital increase or reduction in an existing FIE;
  • any other change of foreign exchange registration details – for example, change of company name or registered address.


Circular No. 19 also sets out a number of updated forms for foreign exchange registration procedures relevant to SPVs and outbound investment generally. These forms are useful in helping to clarify SAFE's complex filing procedures and unify local registration procedures and documentation requirements. However, the renewed emphasis on compliances raises rather than reduces risks in this area.

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