On 14 July 2014, the State Administration of Foreign Exchange (“SAFE”) issued Hui Fa  No. 37 (“Notice 37”) to regulate foreign exchange registration for “round-trip investments”. Notice 37 supersedes previous regulations, including Hui Fa  No. 75 (“Notice 75”). Notice 37 took effect on 14 July 2014.
In a typical “round-trip investment” scenario, a PRC individual holds a PRC operating company through one or several layers of offshore holding companies typically called special purpose vehicles (“SPVs”). Often, the PRC individual transfers the SPV to an offshore trust before conducting an IPO for tax planning and other purposes.
Notice 37 relaxes the registration requirements for round-trip investments. Under both Notice 75 and Notice 37, the round-trip investment must be registered with the foreign exchange bureau. However, unlike Notice 75, which requires every underlying entity between the top PRC resident enterprise or individual and the bottom resident enterprise to be registered with the foreign exchange bureau, Notice 37 only requires the top-tier SPV under the top PRC resident enterprise or individual to be registered with the foreign exchange bureau.
Notice 37 also relaxes the reporting requirements for share transfers. Under Notice 75, any transfer of shares in an SPV by a PRC resident enterprise or individual had to be reported within 30 days of the transfer. Under Notice 37, however, only the transfer of shares in a registered SPV directly established or controlled by a domestic individual (i.e., the top-tier SPV) is required to be reported in a “timely” manner (with no specific time limit). In addition, Notice 37 limits when a change of registration is required to: (i) a change of information in relation to the SPV; and (ii)
capital increase or decrease, equity transfer or swap, etc. by domestic individuals.
Under both Notice 75 and Notice 37, after any registered SPV has been transferred to a foreign trustee under a discretionary trust, there should no longer be a registrable round-trip investment structure. Under Notice 37, a requirement to deregister the structure is now expressly provided.
Notice 37 establishes a mandatory late registration process for unregistered foreign exchange. A PRC resident enterprise or individual who has neglected to register an overseas investment in an offshore SPV must write to the foreign exchange bureau to request a late registration and explain why the investment was not registered on time. The foreign exchange bureau has 20 working days to decide whether to grant a supplementary foreign exchange registration. Depending on the circumstances, an administrative penalty of up to RMB50,000 (for individuals) or RMB300,000 (for entities) may be levied. Additional penalties may apply if the unregistered foreign exchange involves a cross-border fund transfer to or from an unregistered SPV.
As written, the changes in Notice 37 should not have a material impact on the common offshore trust structures and operations used in wealth management. That said, given that Notice 37 has only been recently issued, the exact manner of its implementation by local SAFE remains to be seen.