Compliance Guidelines for Natural Person Round-Trip Investments under SAFE Circular 37 in China

Introduction #

China’s State Administration of Foreign Exchange (SAFE) requires domestic residents to register offshore special purpose vehicles (SPVs) used in outbound investment and round-trip investment structures. This obligation arises under the SAFE Circular No. 37 [2014], formally titled Notice on Foreign Exchange Administration Concerning Overseas Investments and Financing and Round-Trip Investment by Domestic Residents via Special Purpose Vehicles. Failure to comply with Circular 37 may restrict cross-border capital flows, profit repatriation, and dividend distributions, and may also expose individuals and entities to administrative penalties.

I. Legal Basis #

Key legal and regulatory instruments include:

1. Regulations of the People’s Republic of China on Foreign Exchange Administration (State Council Order No. 532)
2. Regulations on the Merger and Acquisition of Domestic Enterprises by Foreign Investors (MOFCOM Order No. 6 [2009])
3. SAFE Circular No. 37 [2014] – Notice on Foreign Exchange Administration Concerning Overseas Investments and Financing and Round-Trip Investment by Domestic Residents via Special Purpose Vehicles
4. SAFE Circular No. 13 [2015] – Notice on Further Simplifying Direct Investment Foreign Exchange Policies
5. SAFE Circular No. 29 [2019] – Notice on Streamlining Foreign Exchange Accounts
6. SAFE Administrative Licensing Measures (SAFE Public Notice No. 1 [2021])

II. Registration Requirements under Circular 37 #

Domestic residents establishing an offshore SPV for outbound or round-trip investment must register with a designated foreign exchange bank authorized to handle direct investment business.

Types of Registration: #

• Initial Registration – Required after the SPV is formed and the investment structure is in place.
• Amendment Registration – Required when there is a material change to the SPV, shareholding, or domestic equity interests.
• Deregistration – Required upon SPV liquidation or disposal of domestic interests.
• Post-Fact Registration (Supplemental Registration) – Required if outbound investment was made before registration, excluding formation costs.

Note: Except for post-fact registrations handled by SAFE, all other procedures are delegated to banks.

III. Who Qualifies as a Domestic Resident? #

The following individuals qualify as “domestic residents” for Circular 37 compliance:

• Chinese citizens with a valid PRC resident ID, military or armed police ID.
• Foreign individuals without valid PRC identification documents but who habitually reside in China due to economic interests are deemed domestic residents. This includes holders of foreign passports (including stateless persons), Mainland Travel Permits for Hong Kong and Macao Residents, and Mainland Travel Permits for Taiwan Residents. Including:
  • Individuals who maintain a permanent residence in China but have temporarily left the country due to travel, education, medical treatment, employment, or residence permit requirements abroad, and are expected to return to their permanent residence once such reasons cease to exist.
• • Individuals who hold equity interests in domestic (PRC-funded) enterprises.
  • Individuals who previously held equity interests in domestic enterprises, and while such interests have been converted into foreign-invested interests, the ultimate beneficial owner remains the same individual.

When handling foreign exchange registration for outbound investment, domestic individual residents must present valid identification documents (e.g., PRC resident identity card or passport). For foreign individuals (including foreign nationals, Hong Kong, Macao, and Taiwan residents), appropriate documentary evidence must be submitted to verify the authenticity of residency and investment interests, such as property ownership certificates or documentation of equity interests in domestic enterprises. Offshore permanent residence permits shall not be accepted as sufficient proof for registration purposes.

IV. SPV Foreign Exchange Registration Procedures #

1. Review Principles: #

• Even without capital injection, registration is required if an SPV structure for round-trip investment is in place or planned.
• Banks may accept registration if:
  • The individual already controls a domestic company directly or indirectly;
• • The domestic company has financing potential;
• • The applicant provides a written commitment to conduct round-trip investment when feasible;
  • Supporting materials prove the authenticity of the structure.
• Registration is only permitted for the first-tier SPV directly established or controlled by the domestic individual.
• If contribution involves domestic assets or equity, registration must be done at the bank where such assets are located. If offshore assets are used, register at the bank in the applicant’s household registration locality.

2. Required Documents: #

• Application letter and registration form
• PRC identity documents or supporting documents for foreign residents
• SPV incorporation documents, shareholder register
• Domestic and offshore shareholder approvals
• Proof of ownership in domestic or offshore assets/equity

V. Amendment Registration #

1. Review Principles: #

• Required for changes to:
  • Shareholders;
• • Company name, term;
  • Capital increases, reductions, equity transfers, mergers, etc.
• Proceeds from SPV transactions should be repatriated through compliant channels (e.g., capital account, dividend repatriation).
• Banks must update and replace original registration certificates accordingly.

2. Required Documents: #

• Application and updated registration form
• Previous registration certificate
• Updated identity documents
• Evidence supporting changes (e.g., shareholder resolutions, contracts)

VI. Deregistration of SPV Registration #

1. Review Principles: #

• Required when the SPV is terminated (liquidation, expiration, restructuring, etc.) or no longer meets Circular 37 conditions.

2. Required Documents: #

• Application letter with supporting evidence of dissolution
• Original registration certificate and proof of deregistration

VII. Post-Fact (Supplemental) Registration #

1. Review Principles: #

• Required if outbound investment occurred (beyond SPV formation costs) before registration.
• SAFE will assess whether:
  • The domestic individual made equity contributions or transferred domestic assets;
• • The SPV maintains a valid round-trip investment structure;
  • Authenticity of contributions and future financing intent is documented.
• Only the first-tier SPV may be registered under this route.
• If the investment violates FX regulations, administrative penalties may apply.

2. Required Documents: #

• Application letter and registration form
• Identity documents
• SPV registration and control documents
• Ownership documentation for relevant assets or equity
• Supporting materials for round-trip structure and financing
• Proof of capital contributions or cross-border settlements
• Power of attorney, if applicable

VIII. Consequences of Non-Compliance #

1. Restrictions on Cross-Border Fund Flows #

Without proper Circular 37 registration, banks and regulators may prohibit or delay:

• Capital inflows and outflows;
• Repatriation of profits or dividends;
• FX settlement of capital contributions or equity disposal proceeds.

This may hinder future capital injections, equity transfers, or exits.

2. Administrative Penalties #

Pursuant to the Regulations of the People’s Republic of China on Foreign Exchange Administration and its implementing rules, where the State Administration of Foreign Exchange (SAFE) identifies round-trip investment activities that have not been duly registered as required, it may impose administrative penalties—such as warnings or fines—on the relevant parties (including domestic individuals or enterprises). The specific penalty amount will depend on the severity of the violation.

• In cases where funds are transferred abroad to special purpose vehicles (SPVs) through fictitious or fabricated transactions, SAFE may, in accordance with Article 39 of the Foreign Exchange Regulations, order the repatriation of foreign exchange within a prescribed period and impose a fine of up to 30% of the evaded amount. In serious cases, fines ranging from 30% to 100% of the evaded amount may be imposed. If the act constitutes a crime, criminal liability shall be pursued in accordance with the law.
• In cases where parties fail to complete the required foreign exchange registration, fail to disclose the actual controlling party of the round-trip investment entity, or make false declarations or commitments, the following penalties may apply:
  • (i) Pursuant to Article 48(5) of the Foreign Exchange Regulations, individuals may be fined up to RMB 50,000.
• • (ii) Where outbound fund transfers have occurred, SAFE may, in accordance with Article 39, order the return of such funds and impose fines up to 30% of the amount transferred. In serious cases, fines exceeding 30% and up to the full amount of the funds may be imposed, and criminal liability may be pursued.
  • (iii) Where inbound funds or foreign exchange settlements are involved, SAFE may, in accordance with Article 41, order rectification and impose fines of up to 30% of the unlawful amount. In severe cases, the fine may range from 30% to 100% of the unlawful amount.
• Where domestic residents fail to file the required international balance of payments declarations for cross-border transactions related to SPVs, SAFE may, in accordance with Article 48(1) of the Foreign Exchange Regulations, impose fines of up to RMB 50,000 to individuals.

Conclusion #

Natural persons involved in outbound investment and round-trip structures via SPVs must ensure full compliance with SAFE Circular 37. Timely registration, accurate disclosures, and cooperation with banks and SAFE are essential to facilitate lawful fund flows, avoid penalties, and ensure long-term access to cross-border capital markets.

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