Professional Interpretation

With the issuance of a series of guidance documents on domestic individuals investing abroad, the government has shown a positive attitude in individual overseas direct investment, such as: “promoting overseas investment by domestic individuals”, “working on the pilot program of direct investment in overseas securities markets by domestic individuals” , “establishing Qualified Domestic Individual Investors Overseas Investment System” and so on. At present, many domestic individuals are planning to invest overseas, but are these investments permitted by Chinese law? This note by the International Affairs team form Beijing Docvit Law Firm briefly discusses the regulatory landscape, in particular, new channels for overseas investments by Domestic Investors. 

I. Qualified Domestic Individual Investors

1.  SPV

On July 4, 2014, State Administration of Foreign Exchange (hereinafter referred to as SAFE) issued Notice of the State Administration of Foreign Exchange on Issues Relating to Foreign Exchange Control for Overseas Investment and Financing and Round-tripping by Chinese Residents through Special Purpose Vehicles, Hui Fa [2014] 37 (hereinafter referred to as ‘Circular 37’). Accordance with Circular 37,  "Special purpose vehicles" shall mean overseas enterprises established directly or controlled indirectly by Chinese residents (including domestic organisations and Chinese resident individuals) using assets or interests of domestic enterprises held by them legitimately or overseas assets or interests held by them legitimately, for the purposes of investment and financing. It can be understood that Chinese resident individuals can directly set up overseas SPV to invest and there is no need to establish domestic holding companies.

Accordance with Notice of the State Administration of Taxation on Further Simplifying and Improving the Foreign Exchange Management Policies for Direct Investment, Hui Fa [2015] No.13 (hereinafter referred to as ‘Circular 13’), the Chinese resident individuals contribute the SPV in overseas assets and equity shall apply to the bank where the residence is registered for the foreign exchange registration of the domestic resident individual special purpose company.

2. Stock Incentive Plan of Overseas Listed Company

A portion of employee compensation used to generate employee motivation, since improved performance of employees increases company profits. When employees own stocks as part of a stock incentive plan, they see increased earnings when the company generates more profit. For the purpose of the implementation of the plan, the stock incentive plan is to solve the problem of long-term incentives for managers and other key personnel and retain and attract talents.

Accordance with Notice of the State Administration of Foreign Exchange on the Relevant Issues Concerning the Administration of Foreign Exchange for Domestic Individuals' Participation in Equity Incentive Programs of Overseas Listed Companies, Hui Fa [2012] No. 7 (hereinafter referred to as ‘Circular 7’), all individuals who participate in the same equity incentive program of an overseas listed company shall, through their domestic company, collectively entrust one domestic agency to solely handle the relevant matters for them including registration of foreign exchange, opening of the account and transfer and conversion of funds, and one overseas  shall solely handle such matters including individuals' exercise of rights, the purchase and sale of relevant stocks or equities and transfer of relevant funds. After the foreign exchange revenues obtained by individuals from participation in the equity incentive program are remitted into China, the domestic agency shall, with the relevant written application, the relevant foreign exchange registration certificate for equity incentive programs, the certificate of overseas transaction and other relevant materials, transfer the funds from its special domestic foreign exchange account respectively into the corresponding individual foreign exchange deposit accounts through the bank, and such funds shall be managed and used in accordance with the relevant provisions on individual foreign exchange deposit accounts. 

The SAFE has now relaxed its policy. The bank can handle the settlement directly.

3. Domestic Companies or Chinese Resident individuals sell overseas SPVs to Chinese Resident individuals

Accordance with Circular 13, the equity transfer between domestic entities should be settled in Renminbi. Chinese Resident individuals shall process the change of overseas SPVs registration formalities at the Bank where the SPVs are registered.

4. Overseas Industrial Investment

At present, since there are no Documents to regulate the process of overseas industrial investment, the issue of Chinese resident individuals purchasing real estate or acquiring overseas equity will no longer be discussed in this article.

In short, due to the lack of specific management measures, Chinese resident individuals’ direct investment abroad has actually not been “fully open”. Chinses resident individual investors must make direct overseas investments through legal entities (such as companies) or through qualified domestic institutional investors.