Laws of the People's Republic of China

the State Administration of Foreign Exchange

Circular of the State Administration of Foreign Exchange on Relevant Issues concerning Foreign Exchange Administration of Financing and Return Investment Undertaken by Domestic Residents through Overseas Special-Purpose Vehicles

Hui Fa [2005] No. 75

October 21, 2005

The branches and foreign exchange administration departments of the State Administration of Foreign Exchange of all provinces, autonomous regions, and municipalities directly under the Central Government, and the municipal branches of the State Administration of Foreign Exchange in Shenzhen, Dalian, Qingdao, Xiamen and Ningbo:

With a view to giving encouragement, support and guidance to the development of economy of non-public sectors, further improving the policy support system for venture investments, standardizing cross-border capital transactions of the investment and financing activities undertaken by domestic residents through overseas special-purpose vehicles, and in accordance with the Regulations of the People's Republic of China on Foreign Exchange Administration, the Measures for the Foreign Exchange Administration of Overseas Investments and the Interim Provisions for Foreign Investors to Merge and Acquire Domestic Enterprises, you are hereby notified of the relevant issues concerning the foreign exchange administration of the equity financing and return investment undertaken by domestic residents via overseas special-purpose vehicles:

I.

The "special-purpose vehicle" as mentioned in this Circular refers to an overseas enterprise directly established or indirectly controlled by a domestic resident legal person or domestic resident natural person for the purpose of undertaking equity financing (including convertible bond financing) abroad with the enterprise assets or rights and interests it/he holds inside China.

The "return investment" as mentioned in this Circular refers to the direct investment activities made within the territory of China by a domestic resident via a special-purpose vehicle, including but not limited to the following ways: acquisition or replacement of the equity of the Chinese party of a domestic enterprise, establishment of a foreign-funded enterprise inside China and acquisition or agreement-based control of assets inside China via the above-mentioned enterprise, agreement-based acquisition of assets inside China and establishment of a foreign-invested enterprise with the investment of acquired assets, and capital increase to a domestic enterprise.

The "domestic resident legal person" as mentioned in this Circular refers to an enterprise or public institution legal person or other economic organization legally established in China; the "domestic resident natural person" refers to a natural person who holds a resident identity card of the People's Republic of China, a passport or other lawful identity certificate, or a natural person who has no legal identity in China but habitually resides in China due to reasons of economic interests.

The "control" as mentioned in this Circular refers to the acts whereby a domestic resident obtains the rights to operate, benefit from and make decisions on a special-purpose vehicle or a domestic enterprise by means of acquisition, trusteeship, holding shares on behalf of others, voting rights, repurchase, convertible bonds, etc.

II.

Before establishing or controlling an overseas special-purpose vehicle, a domestic resident shall bring the following materials to the local branch or foreign exchange administration department of foreign exchange (hereinafter referred to as "foreign exchange office") to apply for foreign exchange registration for overseas investment:

(1)

A written application (which shall go into detail about the basic information of the domestic enterprise, the equity structure of the overseas special-purpose vehicle, and the overseas financing arrangements);

(2)

The documents on registration of the domestic resident legal person in China, or the identity certificate in the case of a domestic resident natural person;

(3)

The business plan on overseas financing;

(4)

The official reply on ratification of the sources of the domestic resident legal person's foreign exchange capital (assets), and the approval document as issued by the competent department of overseas investment;

(5)

The "Foreign Exchange Registration Certificate for Overseas Investment" filled in by the domestic resident legal person, or the "Foreign Exchange Registration Form for Overseas Investment of the Domestic Resident Individual" filled in by the domestic resident natural person (see annex);

(6)

Other certification materials on authenticity.

The foreign exchange office shall stamp the Foreign Exchange Registration Certificate for Overseas Investment or the Foreign Exchange Registration Form for Overseas Investment of the Domestic Resident Individual with the seal for foreign exchange transactions under capital account after the aforesaid materials are found in order.

III.

Where a domestic resident injects the assets or equities of a domestic enterprise it owns into a special-purpose vehicle, or undertakes equity financing abroad after injecting assets or equities into a special purpose vehicle, it shall go through the formalities for the alteration of foreign exchange registration for overseas investment in respect of the net assets and equities of the special-purpose vehicle it holds and the variations thereof, and shall provide the following materials at the same time:

(1)

A written application (which shall go into detail about the changes of the shareholders and equities of the domestic enterprise and the special-purpose vehicle and the way of pricing the assets or equities thereof);

(2)

The Foreign Exchange Registration Certificate for Overseas Investment filled in by the domestic resident legal person, or the Foreign Exchange Registration Form for Overseas Investment of the Domestic Resident Individual" filled in by the domestic resident natural person;

(3)

The documents issued by the competent department of foreign investment on the ratification and filing of the return investment;

(4)

The documents issued by the state-owned assets administration department on the confirmation of the value of the domestic enterprise's assets or equities are required in case any state-owned asset is involved;

(5)

The special-purpose vehicle's registration certificate, business license and other certification, which are valid abroad;

(6)

Other certification materials on authenticity.

IV.

The domestic resident may, according to the fund use plan as stated in the business plan or the prospectus, repatriate the funds, which ought to be arranged for use in China, after the special-purpose vehicle accomplishes overseas financing.

V.

In case a special-purpose vehicle uses the funds raised from overseas financing for return investment or provides shareholder's loans or other debt capital to a domestic enterprise, the relevant domestic enterprise shall go through the relevant formalities concerning foreign exchange administration according to the current laws and regulations on the administration of foreign debts and foreign exchange. The foreign exchange office shall, when registering the establishment or alteration of a foreign-funded enterprise, foreign debts, or the foreign exchange capital earnings of a special-purpose vehicle through equity transfer, examine and check the Foreign Exchange Registration Certificate for Overseas Investment or the Foreign Exchange Registration Form for Overseas Investment of the Domestic Resident Individual.

VI.

A domestic resident may, after going through the formalities for foreign exchange registration of overseas investment or for alteration thereof as required, pay the special-purpose vehicle the profits, dividends and the expenses for liquidation, equity transfer, capital decrease, etc.

The profits, dividends and foreign exchange income from capital changes, which are gained by a domestic resident from a special-purpose vehicle, shall be repatriated to China within 180 days as of the day when they are gained. The profits or dividends may be either entered into the account for foreign exchange transactions under current account or put under foreign exchange settlement; the foreign exchange income from capital changes may, upon approval of the foreign exchange office, be either saved in the special account for capital account transactions, or put under foreign exchange settlement.

VII.

Where a special-purpose vehicle is involved in the capital increase or decrease, transfer or replacement of equity, merger or division, investment with long-term equities or credits, provision of guarantee to a foreign party or other major events, which requires capital alteration and involves no return investment, the domestic resident shall, within 30 days as of the day when the major event happens, apply to the foreign exchange office for going through the formalities for alteration or filing of the foreign exchange registration for overseas investment.

VIII.

Where a domestic resident has established or controlled a special-purpose vehicle abroad and has made the return investment prior to the implementation of this Circular, but fails to go through the formalities of foreign exchange registration for the overseas investment as required, it shall, pursuant to this Circular, make up the foreign exchange registration for overseas investment in the local foreign exchange office by March 31, 2006. After the domestic resident has made up the formalities of foreign exchange registration for overseas investment, the foreign exchange office may handle the foreign exchange registration for foreign investments or foreign debts for the relevant domestic enterprises.

IX.

A domestic venture investment enterprise may establish a special-purpose vehicle abroad and undertake venture investment activities with reference to this Circular.

X.

If several domestic residents are involved in the same administrative matter as mentioned above, they shall authorize 1 or 2 domestic residents of them to go through the relevant formalities on foreign exchange administration by issuing the power of attorney.

XI.

Any other matter not covered in this Circular shall be subject to the current regulations on foreign exchange administration of foreign investment and overseas investment.

XII.

Any domestic resident who violates the provisions in this Circular and constitutes foreign exchange evasion or violates other rules on foreign exchange administration, the foreign exchange, shall be punished by the foreign exchange office in accordance with the Regulations of the People's Republic of China on Foreign Exchange Administration and other relevant provisions.

XIII.

This Circular shall go into effect as of November 1, 2005. The "Circular on the Relevant Issues concerning Improving Foreign Exchange Administration for Merger and Acquisition with Foreign Investments" (Hui Fa [2005] No. 11) and the "Circular on Relevant Issues concerning Registration of Overseas Investments Made by Domestic Resident Individuals and Foreign Exchange Registration of Merger or Acquisition with Foreign Investments" (Hui Fa [2005] No. 29) shall be repealed simultaneously.

Annex:Foreign Exchange Registration Form of Overseas Investment of the Domestic Resident Individual(omitted)