1.Background
In recent years, alongside the continuous “going out” of domestic enterprises as investment entities, a growing number of high-net-worth individuals in China are also seeking overseas investment opportunities as principal investors. As an integral part of the global economy, while Chinese enterprises set sail vigorously for overseas markets, the outbound investment activities of Chinese natural persons are also quite noteworthy. Recently, BZW Law Firm and the UAE law firm Ibrahim Alqassim & Partners (hereinafter referred to as “IA Law Firm”) jointly held the “Seminar on Strategic Legal Pathways for Chinese Enterprises Investing in Dubai” in both Beijing and Dubai. The seminar primarily explored the compliant pathways for Chinese enterprises from initial outbound moves to local establishment, working together to build a solid legal bridge for Chinese enterprises entering the UAE and broader Middle East market.
This article aims to further explore the feasible pathways for Chinese domestic resident individuals, as investment principals, to conduct direct investment abroad under China’s existing legal and regulatory framework.
2.Currently Effective Regulations
- Regulation of the People’s Republic of China on Foreign Exchange Administration (2008 Revision) [Order No.532 of the State Council of the People’s Republic of China – Administrative Regulations]
(hereinafter referred to as ‘Foreign Exchange Administration Regulations’)
- Measures for the Administration of Overseas Investment of Enterprises[Order No. 11 of the National Development and Reform Commission – Departmental Rules]
- Trial Measures for the Administration of Overseas Securities Investment by QualifiedDomestic Institutional Investors [Order of China Securities Regulatory Commission No.46 – Departmental Rules]
- Measures for the Administration of Individual Foreign Exchange[Order of the People’s Bank of China No.3 [2006] – Departmental Rules]
- Detailed Rules for the Implementation of the Measures for the Administration of Individual Foreign Exchange[Departmental Rules]
- Notice of the State Administration of Foreign Exchange on Issues concerning Foreign Exchange Administration of the Overseas Investment and Financing and the round-tripping investmentsMade by Domestic Residents through Special-Purpose Companies[No. 37 [2014] of the State Administration of Foreign Exchange – Departmental Regulatory Documents]
(hereinafter referred to as ‘SAFE Notice No. 37’)
- Notice of the State Administration of Foreign Exchange on Issues concerning the Foreign Exchange Administration of Domestic Individuals’ Participation in Equity Incentive Plans of Overseas Listed Companies[No. 7 [2012] of the State Administration of Foreign Exchange – Departmental Regulatory Documents]
- Notice of the State Administration of Foreign Exchange on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment (Annex: Operating Guidelines for Foreign Exchange Business in Direct Investment)[No. 13 [2015] of the State Administration of Foreign Exchange – Departmental Regulatory Documents]
- Notice of China Securities Regulatory Commission (CSRC) on the Issues concerning the Implementation of the Pilot Rules on the Administration of Overseas Securities Investment by QualifiedDomestic Institutional Investors [No.81 [2007] of China Securities Regulatory Commission – Departmental Regulatory Documents]
- Provisions on the Foreign Exchange Administration of Overseas Securities Investment of Qualified Domestic Institutional Investors [Announcement No. 1 [2013] of the State Administration of Foreign Exchange – Departmental Regulatory Documents]
3. Compliant Pathways for Direct Outbound Investment by Domestic Individuals under the Current Regulatory Framework
According to Article 63 of the ‘Measures for the Administration of Overseas Investment of Enterprises’(hereinafter referred to as ‘Order No. 11’), ‘These Measures shall apply, mutatis mutandis, to overseas investment made by a domestic natural person through an overseas enterprise or an enterprise in Hong Kong, Macao or Taiwan region controlled by him or her. These Measures shall not apply to overseas investment directly made by a domestic natural person. These Measures shall not apply to investment in Hong Kong, Macao or Taiwan region directly made by a domestic natural person.’
Under the currently effective regulations, the primary regulatory model for domestic enterprises’ outward direct investment is ODI confirmation or recordation. However, according to Order No. 11, Article 63, this model does not apply to direct overseas investment by Chinese domestic resident individuals.
Currently, there are three main legitimate and compliant pathways for domestic individuals to conduct direct investment overseas: (1) Establishing a Special Purpose Vehicle (SPV) overseas; (2) Participating in equity incentive plans of overseas listed Companies; (3) Investing in overseas securities through a Qualified Domestic Institutional Investor (QDII) scheme.
Due to space limitations in the article, this article will first introduce pathway (1). Other pathways will be explored in subsequent series.
According to SAFE Notice No. 37, if a Chinese domestic resident individual wishes to invest overseas, it must be done through an SPV established abroad; direct personal investment abroad is not feasible. As this model differs from the corporate ODI model, domestic individuals are not required to obtain approval or filing from the National Development and Reform Commission (NDRC) or the Ministry of Commerce (MOFCOM). Instead, they need only to fulfill the registration requirements of the State Administration of Foreign Exchange (SAFE). Here, ‘domestic resident individual’ refers to a Chinese citizen with a resident identity certificate, an identity certificate for servicemen, or an identity certificate for armed police of China, or an overseas individual who habitually resides in China for economic interests, although without a legal identity certificate of China.. Here, ‘special purpose company’ refers to an overseas enterprise directly formed or indirectly controlled for investment or financing purposes by a domestic resident (domestic institution or domestic resident individual) with the assets or interests it legally holds in a domestic enterprise, or with the overseas assets and interests it legally holds.. Here, ‘control’ refers to the behavior whereby a domestic resident obtains the rights to carry out business operation of, to gain proceeds from or to make decisions on a special purpose company by means of acquisition, trusteeship, holding shares on behalf of others, voting rights, repurchase, or convertible bonds, among others.
Thus, two key questions arise:
（1）Can a domestic resident individual invest overseas without completing foreign exchange registration? What are the consequences of non-compliance?
- According to Articles 3 and 5 of SAFE Notice No. 37, ‘Only after making foreign exchange registration for foreign investment may a domestic resident engage in the subsequent business operations.’and ‘Only after making foreign exchange modification registration for foreign investment may a domestic resident engage in the subsequent business operations (including the inward remittance of profits or dividends).’These provisions establish foreign exchange registration as a prerequisite for domestic individuals to initiate outward investment. Failure to complete registration will likely prevent subsequent activities such as capital remittance.
- According to Article 15 of SAFE Notice No. 37, domestic resident individuals investing overseas who fail to complete the relevant foreign exchange registration as required may face warnings, fines from SAFE, or even criminal liability.
According to a case published on the official website of SAFE, from November 2016 to March 2017, the actual controller of Xiangcunji (Chongqing) Investment Co., Ltd. failed to complete the required overseas investment foreign exchange registration and subsequent change registration, and illegally remitted profits to its overseas parent company, totaling USD 8.8599 million. This act violated Article 16 of the Foreign Exchange Administration Regulations and constituted an act of evasion of foreign exchange. In accordance with Article 39 of the Foreign Exchange Administration Regulations, a fine of RMB 3.02 million was imposed. The penalty information will be displayed in the People’s Bank of China’s credit reference system.
（2）How to apply for foreign exchange registration?
The application process involves several aspects: the applicant, circumstances requiring registration, application timing, the registering authority, and the possibility of delegation. The specific procedural details will be elaborated in Part 4 below.
4. Practical Operational Guidance
（1）Applicant
According to SAFE Notice No. 37, the entity applying for foreign exchange registration for an overseas SPV is the domestic resident (including domestic institutions and domestic resident individuals). As this article focuses on investments by domestic resident individuals, the applicant is the domestic resident individual.
（2）Circumstances Requiring Registration
The core circumstances requiring registration mainly include:
- Establishment and Control: A domestic resident individual establishes a new SPV overseas using their held assets or equity in a domestic company.
- Indirect Control: A domestic resident individual obtains control over an existing overseas company’s equity or assets through acquisition, trust, proxy holding, voting rights, repurchase, convertible bonds, etc., using their held assets or equity in a domestic company.
- Overseas Financing and round-tripping investments: A domestic resident individual establishes an SPV for the purpose of overseas financing and listing. Subsequently, this SPV establishes a Wholly Foreign-owned Enterprise (WFOE) in China through new establishment or indirect control, and controls the domestic operating entity through this WFOE via a Variable Interest Entity (VIE) structure. The WFOE established through round-tripping investments must undergo relevant foreign exchange registration procedures according to the current foreign exchange administration regulations on foreign direct investment.
- Modification Registration: If a registered overseas SPV undergoes changes in basic information (e.g., its domestic resident individual shareholders, name, term of operation) or important matters (e.g., capital increase or decrease, equity transfer or replacement by a domestic resident individual, merger or division), the domestic resident must promptly apply to SAFE for foreign exchange modification registration.
- Deregistration: If a domestic resident no longer holds interests in a registered SPV due to share transfer, bankruptcy, dissolution, liquidation, expiration of business term, change of identity, etc., or no longer needs to undergo the registration procedure for SPV registration, they must submit authentic supporting documents to SAFE in a timely manner to apply for modification or cancellation of registrationn.
（3）Application Timing
The registration under SAFE Notice No. 37 has strict timeliness requirements and must be completed before the relevant actions are taken.
The core timing is that the domestic resident individual must complete the foreign exchange registration before contributing capital (including injecting assets or equity) to the SPV. In practice, this typically means completing the registration for the entire structure after the SPV is established but before it carries out round-tripping investments to establish an WFOE (or before processing the WFOE’s change registration). The principle of “register first, contribute later” must be adhered to. Post-facto registration is extremely difficult and carries significant compliance risks.
（4）Registering Authority
The specific authority for handling the registration differs depending on whether the individual uses “domestic” or “overseas” lawful assets or equity for the contribution to the SPV.
- Contribution using domestic assets or equity: Application should be submitted to the foreign exchange authority at its place of registration or at the locality of the assets or interests it holds in a domestic enterprise.
- Contribution using overseas assets or equity: Application should be submitted to the foreign exchange authority at its place of registration or the place of its registered permanent residence. If multiple domestic enterprises are involved, the SAFE branch in the location of one primary enterprise may be selected.
It is important to note that specific operational details and review standards may vary among different local SAFE branches. Preliminary communication with the local SAFE is recommended before application.
（5）Delegation (Power of Attorney)
Delegation is permitted. Given the professional complexity of the SAFE Notice No. 37 registration process and the documentation preparation involved, domestic resident individuals typically entrust professional lawyers or Qualified foreign exchange agencies to handle the application on their behalf.
When delegating, the applicant must provide the agent with a comprehensive and clearly authorized Power of Attorney. The agent will be responsible for preparing the registration application report, the full set of application forms, the individual’s identity documents, the SPV’s registration certificate and articles of association, a chart of the domestic and overseas corporate structure, the letter of investment intent, and other required application materials, and will submit them and communicate with SAFE on the applicant’s behalf.
5. Conclusion
For Chinese domestic resident individuals, conducting direct outbound investment under the current regulatory framework, while facing pathway restrictions, remains a clear and core compliant channel through the establishment of an SPV and strict fulfillment of the foreign exchange registration obligations under SAFE Notice No. 37.
This guide has focused on analyzing the legal logic and practical operational core of this pathway. It is essential to recognize that compliant registration is not a mere procedural formality but the cornerstone of the entire investment structure’s legality, the safety of cross-border capital flows, and the smooth repatriation of future investment returns. Any oversight may lead to serious consequences, including warnings, fines, and even criminal liability.
Outbound direct investment is a systematic project that involves complex issues beyond foreign exchange management, including the laws and taxes of the destination country, among others. We strongly recommend seeking early involvement and ongoing support from professional legal, tax, and financial advisors before initiating any outbound investment plan. A holistic design and planning of the investment structure are crucial to ensure your overseas investment journey begins compliantly and proceeds steadily and sustainably.
In subsequent articles in this series, we will continue to interpret the other two pathways: “Participating in an Overseas Listed Company’s Employee Equity Incentive Plan” and “Investing through a Qualified Domestic Institutional Investor (QDII).” Please stay tuned.
Disclaimer: This article is for informational purposes only and does not constitute formal legal advice from this law firm. Each case has its unique specifics. We advise you to consult professional lawyers for specific issues.
