The State Administration of Foreign Exchange issued the "Notice on Issues Related to Foreign Exchange Management for Domestic Residents' Overseas Investment and Financing through Special Purpose Companies and Return Investment" (hereinafter referred to as Document No. 37) on July 14. Among the regulations, the cancellation of the mandatory 180-day repatriation of funds and the registration of options for unlisted companies are of significant importance for domestic residents' overseas investment.
Funds Can Be Retained Overseas
One of the highly anticipated requirements in Document No. 37 is the relaxation of restrictions on the use of overseas financing funds, which cancels the mandatory repatriation requirement that "the foreign exchange income from profits, dividends, and capital changes obtained by domestic residents from special purpose companies must be repatriated within 180 days from the date of receipt," allowing overseas financing and other related funds to be retained for use abroad.
This regulation was actually canceled before the issuance of Document No. 37, but its formal establishment is of great significance for individual and corporate investors.
Retaining funds overseas allows investors to make any investments, provided they comply with local requirements. According to the notice, a "special purpose company" refers to an overseas enterprise directly established or indirectly controlled by domestic residents (including domestic institutions and individual residents) for the purpose of investment and financing, using their legally held domestic enterprise assets or rights, or their legally held overseas assets or rights.
Exercise Funds Can Exit the Country
Another piece of encouraging news for wealthy individuals and entrepreneurs is that options and equity of unlisted overseas companies can exit the country after registration and legal procedures.
Issuing options by unlisted companies is a legal gray area, which has now been legalized. Before the issuance of Document No. 37, domestic residents could register for options plans of overseas listed companies. However, for unlisted companies issuing options to employees in the mainland, foreign exchange registration could not be processed, making it difficult for employees' exercise funds to exit the country.
However, Document No. 37 clearly stipulates that non-listed special purpose companies can conduct registration procedures for directors, supervisors, senior executives, and employees of domestic entities, allowing these funds to exit the country as exercise funds.
According to Article 6, non-listed special purpose companies can provide equity incentives to directors, supervisors, senior management, and other employees with an employment or labor relationship with the company, based on the company's equity or options. Relevant domestic residents can submit materials to the foreign exchange bureau to apply for foreign exchange registration procedures for special purpose companies before exercising their options.
According to relevant regulations, the materials include proof of the authenticity of the equity incentives issued by the special purpose company or its actual controller, and the foreign exchange business registration certificate of the registered special purpose company's overseas investment.
The specific operational aspects must be carried out according to the requirements of the local foreign exchange department, and the requirements for exercising options of listed companies and transferability must also be conducted according to the agreements of the companies.
