October 15, 2005

New “Draft SAFE Circular” released…a quick fix?

Filed under: Regulatory — Administrator @ 2:33 pm

SAFE and MOFCOM delivered drafts of new proposed SAFE Circulars (Notice 11 and Notice 29) regulating offshore restructurings and mergers and acquisitions involving PRC residents. Rumors suggest that the Draft SAFE Circular will become law as early as November 1, 2005.

I was talking to Rob McCormak, Mustang Ventures, about the New Draft Circular and how it might impact the future of venture investing in China. Rob’s general assumption is that the ambiguity and increasingly complexity of Chinese tax and legal system, including SAFE, increases the importance of using “good, high priced lawyers and auditors” for the best possible legal & tax advice.

I tend to agree with Rob that China will become the most litigious society in the world but I think as more local companies organize offshore there will be more resources and alternatives to the “high priced lawyers” currently operating in China…at least I truly hope so…

The Draft SAFE Circular key points (from law firm Lovells Beijing):

– offers no clear application scope: “PRC resident” still open to regulatory interpretation;

– requires registration with SAFE prior to the establishment or acquisition of control of an offshore special purpose company (“SPC”) by PRC residents;

– offers no clear standard of review by SAFE or indications as to the level of difficulty and the time required in obtaining approval;

– requires retrospective compliance by Chinese holders of interests in pre-existing offshore SPCs before December 31, 2005;

– regulates interests held through trusts, nominee arrangements, voting rights, convertible bonds or other such similar methods;

– requires a third party appraisal for share or asset purchases at the PRC level – without clear indication as to the qualification of the appraiser or the cost involved;

– does not allow parking of funds offshore for PRC residents – must repatriate to China;

– requires PRC residents receiving offshore dividends or income to repatriate forex to China within 180 days; and

– requires the reporting of material changes in capital structure of the SPC to SAFE within 30 days of occurrence.

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