China: Seeking Truth From Fact: Rationale And Use Of Offshore Jurisdictions In The PRC

I. INTRODUCTION

In 2013, inflows of foreign direct investment ("FDI") to the People's Republic of China ("PRC") amounted to US$127 billion, making the PRC the world's second largest recipient of inward FDI after the United States.¹ Slightly behind the PRC were the British Virgin Islands ("BVI") which had received FDI inflows of US$92 billion, making the BVI fourth in the world.² It is noteworthy that not only are the PRC and the BVI among the top four recipients of FDI, there is also a strong relationship between the two jurisdictions in terms of FDI flows. For instance, the BVI is frequently cited as one of the top three sources of FDI into the PRC (together with the Cayman Islands ("Cayman") and Hong Kong). In 2010, the BVI was the second-largest investor in the PRC, providing US$10.4 billion (9.1%) of total inward FDI into the PRC.³

The question then arises as to why a small island located in the Caribbean should be both a significant recipient of global FDI and a leading contributor of FDI into the PRC. This paper will look at the reasons behind this phenomenon, by examining the role of the BVI in structuring inward investment into the PRC and considering how the BVI is used to structure outward investment by PRC enterprises. This paper will also consider other offshore jurisdictions, as well as the role of Hong Kong and Macau (which are often considered to be quasi-offshore jurisdictions) in Chinese FDI.

This article will focus on the use of offshore jurisdictions from a legal perspective and consider the interplay of offshore structures with PRC law. This paper is divided into seven parts. Part I provides an overall introduction. Part II examines key definitions and perspectives. Part III looks at the economic development of the PRC and the context in which the use of offshore structures has emerged. Part IV looks at how offshore structures are used to finance PRC enterprises. Part V looks at how offshore jurisdictions have been used by PRC enterprises to structure their outward investment. Part VI will look at the future role of offshore jurisdictions in the PRC. Lastly, Part VII will make some concluding remarks.

II. DEFINITIONS AND METHODOLOGY

Before looking at the role of offshore jurisdictions in Chinese FDI, it will be useful to clarify what is meant by "FDI" and "offshore." We will investigate the nature, purposes and use of offshore jurisdictions in the PRC from a legal perspective.

A. Foreign Direct Investment

There are many ways of measuring economic activity, but when considering the role of offshore jurisdictions in the PRC, the concept of FDI is frequently used. FDI is a useful concept for understanding the extent of economic activity involving offshore jurisdictions, but only when well-defined.

The Organization for Economic Co-operation and Development ("OECD") provides the following definition of FDI:

An interesting feature of this definition of FDI is that the focus is not on the financial nature of the investment. Instead, the key attributes of FDI relate to influence, ownership and voting power. These attributes necessarily engage legal concepts, as they concern property rights and voting rights.

B. Offshore

Many terms are used to describe offshore jurisdictions,⁵ but for the sake of clarity and consistency, this article adopts the term "offshore" which is widely used and also defined by the OECD. The OECD defines offshore financial centers as:

This is a broad definition and also captures such jurisdictions as the United Kingdom, Hong Kong and Singapore. However, an International Monetary Fund ("IMF") working paper suggests that the definition should also include "centres which provide some or all of the following services; low or zero taxation; moderate or light financial regulation; banking secrecy and anonymity"⁷ as well as providing services such as banking services, fund management, insurance, trust businesses, tax planning and company incorporation.

Again, this definition can still include many jurisdictions that are considered onshore. This is a fundamental point in thinking about offshore centers, as activities that are considered offshore, such as banking, fund management, and tax arbitrage, also take place onshore, just at a different level of intensity.

However, for the purposes of this article, the primary focus will be on the BVI and Cayman, which are Caribbean offshore jurisdictions that offer a number of the services described by the IMF. In particular, each jurisdiction specializes in some of these activities. The BVI specializes in company incorporation, being the world's leading offshore incorporation jurisdiction, whereas the traditional focus of Cayman is on banking and funds. Both jurisdictions, however, play a leading role in Chinese FDI.

Both the BVI and Cayman are common law jurisdictions whose ultimate court of appeal is the Privy Council in London.⁸ The two jurisdictions are notable for the quality of their commercial law and the caliber of the professionals working in such jurisdictions.⁹ The territories specialize in the establishment of offshore structures, such as companies, partnerships, trusts and funds. The jurisdictions are popular among international investors due to their tax neutrality (with no income, corporate or withholding taxes), light regulation (with no foreign exchange controls or takeover codes) and flexible corporate legislation.

C. Legal Perspectives on the Role of Offshore Jurisdictions in FDI

There is a growing body of literature on the role of offshore jurisdictions in Chinese FDI, although it is still not widely studied as a topic. However, what is notable from the limited studies in this area is that there is an over-emphasis on the question of taxation and little analysis of the legal, practical and commercial rationale for the use of offshore jurisdictions. This emphasis is understandable, given that a key benefit of using offshore jurisdictions is that they provide a tax neutral platform to structure investments, thereby avoiding the need to have a further layer of tax in any investment structure.

However, this over-emphasis on the role of taxation leads to a misconception about the nature and types of offshore transactions.¹⁰ As a result, much commentary is preoccupied with notions of round-tripping, tax and transparency, and fails to adequately address the key drivers behind the use of offshore jurisdictions, which are essentially legal in nature and concern the management of legal and commercial risks.¹¹ Therefore, in order to seek truth from facts,¹² this paper will focus on the legal rationale behind the use of offshore jurisdictions by examining examples in which offshore vehicles have been used in the PRC.

A legal perspective is essential to understanding the role of offshore jurisdictions in Chinese FDI, given that the key attributes of FDI are to acquire management, ownership and control. These concepts necessarily engage legal principles. These concepts also prompt legal questions such as, how will such management, ownership and control be recognized and enforced, and is the legal environment sufficiently robust to protect these rights? In essence, an investment involves legal risks and it is essential to ensure that an investor has legal protection from such risks, whether by ensuring that the legal structure is secure or that legal complications in the regulatory environment have been overcome or protected against. These are fundamental reasons for why offshore vehicles feature in Chinese FDI, as they are used to structure investment into PRC companies and are used by PRC enterprises to structure their external investment in order to minimize risks and overcome legal complexity. These points will be considered in further detail in this article.

III. RECENT CHINESE ECONOMIC DEVELOPMENT

In order to have a clearer understanding of the interplay between offshore jurisdictions and Chinese law, it will be instructive to take a short look at the economic development of the PRC. By looking at the growth of the PRC, we will have a deeper insight into how its laws developed and how the developing investment climate fostered the use of offshore structures.

The modern economic development of the PRC has its roots in the Third Plenary Session of the 11th CPC Central Committee in 1978, which implemented the policy of reform and opening up. Shortly afterwards, the PRC approved the establishment of four Special Economic Zones ("SEZs") between 1980 and 1984. At first, the policy makers had a dilemma as to how to push forward with economic reforms and opening up, without incurring social and political consequences. The solution was to establish these SEZs, which were initially conceived to be free trade and export processing zones, which would be used in a limited capacity and, if successful, would act as a blueprint for the rest of the nation.¹³

The initial SEZs had modest success and fourteen more SEZs were approved in 1984, with further SEZs approved in the years thereafter. Furthermore, in 1985 the objectives of the SEZs were clarified and expanded upon:

As a result, the SEZs were allowed to operate under a different set of legal and financial rules as they had special tax incentives for foreign investment, less red tape and greater independence in setting international trade policy. In essence, the PRC had set up its own form of offshore centers, which operated within the PRC, and yet had different tax, regulatory and policy rules from the rest of the onshore PRC.¹⁵

In addition to creating the SEZs, the PRC also acquired two further economic zones in the form of Hong Kong and Macau. Hong Kong was handed over to China in 1997, when it became a Special Administrative Region. The Hong Kong Basic Law provides for the principle of "one country, two systems." Hong Kong shares attributes with offshore jurisdictions in that it provides financial services to non-residents on a scale incommensurate with its domestic economy and is a significant banking and company incorporation center. Additionally, Hong Kong has a low tax environment with a well-developed legal system and is also the leading source and destination for Chinese FDI.

Similarly, Macau was handed over to China in 1999 and became a Special Administrative Region. Like Hong Kong and other offshore financial centers, Macau can be considered as offshore to the extent that it provides financial services to non-residents on a scale that is disproportionate to its domestic economy. However, unlike Hong Kong, Macau has taken active steps to position itself as an offshore jurisdiction. For instance, just prior to the handover, the Governor of Macau signed and approved the Offshore Law of Macau which provides for the incorporation and regulation of offshore vehicles in Macau, although it has not achieved widespread use as an offshore financial center. The reasons for this are unclear, but one reason may be that Macau operates under a civil law system, and such systems are generally ill-suited for the incorporation of offshore companies.¹⁶ Another reason may be that Macau has achieved success as a gambling center and otherwise captures FDI flows by virtue of the gambling revenue that passes through it.¹⁷

Unlike the SEZs, the PRC did not expressly set out to endow Hong Kong and Macau with offshore attributes, as these regions were handed over rather than created. However, the PRC has accepted their positions as quasi-offshore centers by virtue of the one country, two systems principle and minimal central interference with the operation of such regions.

The economic reforms in the PRC, the establishment of the SEZs, and the handovers of Hong Kong and Macau are instructive for two key reasons. First, they illustrate the tension between the need to establish a more open economic system while simultaneously externalizing this system from the dominant political narratives within China. Second, the existence of the SEZs, Hong Kong and Macau illustrates that the PRC was prepared to accept the coexistence of two systems: the dominant legal and economic system in the mainland and the different system of rules and tax incentives in the SEZs, Hong Kong and Macau.

On one level, offshore jurisdictions are simply an extension of the type of deregulated and free-market space which the PRC was experimenting with. However, given the political narratives in the PRC at the time, and the impracticality of achieving such a level of deregulation, this pure form of a deregulated free market space was simply not feasible within the PRC.¹⁸ However, the use of such a space offshore was more politically acceptable as this would not distress the internal political narratives. On another level, since the PRC allowed the exercise of two separate and co-existing systems in the same territory, then there is little practical or conceptual difficulty with adopting the tax and legal principles of a third system that exists outside of such territorial space.

IV. INWARD INVESTMENT: FINANCING PRC ENTERPRISES THROUGH OFFSHORE STRUCTURES

A. Round-Tripping

As mentioned in Part II, most literature on Chinese FDI assumes that a substantial proportion of Chinese activity in offshore centers is due to the round-tripping of funds.¹⁹ Round-tripping describes the process whereby capital is moved overseas and then returned to the PRC in the guise of foreign investment, by virtue of being routed through a company incorporated in the BVI or Cayman. The roundtrip is made in order to benefit from certain tax and regulatory benefits made available to foreign investors under PRC law.

There are a number of problems with this analysis. First, this approach is founded on a number of assumptions about the nature of Chinese FDI. As facts on Chinese FDI are scarce, this means that such theories are necessarily based on inference rather than fact. As a result, most literature that focuses on the topic of round-tripping tends to speculate about the level and extent of round-tripping or disregards the role of offshore jurisdictions entirely. This latter observation leads to a second problem, namely that some literature on this subject simply excludes offshore jurisdictions from an analysis of Chinese FDI on the assumption that it is round-tripped capital.²⁰ This approach is particularly unhelpful as it essentially fails to engage the topic in any meaningful way. It replaces analysis with supposition, and fails to develop an understanding of the particular historic, economic and legal circumstances within the PRC, which necessitated the use of offshore jurisdictions.²¹

This blind approach to the role of offshore jurisdictions in Chinese FDI is a significant issue. Not only does it raise questions of methodology, but it also fails to address a number of facts that undermine the validity of the theory.

First, the round-tripping theory is based on the premise that there is something unusual in the use of offshore jurisdictions in the PRC. A natural conclusion to draw from this premise is that such flows are not representative of normal commercial activity. However, studies have found that FDI levels in the PRC are actually normal and correspond with other nations in similar periods of development. For example, when looking at outward FDI, Cheng and Ma noted that "the growth of China's aggregate FDI outflows during 1998 to 2002 were quite similar to those of South Korea during the same period and to Japan's outflows in the period of 1968 to 1992."²² A further study looked at Chinese overseas FDI and noted that the structure of outward FDI from the PRC mirrored international patterns in this respect.²³ On a related, but significant point, Sutherland, Matthews and El-Gohari looked at FDI flows from the BVI and Cayman to and from the PRC and noted that the net FDI flows stood at a surplus of around US$16 billion in the 2004 to 2006 period, concluding that "if round-tripping alone was the answer, they should roughly balance themselves out" but instead the picture is more complex.²⁴

Secondly, the round-tripping theory overlooks the fact that other nations have made significant investments into the PRC. For example, Li conducted a study of venture capital investment into the PRC and found that the majority of venture capital investments were made by U.S. Funds. Taking a sample of 467 private equity and venture capital transactions in the mainland PRC from 1990 to 2005, Li noted that "as to the origin of investors, it is obvious ... that most of them are foreign venture capitalists. Being the unquestionable leader in the global venture capital industry, the U.S. also excelled in the Chinese market in the sense that 129 out of the total of 290 VC funds and 92 out of the total of 211 VC firms came from the U.S."²⁵

Third, it is important to recognize that not only does the PRC use offshore financial centers to structure investment, but many European and U.S. investors also use offshore jurisdictions. Taking the private equity industry again as an example, a recent study found that 55% of all hedge funds were domiciled in the BVI and Cayman and 12% of all private equity funds were domiciled in these two jurisdictions.²⁶ Given the significant role that the BVI and Cayman play in the global funds industry, it is not surprising that they are significant contributors to Chinese FDI because other nations also use such jurisdictions to structure their investments.

Fourth, the round-tripping argument fails to account for the fact that the PRC has instituted a variety of legal restrictions for the round-tripping of funds.²⁷ In particular, most literature on the topic fails to recognize that (i) in 2005 the State Administration of Foreign Exchange ("SAFE") issued Circular No. 75 which required PRC residents to register with the local SAFE branch before establishing or controlling any offshore company with assets or equity in a PRC company for the purpose of an offshore equity financing, (ii) in 2006, six Chinese ministries jointly issued the amended Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors ("M&A Rules") which required central government approvals for any round-trip investments (and it should be noted that virtually no approvals have been granted under the M&A Rules), (iii) in 2008 a new Enterprise Income Tax Law removed preferential tax treatments for foreign investment, thereby removing a key rationale for round-tripping, and (iv) in 2009 the State Administration of Taxation issued Circular No. 698 which applied certain reporting requirements on the transfer of a direct or indirect interest in a Chinese tax-resident enterprise meaning that such transactions may give rise to a tax liability unless a reasonable business purpose is established.²⁸ However, since the implementation of such laws, the use of offshore jurisdictions in Chinese FDI has continued, which suggests that round-tripping is not a key driver for the use of the BVI and Cayman in Chinese FDI.²⁹

Fifth, the round-tripping theory ignores the critical role that offshore jurisdictions play in providing legal and practical solutions. Specifically, offshore structures are used to manage legal complexity and ensure investor protection through structuring the deal offshore. This usage accords with the definition of FDI discussed in Part II which concerns questions of ownership and control, which are essentially legal issues. This fundamental point was recognized by Maurer who observed that, although the PRC had removed FDI tax preferences, Chinese companies continued to make use of offshore jurisdictions. He therefore concluded that "tax minimization through the Caribbean offshore thus seems to be less a motivating factor than property rights, investment seeking and institutional arbitrage."³⁰ These key factors will be explored in the following sections.

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Originally published in Tsinghua China Law Review, 6TSINGHUA CHINA L. REV. (2014).

Footnotes

* I would like to thank Stephen Adams, Alasdair Hunter and Simon Pascoe of Bedell Cristin for their support and constructive feedback. I would also like to thank Bill Maurer, Jing Li, Dylan Sutherland and William Vlcek for taking their time to correspond, provide feedback or point to useful sources on this topic.

1. U.N. Conf. on Trade and Dev., 15 Global Investment Monitor 5, U.N. Doc. WEB/DIAE/IA/2014/1 (Jan. 28, 2014).

2. Id. at 6 (Interestingly, the BVI would have been higher, if not for the fact that FDI flows to Russia rose 83% to US$94 billion, causing Russia to be ranked third. The rise in Russian FDI was "predominantly ascribed to the large acquisition by BP (United Kingdom) of 18.5% of Rosneft (Russia Federation) as part of Rosneft's US$57 billion acquisition of TNK-BP, which is a company registered in the British Virgin Islands").

3. Ken Davies, China Investment Policy: An Update (OECD Working Papers on International Investment 2013), available at http://www.oecd.org/china/WP-2013_1.pdf.

4. ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, OECD FACTBOOK 2013: ECONOMIC, ENVIRONMENTAL AND SOCIAL STATISTICS 86 (2013).

5. Other terms include 'tax havens' and 'international finance centers.' Neither term is particularly useful to the analysis as the first term is pejorative and excludes other uses of offshore jurisdictions (such as legal structuring) and the second term is so ambiguous that it risks becoming meaningless. Therefore this article uses the term 'offshore' which is familiar to most readers.

6. OECD Glossary of Statistical Terms – Offshore Financial Center Definition, http://stats.oecd.org/glossary/detail.asp?ID=5988 (Jan. 4, 2006).

7. Int'l Monetary Fund [IMF], Monetary and Exchange Affairs Dept., Offshore Financial Centers IMF Background Paper, http://www.imf.org/external/np/mae/oshore/2000/eng/back.htm (June 23, 2000).

8. The Judicial Committee of the Privy Council was formerly the ultimate court of appeal for the British Empire, other than the UK, but is now the final court of appeal for a number of Commonwealth countries and British Overseas Territories such as the BVI. It is composed of justices who also sit on the Supreme Court of the United Kingdom and is essentially the Supreme Court by another name. See further Judicial Committee of The Privy Council FAQs, http://www.jcpc.uk/faqs.html#1 (last updated 2014).

9. In particular, the BVI has developed a strong reputation for the quality of its commercial law, given that it has a dedicated commercial court with a permanent commercial judge (who is also Queen's Counsel) and that some of the leading barristers in the UK frequently appear before its court. In addition, the legal professionals that work within the industry are generally drawn from international law firms in common law countries such as the UK and Canada.

10. Most commentary on offshore centers (which is generally Western) operates under the assumption that offshore jurisdictions are used primarily for tax avoidance and confidentiality, and that the use of offshore structures by the PRC suggests that Chinese FDI is routed through such centers in order to avoid tax or to mask the identity of their beneficial owners. Not only does this outlook fail to engage with the practical and commercial use of offshore structures, but this also demeans Chinese economic success. For an alternative view, See Bill Maurer and Sylvia J. Marsh, Accidents of Equity and the Aesthetics of Chinese Offshore Incorporation, 39 J. AM. ETHNOL SOC'Y 527, 532 (2012) (noting that the Chinese firms using the BVI are "the darlings of the U.S. press because they are the people behind some of China's most dynamic and innovative enterprises").

11. See William Vlcek, Byways and Highways of Direct Investment: China and the Offshore World, 39 J. CURRENT CHINESE AFF. 111, (2011). (In contrast to some literature, Vlcek recognizes that "the common portrayal of the [offshore jurisdiction] today as a tropical island "tax haven" fails to acknowledge that it provides other forms of regulatory arbitrage beyond taxation. It may be the home to mutual (hedge) funds, captive insurance and re-insurance firms, trust companies, and shipping registries, as well as an international business company (IBC) registry." However, the analysis should also be extended to cover the fact that offshore jurisdictions provide legal protection and legal certainty as opposed to simple regulatory arbitrage.).

12. "实事求是": The idiom suggests one should take a pragmatic understanding of phenomena from the facts, rather than basing analysis on dogma. This idiom is meaningful to our analysis, given both its relevance to economic reforms and its emphasis on looking at facts rather than relying on suppositions or value judgments.

13. Ge Wei, Special Economic Zones and the Economic Transition in China, in 5 ECONOMIC IDEAS LEADING TO THE 21ST CENTURY 43 (1999).

14. Id. at 49.

15. See e.g., Ronen Palan, The Emergence of an Offshore Economy, 30 FUTURES 63, 69 (1998).

16. For example, civil law jurisdictions often have increased costs and complexities because corporate acts are public. As a result, many corporate activities require compliance with onerous civil law procedures and/or must be sworn before a notary, which often increases costs and delays. Additionally, it is often argued that common law jurisdictions are more open to legal change and innovation and protect investors more effectively. For an interesting study on such differences, see Francisco Reyes & Erik P.M. Vermeulen, Company Law, Lawyers and "Legal" Innovation: Common Law versus Civil Law, Kyushu U. Legal Res. Bull. (Apr. 9, 2012), http://www.law.kyushu-u.ac.jp/programsinenglish/Erik.pdf.

17. For a meaningful analysis on this point, see William Vlcek, Taking Other People's Money: Development and the Political Economy of Asian Casinos, THE PACIFIC REV (forthcoming 2012).

18. Indeed, it is not practical for most large states, given that laws are created as a compromise between different interest groups and to regulate various types of different activity. However, in small offshore states, it is more feasible to create such pure deregulated and tax neutral spaces. The advantage of this approach is that it provides the developed states with the tools that they are unable to craft themselves.

19. See Xiao Geng, People's Republic of China's Round-Tripping FDI: Scale, Causes and Implications (ADB Institute Discussion Paper 7, 2004).

20. See, e.g., Ivar Kolstadt & Arne Wiig, What Determines Chinese Outward FDI?, 47(1) J. WORLD BUS. 26 (The authors asserted that as financial flows from offshore jurisdictions "likely reflect motives different from other FDI flows, and since data on key explanatory variables is not available for these locations, we exclude them in the subsequent analysis". Not only is this type of unsupported assertion unhelpful to an analysis of the role of offshore jurisdictions, it is also, unfortunately, an approach that is frequently taken.).

21. There is, however, some insightful analysis in this area. See Vlcek, supra note 11. See also Sutherland, D., El-Gohari, A., Buckley, P. J. & Voss H., The Role of Caribbean Tax Havens and Offshore Financial Centres in Chinese Outward Foreign Direct Investment 25, 25–26 (2nd Copenhagen Conference on: 'Emerging Multinationals': Outward Investment from Emerging and Developing Economies, Copenhagen Business School, 2010) , available at gdex.dk/ofdi10/Dylan%20Sutherland%20%20-%20et%20al.pdf.

22. Leonard K. Cheng & Zihui Ma, China's Outward Foreign Direct Investment, in CHINA'S GROWING ROLE IN WORLD TRADE 545, 547 (Robert C. Feenstra and Shang-Jin Wei, eds., 2010).

23. Shujie Yao, Dylan Sutherland & Jian Chen, China's Outward FDI and Resource-Seeking Strategy: A Case Study on Chinalco and Rio Tinto, 17 ASIA PAC. J. ACCT. & ECON. 313, 313–25 (2010) ("in general a large share of all global FDI has been carried out by a relatively small number of the very largest TNCs (UNCTAD, 2007). China's OFDI is also concentrated in hands of a small number of large business groups (Morck, Yeung and Zhao, 2008; Sutherland, 2009). In this regard, the considerable concentration of China's OFDI in a comparatively small number of big business groups mirrors international patterns").

24. Dylan Sutherland, Ben Matthews & Ahmad El-Gohari, An Exploration of How Chinese Companies Use Tax Havens and Offshore Financial Centres: 'Round-Tripping' or 'Capital Augmenting' OFDI? (TMD Working Paper Series 3, 2009); see also Daniel H. Rosen & Thilo Haneman, China's Changing Outbound Foreign Direct Investment Profile: Drivers and Policy Implications, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS, (June 24, 2009) http://www.iie.com/publications/pb/pb09-14.pdf ("despite the rapid growth of China's OFDI, it is important to emphasize that China's net FDI position is still negative, with an inward FDI stock of $876 billion compared with an outbound stock of only $170 billion in 2008").

25. Li Jing, Venture Capital Investments in China: The Use of Offshore Financing Structures and Corporate Relocations, 1 MICH. J. PRIVATE EQUITY & VENTURE CAP. L. 39 (2012).

26. Press Release, Stefan Jaeklin, Oliver Wyman et al., Domiciles of Alternative Investment Funds, (2011), available at http://www.alfi.lu/sites/alfi.lu/files/files/Publications_Statements/Press_releases/Oliver-Wyman-presentation-written-21-11-11.pdf.

27. See e.g., HOWARD CHAO & WALKER WALLACE, O'MELVENY & MYERS LLP, ONSHORE FINANCIAL INVESTING IN CHINA (Feb. 2011) (for a more detailed discussion of Circular No.75).

28. It is generally considered that Circular 698 is not triggered if a reasonable business purpose can be established, such as incorporating an offshore holding company in anticipation of a listing. However, in 2013, the local SAT office in Heilongjiang found a Cayman subsidiary of a U.S. private equity fund liable for tax on the basis that the transfer of shares held in a listed Cayman company was a taxable event. The rationale was that the 'effective management' of the listed company was the same as its PRC subsidiary and therefore the listed company was tax resident in the PRC. Circular 698 was not engaged, and it is unclear whether other local SAT offices will follow the same approach, but this does suggest that consideration should be given with any offshore structuring as to the effective management of the company and as to its business purposes.

29. Unfortunately, most literature continues to cite Xiao as authority for the argument that roundtripping is a significant factor, despite the fact that these laws came into effect after Xiao published his article on round-tripping in 2004. As a result, it is inappropriate to rely upon Xiao's analysis for an understanding of FDI in the PRC after 2005. However, some commentators continue to do so. E.g., Daniel H. Rosen & Thilo Haneman, supra note 24, at 3 (asserting that round-tripping is a factor and that "some analysts think it could be more than one third of all inward FDI" despite only citing Xiao's 2004 paper as a source in support of this contention.).

30. Bill Maurer, Jurisdiction in a Dialect: Sovereignty Games in the British Virgin Islands, in EUROPEAN INTEGRATION AND POSTCOLONIAL SOVEREIGNTY GAMES 130, 142 (Rebecca Adler-Nissen & Ulrik Pram Gad eds., 2013).

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