Offshore Structure and Red-Chip Reorganisation
A USD fund wants a Cayman structure it can read; the onshore regulator wants a compliance trail it can trace. Both chains must close, or the structure does not hold.
A red-chip structure is not an org chart — it is two compliance chains closing together
Setting up a red-chip structure is often described as “incorporating a Cayman company and dropping the onshore equity in”. A workable structure actually requires two chains to close:
Upward: foreign exchange and outbound investment. A PRC resident contributing onshore assets to an offshore company requires SAFE Circular 37 registration; an onshore institution investing abroad requires ODI filing with the NDRC, MOFCOM and SAFE. With a gap in this chain, offshore proceeds cannot be repatriated lawfully and any listing will require remediation.
Downward: control and consolidation. Where the business falls into a restricted or prohibited category for foreign investment (value-added telecoms, some AI application services), consolidation is achieved through contractual control (VIE) — an arrangement that onshore regulation has neither clearly endorsed nor clearly prohibited.
AI companies carry a third layer: cross-border flow of training data and models. If data sits with the offshore entity, the data export security assessment becomes a separate and independent problem.
What we do
- Structure design and path selection: direct holding, VIE, or two-tier, determined by business scope and listing venue
- Circular 37 registration: SAFE registration for offshore investment by PRC residents, including existing equity and change filings
- ODI filing: NDRC project filing, MOFCOM outbound investment filing, SAFE registration
- Reorganisation execution: onshore equity steps, flips, ESOP migration, tax cost modelling
- Returning investment and related-party transactions: foreign investment reporting, transfer pricing documentation
- Data compliance interface: data ownership within the structure, cross-border transfer paths and assessment
Typical situations
Situation 1: Structure first, registration later
The founder incorporates in Cayman and closes a USD round without Circular 37 registration. At listing, the regulator asks for the FX compliance position; late registration brings timing and outcome uncertainty and disrupts the filing timetable.
Our approach: run the structure and the registration in parallel — complete Circular 37 at incorporation, and file changes whenever onshore or offshore equity moves (capital increase, transfer, option exercise).
Situation 2: VIE agreements signed but control is not defensible
The contractual control package is a template, not adapted to the business — board composition, reserved matters, profit transfer mechanism and remedies are all weak. The auditor challenges the consolidation conclusion.
Our approach: design the package as a set (exclusive service agreement, equity pledge, voting proxy, exclusive call option, spousal consent) and align it with the actual governance arrangements.
Situation 3: The offshore HQ becomes the compliance liability
The offshore entity receives onshore user data as a processor without completing the export security assessment. After launch the company is ordered to remediate — the “offshore headquarters” becomes a burden rather than an asset.
Our approach: assess data flows at design stage, define controller and processor roles, choose onshore storage with offshore access or localised deployment, and complete assessment first where required.
Process and deliverables
| Stage | Work | Deliverables |
|---|---|---|
| 1 | Business scope and listing venue assessment, structure options | Structure design + path comparison |
| 2 | Circular 37 registration, ODI filing | Registration certificates + filing documents |
| 3 | Onshore reorganisation, flip, ESOP migration | Reorganisation plan + tax model + closing documents |
| 4 | VIE package and governance documents | Full contractual control set + articles and shareholders’ agreement |
| Ongoing | Change filings, related-party and data compliance upkeep | Change register + compliance maintenance checklist |
Frequently asked
When is a red-chip structure actually necessary? When taking USD fund investment, or listing in Hong Kong or the US. For RMB-only financing targeting the A-share market it is not required, and unwinding it later is costly.
What if Circular 37 registration was missed? Late registration is possible but requires explanation and may carry penalties. Timing and outcome are uncertain and affect both financing and filing schedules — far better to get it right at incorporation.
Is a VIE still needed? Depends on whether the business falls within restricted categories. AI application services involving value-added telecoms generally still require contractual control; others can use direct holding, which is simpler.
Can a structure be unwound? Yes, but expensively — offshore deregistration, onshore buyback, SAFE cancellation and tax clearance typically take 6-12 months, during which financing and listing are constrained.
Legal basis
- SAFE Circular on Foreign Exchange Administration of Offshore Investment, Financing and Returning Investment by PRC Residents via Special Purpose Vehicles (Huifa [2014] No. 37)
- Measures for the Administration of Overseas Investment (NDRC Order No. 11)
- Measures for the Administration of Overseas Investment (MOFCOM)
- Foreign Investment Law and implementing regulations: returning investment and reporting
- Measures for Security Assessment of Data Export; Measures for Standard Contracts for Personal Information Export