On Chinese social media, a wide range of speculation has emerged over how China might investigate the Meta–Manus transaction. Commentators from different quarters have offered various interpretations of whether the deal complies with Chinese law, with many arguing that Chinese regulators have ample legal grounds to investigate and assert jurisdiction over the transaction. The matter has clearly caused a significant shock both within the Chinese government and among the public.
MOFCOM’s response a few days ago was notable in that it unexpectedly mentioned the possibility that the transaction could involve issues related to “outbound investment” and the associated compliance requirements—an angle that many observers had overlooked. Most of the attention so far has focused on technology export controls, but what Manus may actually need to worry about most could lie precisely in the outbound investment aspect. Put differently, the key question may be how the money was transferred to Singapore.
Much like the U.S. “reverse CFIUS” framework that restricts outbound investment, China has long maintained regulatory oversight over the overseas investment activities of Chinese companies. Specifically, MOFCOM issued the Measures for the Administration of Overseas Investment in 2014, while the NDRC followed with the Measures for the Administration of Overseas Investment by Enterprises in 2017. Whether the Meta–Manus transaction violates any of these regulations remains an open question.
Some analyses have further pointed out that the transaction may also involve Chinese resident individuals directly holding equity in an overseas non-listed company—something that is, in fact, prohibited under Chinese law.
Manus’s establishment of a red-chip structure and its subsequent relocation of the company as a whole to Singapore most likely did not fully comply with the registration requirements under China’s SAFE Circular No. 37, nor with the subsequent change-registration obligations.
By way of background, Chinese law does not allow PRC resident individuals to directly hold equity in overseas companies. The only recognized channel is provided by SAFE Circular No. 37, which permits PRC resident individuals to establish offshore special purpose vehicles for financing purposes, followed by “round-trip investment” back into China.
Outside this framework, any direct holding by PRC resident individuals of equity in overseas non-listed companies is, strictly speaking, non-compliant.
Historically, enforcement of SAFE Circular 37 has been relatively light. In most cases, as long as a company wasn’t doing FX settlement, paying dividends, going public, or engaging in M&A, the authorities wouldn’t proactively step in. Problems usually surface at exactly those moments—when you need to move money, distribute proceeds, list, or restructure—because regulators then look back at the underlying structure and any failure to complete Circular 37 registration suddenly becomes an issue.
As for Manus, I don’t know whether Circular 37 registration was properly completed when the red-chip structure was first set up. What is clear, however, is that the later decision to relocate the company wholesale to Singapore and effectively shut down its onshore operations constitutes a material change to the round-trip investment structure, which would have required a new filing. That step was almost certainly not made—and for a very practical reason: even if they had tried, approval would have been highly unlikely.
Put bluntly, failing to complete Circular 37 registration by itself is not as “fatal” as many people imagine. Under China’s Foreign Exchange Administration Regulations, a simple violation of the registration requirement typically results in a fine of no more than RMB 50,000 for individuals. This is precisely why many people in the past felt comfortable delaying or skipping the registration altogether—the downside appeared relatively limited.
The real trouble begins when foreign exchange transactions take place without Circular 37 registration. Once the conduct is characterized as an FX transaction violation, the penalty framework changes entirely. The issue is no longer about a capped fine, but about the transaction amount itself. Under current rules, fines can generally reach up to 30% of the transaction value, and in serious cases can exceed that level.
Another point that is often underestimated is that the funds do not need to physically move in or out of China. Even if all transactions occur offshore, with no inbound or outbound FX settlement, SAFE may still, under a “substance over form” approach, impose penalties based on the offshore transaction amount if it concludes that the parties failed to register as required or deliberately sought to evade foreign exchange supervision.
Objectively speaking, past enforcement of Circular 37 has mostly arisen when companies were converting or settling foreign exchange and were “caught” in the process, with relatively few cases targeting purely offshore structures. But this reflects enforcement discretion, not a lack of authority. From a legal standpoint, the option to impose fines of up to 30% of the transaction amount has always been in SAFE’s toolbox, ready to be used when deemed necessary.
The second unavoidable issue is tax compliance.
To start with a basic premise: Chinese tax residents are subject to global taxation. Whether income is earned inside China or overseas, as long as an individual remains a Chinese tax resident, in principle they are required to pay individual income tax in China.
In practice, in transactions like the Manus acquisition, it is almost impossible for natural-person shareholders to receive the proceeds directly. The common approach is for shareholders to set up a holding company in a low-tax jurisdiction (such as Singapore or the BVI). When the transaction occurs, it is the holding company that sells the equity and receives the proceeds, rather than the individual. On the surface, the income then appears to belong to an offshore company rather than to the individual, and in many cases Chinese tax authorities have not proactively pursued such arrangements.
The problem, however, is that Chinese tax law contains clear anti-avoidance provisions.
Article 8 of the Individual Income Tax Law states explicitly that where a Chinese tax resident controls a company established in a country or region with an “obviously low effective tax burden,” and that company lacks a reasonable business purpose while failing to distribute, or under-distributing, profits that should be attributable to the resident individual, the tax authorities have the right to make tax adjustments using reasonable methods.
Put more plainly: even if not a single dollar is paid into the individual’s personal account, if the tax authorities determine that the holding company is merely a shell established for tax avoidance, they can pierce the structure and levy tax directly on the individual. The applicable tax rate for individual capital gains from equity transfers is 20%.
Applied to the Manus situation, this becomes particularly sensitive. If the shareholders only hastily set up a holding company when constructing the Singapore structure, and that holding company is located in the BVI with no employees, no assets, and no substantive operations, it is extremely difficult to argue that it has any “reasonable business purpose.”
As a result, even if Manus’s shareholders have since changed their nationality, they are very likely still Chinese tax residents, and may still be pursued by the tax authorities for this 20% tax.
That said, it should be acknowledged that in recent years, Chinese tax authorities have not been especially aggressive in enforcing tax claims on equity transactions that occur entirely offshore, and there have been relatively few cases of cross-border tax recovery and heavy penalties. But this does not mean the authorities lack the power to do so—it simply has not been used frequently in the past.
The real issue is that if potential SAFE (foreign exchange) penalties are combined with potential individual income tax liabilities, then even if MOFCOM ultimately approves the transaction, Manus’s shareholders could, in theory, be facing close to US$1 billion in combined fines and tax exposure.
More importantly, all of these enforcement tools already exist. No new regulations need to be introduced, and no laws need to be amended. They are usually left “in the drawer,” but can be taken out and applied at any time if regulators choose to do so.
I do not know how the Manus team is currently thinking about this, but going forward there are likely only two options. One is for them to proactively engage with Chinese regulators such as MOFCOM and see whether a solution acceptable to all parties can be negotiated.
The other is to simply refuse to cooperate, in which case China may indeed impose substantial fines. However, given that Manus’s shareholders have long since left China—and may even have changed their nationality—and hold no assets within China, the question then becomes how such enforcement measures would be executed across borders. Would the situation really have to escalate to the criminal level, triggering mechanisms for international criminal judicial assistance and law enforcement cooperation? If it came to that, the outcome would be extremely ugly—and ultimately a lose-lose for everyone involved.
