2026 ODI Rules Get Tougher: Key Red Lines to Avoid (II)

In the previous installment, we explained the core regulatory changes of 2026, including the industry‑graded review mechanism, full‑chain look‑through verification, and the escalated substantive operating requirements. We also detailed the encouraged, restricted, and prohibited industry categories. From this section, we will continue with the legal definition of ODI, the mandatory filing scenarios, and the risks of non‑compliance.

Basic Definition of ODI and Applicable Legal Framework

1.       Basic Definition

Overseas Direct Investment (ODI), as defined in Article 2 of the Notice on Issuing the Provisions on the Foreign Exchange Administration of the Overseas Direct Investment of Domestic Institutions, refers to the act by which domestic entities, upon approval by the competent authority for foreign direct investment, establish or acquire ownership, control, or management rights in existing enterprises or projects overseas through means such as establishing entities (wholly-owned, joint ventures, or cooperative ventures), mergers and acquisitions, or equity participation.

2.       Legally Mandated Process

Under the division of regulatory responsibilities among the three authorities, the complete process follows a legally prescribed sequence: the enterprise first should first complete or simultaneously complete the project filing or approval with the National Development and Reform Commission (NDRC) and the entity filing with the Ministry of Commerce (there is no mandatory sequence for these two processes, and they may be handled in parallel). After obtaining the filing or approval documents from both departments, they should proceed to the designated bank to complete the foreign exchange registration for overseas direct investment (the State Administration of Foreign Exchange has delegated registration authority to banks), collect the foreign exchange business registration certificate, and finally use this certificate to legally transfer funds overseas and implement the overseas investment project.

3.      Circumstances Requiring ODI Filing (Statutory Scope)

Where a domestic enterprise seeks to transfer capital across borders for industrial investment purposes and any of the following six circumstances apply, ODI filing must be completed in accordance with laws and regulations; there is no room for exemption:

1)        New Establishment of Overseas Company

Establishing a new operating entity overseas, or increasing the capital contribution to an existing overseas enterprise, both involve cross-border capital movements and require filing.

2)        Cross-Border Mergers and Acquisitions

Acquiring or subscribing to equity in an overseas enterprise and obtaining control or significant influence over the operations of the target enterprise.

3)        Equity Investment in Overseas Projects

Making an equity investment in a substantive overseas project, such as in mining, energy, or infrastructure.

4)        Establishment of Overseas Listing Structures

Establishing overseas SPVs for the purpose of creating a red-chip or VIE (variable interest entity) structure for overseas listing, including the injection of capital.

5)        Overseas Industry Chain Support Arrangements

Establishing support facilities overseas, such as procurement centers, warehousing and logistics hubs, and research and development centers.

6)        Round-Trip Investment

The use of capital from an overseas entity to invest back into China for business operations.

[Circumstances That Do Not Require ODI Filing]

Based on current regulatory interpretations, the following ordinary business activities do not fall within the scope of overseas direct investment and do not require ODI filing:

­          Pure goods trade (buying and selling of goods across borders, importing and exporting of merchandise)

­          Ordinary service trade (payment of consultancy fees, technical service fees, service fees, etc., overseas)

[Important Reminder]

Even if an enterprise merely registers an overseas company in Hong Kong, the Cayman Islands, or elsewhere without actually remitting any funds, if the domestic enterprise already holds equity in that overseas company, this still constitutes overseas investment, and retroactive ODI filing must be completed.

Failure to complete filing will directly prevent the lawful remittance of funds overseas and the repatriation of overseas profits. Furthermore, under Measures for the Administration of Overseas Investment of Enterprises, domestic enterprises investing in Hong Kong, Macao, or Taiwan are subject to the same overseas investment regulatory requirements and must complete ODI filing.

4.      Legal, Tax and Operational Risks of Failing to Complete ODI Filing

With regulatory scrutiny continuing to tighten in 2026, any attempt by an enterprise to deliberately circumvent ODI filing will expose it to a series of cascading risks that also affect cross-border tax compliance, as detailed below:

Full Restriction on Capital Inflows and Outflows, Triggering Foreign Exchange Penalties

The enterprise will be unable to lawfully remit overseas investment funds abroad, and the profits and dividends generated by the overseas enterprise will likewise be unable to be repatriated to China in compliance with regulations. Any unauthorized cross-border transfers of funds through underground channels or personal accounts will be treated as illegal cross-border movement of foreign exchange and may result in fines and official warnings pursuant to the Regulation on Foreign Exchange Administration.

Complete Stagnation of Capital Market Activities

All capital market activities—including round-trip investments, red-chip listings, VIE structure establishment, overseas financing, and equity transfers—will be rendered impossible to pursue, causing the enterprise to miss critical windows for development.

Loss of Access to Policy and Tax Incentives

The enterprise will be ineligible to apply for special government subsidies for overseas investment, funding support for Belt and Road projects, and legal aid support for cross-border intellectual property disputes. At the same time, the enterprise will be unable to access tax credits and cross-border tax incentives applicable to overseas investment, resulting in a higher effective tax burden.

Accumulation of Legal and Operational Risks

Regulatory authorities may restrict the domestic investing entity from undertaking any new overseas investments, and any overseas projects already implemented may be ordered to cease operations. The enterprise itself and its responsible officers may be subject to administrative fines and official warnings; in cases of serious violations, criminal liability may be pursued in accordance with law.

In the next section, the final installment, we will cover: the six mandatory eligibility requirements for ODI filing; the complete step‑by‑step filing process; common reasons for rejection and how to remediate them; frequently asked questions; and the concluding summary with key takeaways.

If you have any questions, feel free to contact us to discuss further.