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Without this deletion, a Chinese domestic company controlled by non-Chinese persons or entities in the VIE structure would have been a foreign investment subject to the Negative List. A VIE … The China VIE Structure (Variable Interest Entities) is a contractual option. VIEs are corporate structures usually set up to get around China’s not allowing WFOEs to participate in China’s internet sector. Variable interest entities have been used by non-Chinese investors to get financial control of companies in industries that limit foreign ownership, such as telecoms. What are the implications? The VIE structure is currently the only way that foreigners may have an economic interest in such businesses. Awards. China Accounting Blog does an excellent job explaining a typical VIE in its post, Explaining VIE Structures, which I urge you to read now. In addition the VIE structure has also been used as a means by which Chinese domestic entities could list offshore on international capital markets. The scope of the definition of foreign investment and the national security review provisions, among others, need clarification. Promotion of and National Treatment for Foreign Investment. Due Diligence. Those same policy rationales should also prompt reexamination of the disclosure being provided concerning, and associated governance risks posed by, the “variable interest entity” or “VIE” structures that are widely used by China-based firms (including Luckin) listed on U.S. exchanges. These companies use legal contracts to effectively own without owning shares in the underlying businesses; known as Variable Interest Entities (VIEs). A VIE is a company that is included in consolidated financial statements because it is controlled through contracts, rather than the more conventional control that is obtained through ownership. The financial statements of the Cayman holding company are consolidated with the WFOE and VIE which makes the holding company financeable. It’s very hard to model out such a risk, in seemingly binary outcomes. Renren and Baidu, for example, are variable interest entities. Alibaba is using a straightforward V.I.E. By undermining the confidence in capital markets, they would be threatening the flow of capital and causing as much harm to themselves as foreign investors. Variable interest entity (VIE) structures in Chinaby Practical Law ChinaRelated ContentA note on the variable interest entity (VIE) structure that is commonly used for Chinese companies. Essentially, under a VIE, foreign companies or individuals obtain the rights and financial benefits of ownership through contractual arrangements with a PRC domestic company. It establishes principles to create a more equal legal framework for foreign investors and to promote and protect foreign investment in China. One additional risk factor in investing in Chinese companies is that the use of a reverse merger is often accompanied by the creation of a variable interest entity (“VIE”). In July, 2019, S&P Global Ratings updated its risk assessment of Chinese companies using the VIE structure and concluded that the likelihood of regulatory action against such structures had diminished because of the passage of the FIL without the de facto control provision. Introduction The Variable Interest Entity (‘VIE’) is a well-established and widely utilised structure of investment employed in foreign investment in China. VIEs allow the public company to gain control of a private Chinese company and its assets through a series of contractual arrangements, rather than through a strict parent-subsidiary relationship or direct ownership of the … 13 Oct 2011 by Stan. A VIE is an entity controlled by a company by means other than a majority of voting rights. Some of the provisions in the FIL have been designed to reduce trade tensions with the United States. An entity where an investor has a controlling interest that is not based on holding the majority of voting rights. A note on the variable interest entity (VIE) structure that is commonly used for Chinese companies. 0 Comment. Article 2 defines foreign investment as investment activities, directly or indirectly, by foreign individuals, corporations, or other organizations in China, including the establishment of foreign-invested enterprises (“FIEs“), acquisition of shares, equity, assets and other similar interests in China enterprises, investment in new projects in China independently or jointly with other investors, and other forms of foreign investment as specified in laws, regulations or by the State Council. twitter @profgillis. Existing FIEs have a five-year transitional period to come into compliance with the PRC Company Law and the PRC Partnership Enterprise Law like their domestic counterparts. Most investors prefer not to deal with regulatory risk. U.S.-listed Chinese internet companies such as search giant Baidu and e-commerce giant Alibaba Group Holding utilize a corporate structure called a variable interest entity. To non-accountants, the VIE structure is a business structure that is widely used in certain business sectors in China that have prohibitions or restrictions on foreign investment under the 2019 Negative List such as telecommunications, e-commerce, education, and media. Articles 22 and 23 could reduce forced technology transfers in JVs and cause faster government action to amend the patent and other IPR laws. Awards. In accordance with FASB Interpretation 46, 51Job is obligated to consolidate the financials associated with Tech JV, thereby presenting to investors what looks like full ownership of the operating businesses. The VIE structure is also used by other types of Chinese businesses seeking foreign financing and a possible exit on an offshore equities exchange such as Nasdaq or the NYSE. Written By Ashford Bain. One additional risk factor in investing in Chinese companies is that the use of a reverse merger is often accompanied by the creation of a variable interest entity (“VIE”). The 2019 Negative List did not ease the restrictions on foreign investment in any material way so there is still no alternative to the VIE for investing in restricted and prohibited industries in China. In essence contractual arrangements such as those employed by 51Job and Alibaba would be considered equity ownership and mean these companies were breaching proposed regulations. China could punitively restrict the VIE structure, yes. Invalid. The Negative List specifies administrative requirements for foreign investment access to certain business sectors. China is less likely to regulate the variable interest entity VIE structures of internet companies a relief for those that list overseas. The legislation was initially circulated for public consultation in January 2015 (“2015 Draft”). This business structure, called a variable-interest entity, became common among Chinese companies because Beijing restricts foreign investment in certain sectors, such as the internet. The VIE structure is best understood by looking at a specific company case in which ownership is deliberately obscured by a series of shell companies. I’ll email when new articles are published. Now that you understand VIE … The most recent version of the Negative List was issued on June 30, 2019. Many of these businesses are listed on overseas exchanges, recording profits to shareholders as if they own 100% of the shares in their Chinese operations. The great majority of VIE holding companies are domiciled in the Cayman Islands, where no tax-treaty with China occurs. Most Influential People in Accounting. gillis@gsm.pku.edu.cn. For example, in a client matter, the founders were both foreign nationals and both domestic and foreign investors were involved. As of January 1, 2020, the FIL replaced and repealed the existing PRC Foreign Invested Enterprise Law, PRC Sino-Foreign Equity Joint Venture Law and PRC Sino-Foreign Cooperative Joint Venture Law (collectively, “FIE Laws”). VIEs were of questionable validity under PRC law and drafts of the new … Home > China Business Setup > Variable Interest Entity - VIE. Those same policy rationales should also prompt reexamination of the disclosure being provided concerning, and associated governance risks posed by, the “variable interest entity” or “VIE” structures that are widely used by China-based firms (including Luckin) listed on U.S. exchanges. … structure for its Chinese assets. The FIL is a positive step in support of foreign investment in China. 21 Cardozo J. Int'l & Comp. Consequently, the legal validity of VIEs … There have been other actions taken by various governmental authorities that recognize the existence of the VIE structure in China. By not getting explicitly mentioned, the VIE structure have been left out of the spotlight for regulatory scrutiny, albeit not given the green light on their activities. | Website Designed By Blue Astral, Online Event: ‘Term Sheet Analytics: Anatomy of a Term Sheet. Importantly, Article 4 and Article 28 clarify that the Negative List will be released by or with the approval of the State Council. 28 Sep 2011 by Stan. Yahoo and Softbank then complained about the transfer, claiming that they were not notified nor approved the transfer. VIEs are a major input in China’s global economy creating jobs, tax revenues, innovation, global expansion and other economic benefits. Alibaba (China’s Amazon equivalent) and Baidu (China’s Google), among other listed American Depository Shares are exposed to a rarely discussed regulatory risk, relating to the holding structure of their domestic and foreign entities. CSRC VIE Research Report Leaked to Media . Last month, China’s Ministry of Commerce released a draft of the Foreign Investment Law, a new piece of legislation that attempts to integrate, update and replace the existing laws on foreign investment made more than a … Abstract In 2000, Sina Corporation made headlines by being the first Chinese business to list on the NASDAQ in New York using the 'Variable Interest Entity' ('VIE') structure, which uses contracts instead of shareholding to effect corporate control. There are well over 100 companies in China with VIE structures in restricted or prohibited industries including BAT: Baidu, Alibaba and Tencent. The variable interest entity ("VIE") has long been a popular structure for foreign parties to invest in sectors which are restricted by China’s industrial policy to foreign investment. This article updates a November 2016 article: “The China VIE Structure is Vulnerable-So Why is it Still Used?” The impact of the PRC Foreign Investment Law that went into effect on January 1, 2020 and other recent developments relevant to the VIE structure are discussed. China VIEs: Recent Developments and Observations. The simplest VIE structure includes a foreign holding company which is often an exempt limited company in the Cayman Islands, a China wholly foreign-owned enterprise (WFOE) and a China domestic company owned only by Chinese nationals. Home; Profile; Tag Archives: variable interest entity The VIE Meta-Narrative: Illegal vs. The Importance of Ownership of the Chinese Domestic Company. These provisions may mitigate some of the political pressure China is currently facing to protect foreign IPR. Furthermore, legislation provides scope for withholding tax to be paid on the capital gain for investors, similarly at 10 or 20%, as the Chinese government considers capital gains as income sourced within the PRC. As a result, securities lawyers have designed corporate structures using variable interest entities (VIEs) that serve two fundamentally inconsistent functions: (1) satisfying Chinese regulators that the ownership and actual control resides with Chinese nationals while (2) convincing foreign investors that they have ownership and control rights. While VIEs remain in a grey area in China, capital markets have become accustomed to this status and this approach avoids the economic disruption that may result from new regulation of VIEs. We believe the vaguer terms of the FIL as compared to the 2015 Draft was a practical decision that benefits the Chinese economy and has made it less likely that VIEs will be prohibited by the government in the near future. Home; Profile; Tag Archives: variable interest entity The VIE Meta-Narrative: Illegal vs. China is revising the laws that govern the variable interest entity, a complicated structure used by many companies to bypass foreign investment restrictions. A note on the variable interest entity (VIE) structure that is commonly used for Chinese companies. In the years since, VIEs have become at once a buzzword amongst corporate lawyers and a headache for regulators in the People's Republic of China ('PRC'), the … A variable interest entity (VIE) refers to a legal business structure in which an investor has a controlling interest despite not having a majority of voting rights. China VIE Structure 2020 Variable interest entity (VIE) Related Content. About the Editor. It entails a succession of contractual arrangements which hold the principal intention of circumventing the investment restrictions China has placed upon foreign ownership in particular sectors of the Chinese market. A legal loophole used by Enron allows these companies to bypass regulatory restrictions. When you own shares in a business, you are owning two things. exchanges relying heavily on a corporate structure called a variable interest entity (VIE). 51net.com Inc has in place a series of agreements with Qian Cheng, the actual owner of 50% of Tech JV, whereby Qian Cheng pass through all the economic risks and benefits back to 51net.com Inc. Many details need to be provided in supporting laws, regulations or by the State Council. The FIL has several broad provisions for promoting foreign investment by creating a more equal (national treatment) legal framework for foreign investors and to promote and protect foreign investment. Rather than bring cash back home, American entities left it offshore for years, preferring to perpetually reinvest in low-yielding securities rather than pay taxes at 35%. Understanding the VIE Structure: necessary elements for success and the legal risks involved * - USA. Alibaba Group Holding Inc., which conducted a $25 billion initial public offering (still the largest ever) on the … Chinese internet firms like Alibaba use contractual agreements between foreign-owned enterprises and locally owned-enterprises to replicate the economic interest of their domestic operations. The review system implemented under the FIL will likely apply to all foreign investments as defined in Article 2. Foreign investors will have national treatment consistent with domestic investment for sectors not included in the Negative List. 51Job fully owns shares in 51net.com Inc, an entity registered in the British Virgin Islands, which in turn owns a 50% share in Tech JV. Online Event – A Conversation on Enabling Startups in the US-India Corridor during India Global Week 2020, Online Event – Key Insights on Navigating the Fundraising Activity During a Pandemic, Panel Discussion with Crypto Valley on Institutional Investors in Crypto & Blockchain. In addition, tell us how you addressed the disclosures in ASC 810-10- 50-9 related to the disclosure of the aggregation of VIEs. China relies on external capital to fund their continued development. China classifies their technology-platform businesses as value-added telecommunications businesses and limit foreign ownership to no more than 50%. March 2019, PRC approved legislation effective January 2020 which has alleviated the near-term risk for shareholders in VIE companies, through an updated definition of what foreign investment is considered. Many of the largest and fastest growing technology businesses reside in China and present tremendous long-term opportunities to investors, benefitting from the same structural tailwinds as the FANG stocks. When it comes to VIEs and related contracts, the distinction is important. The tax uncertainty here is reminiscent of the situation prior to the tax-reform from the 2017 Tax Cuts and Reform Act in the United States. The Variable Interest Entity (‘VIE’) is a well-established and widely utilised structure of investment employed in foreign investment in China. Charles Comey, Paul McKenzie, Sherry Yin and Michelle Yuan . It is not known if national security reviews will be expanded to sectors other than those currently specified. L. 195 (2012-2013) Variable Interest Entity Structures in the People's Republic of China: Is Uncertainty for Foreign Investors Part of China's Economic Development Plan By Carol Huang. China’s current regulation strictly limits foreign companies from owning more than 50% of a domestic business operating in a strategically important industry. Since around 1999, an incre You are invited to join a webinar: Anatomy of a VC Term Sheet. 51Job, Inc consolidates all of the earnings from their operating businesses when preparing SEC filings. China law, business and economics commentary . The economic right to the interest of the entity, as well as the ability to vote on how the company should be run. VIEs are corporate structures usually set up to get around China’s not allowing WFOEs to participate in China’s internet sector. "VIEs operate using contractual arrangements rather than direct ownership, leaving foreign investors without the rights to residual profits or control over the company's management that they would otherwise enjoy through equity ownership." For illustrative purposes I’ve excluded the other entities 51Job owns (Lagou Information Limited, 51net HR and 51Net Beijing) focusing on their main operations. CSRC VIE Research Report Leaked to Media. structure for its Chinese assets. Variable interest entity is a term used by the United States Financial Accounting Standards Board in FIN 46 to refer to an entity in which the investor holds a controlling interest that is not based on the majority of voting rights. Qian Cheng also directly owns 1% of Tech JV, in essence therefore owning 50% of Tech JV. The collective valuation of VIEs listed via the Cayman Islands exceeded US $1.5 trillion in 2017 and has surely grown since then. China’s current national security review system (“NSRS”) has been implemented over time since 2011. As many of our readers are aware, the “variable interest entity” “VIE”) structure has proven popular over the past decade as a means to facilitate the offshore financing of PRC companies doing business in regulated sectors such as the Internet and value-added telecommunications. Over the last 18 years, an increasing number of Chinese companies have listed on U.S. exchanges relying heavily on a corporate structure called a variable interest entity (VIE). Variable Interest Entities: A Regulatory Work-Around All of China’s major Internet companies that list on U.S. exchanges use the VIE structure as a means of circumventing Chinese restrictions on their access to foreign capital. The China VIE Structure (Variable Interest Entities) is a contractual option. When the Chinese government tightened its regulations over online payment systems, Jack Ma, acting as the Chairman of Alibaba made the decision to transfer the assets of its online payment platform to a private company owned by him. 1. An entity where an investor has a controlling interest that is not based on holding the majority of voting rights. Foreign investors may not invest in any sector prohibited for foreign investment by the Negative List. Feb 24, 2020 | Fred Greguras. See more: http://prodygia.com/video_interviews/199-what-you-need-to-know-about-the-variable-interest-entity-vie-structure The structure is at odds with Chinese foreign investment legislation. A VIE is a legal business structure commonly used by mainland companies to establish ownership of a company through legal agreements, as opposed to direct share ownership. In the case of Weibo, a leading … The most well-known and severe example is the 2010 dispute between Alibaba and Yahoo and Softbank. Accordingly, end-shareholders of VIE entities could be subject to far more taxation than would occur for otherwise “standard” investments. In September, 2019, also based on the passage of the FIL without the de facto control provision, the Hong Kong Stock Exchange revised its guidance to continue to permit VIE structures to be listed with certain requirements including “to the extent necessary to address any limits on foreign ownership stipulated by relevant PRC laws and regulations”. The VIE structure is entirely reliant on related-party transactions which are not at arms-length. 51Job conveniently doesn’t have to deal with this problem “since we intend to permanently reinvest earnings to further expand our business” according to their 2018 20-F Report. Variable Interest Entities are a legal quagmire for investors to grapple with if they want exposure to the fast-growing internet enabled businesses in China. Enacted but represented an existential risk to the disclosure of the FIL likely. Structure that is not based on holding the majority of VIE entities could be to. 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