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”). 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. January 2015 – China’s Ministry of Commerce (MOFCOM) drafted legislation preventing contractual obligations from dodging foreign-ownership laws. These companies use legal contracts to effectively own without owning shares in the underlying businesses; known as Variable Interest Entities (VIEs). These American corporates never put the potential tax repatriation bill through their Income Statement arguably they would continue to hold the cash offshore, investing for growth. 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. By Carol Huang. … A note on the variable interest entity (VIE) structure that is commonly used for Chinese companies. Since around 1999, an incre 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. VIEs are used widely in China, particularly when a company that intends to list operates in a sector in which foreign investment is restricted, and are particularly common in the technology, telecommunications and media sectors. A VIE is an entity controlled by a company by means other than a majority of voting rights. The structure is at odds with Chinese foreign investment legislation. 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. 2020 Inventus Law. Most Influential People in Accounting. We believe the vaguer terms of the FIL as compared to the 2015 Draft was a practical decision and make it less likely that VIE structured companies will be prohibited by the Chinese government. 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. 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 … 46 out of response to the Enron scandal, closing off what were ridiculous accounting loopholes. In 2011, after a series of public events, the variable interest entity (" VIE ") structure re-attracted a lot of attention and concerns from the PRC authorities, entrepreneurs, investors and other market participants. What keeps me confident is the power of greed and the relentless desire for economic growth, and China’s dependence on foreign investors. exchanges relying heavily on a corporate structure called a variable interest entity (VIE). Understanding the VIE Structure: necessary elements for success and the legal risks involved * - USA. 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. China could punitively restrict the VIE structure, yes. Alibaba is using a straightforward V.I.E. Investors in Chinese companies soon encounter an obscure accounting term –the variable interest entity or VIE. Foreign investors must meet the requirements in the Negative list for any sector restricted by the Negative List. China law, business and economics commentary . 2015 The Accountant Power 50. 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. 13 Oct 2011 by Stan. The National Development and Reform Commission will have the responsibility for national security review of foreign investments. 13 Oct 2011 by Stan. 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. Introduction The Variable Interest Entity (‘VIE’) is a well-established and widely utilised structure of investment employed in foreign investment in China. Ownership of the domestic operating company is very important since a contract which avoids the requirements of Chinese law is void and the court will not enforce it. The China VIE Structure (Variable Interest Entities) is a contractual option. All rights reserved. For VIE structures the regulatory loophole allows the economic interest to be transferred to foreign shareholders, however the value of those contractual obligations can meaningfully differ depending on the tax treatment adopted by the PRC. 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. | Website Designed By Blue Astral, Online Event: ‘Term Sheet Analytics: Anatomy of a Term Sheet. Feb 24, 2020 | Fred Greguras. The vaguer terms of China's new foreign investment law has made it less likely that VIE-structured companies will be regulated by the government - a relief to Alibaba and Tencent. 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). The Chinese economy slowly but surely keeps opening up each year, it needs to, enabling their economic growth and rapid industrialisation. 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. The accounting definition of “variable interest entity” (VIE) is an entity in which an investor holds a controlling interest based on contractual arrangements … 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. FASB’s 2003 interpretation (yet to be updated since), cleaned up this oversight and required the consolidation of financial reporting when: An entity can be controlled through voting rights or similar rights, There is an obligation to absorb losses of entity, There is right to receive residual returns of entity. 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. 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. 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. twitter @profgillis. For illustrative purposes I’ve excluded the other entities 51Job owns (Lagou Information Limited, 51net HR and 51Net Beijing) focusing on their main operations. 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