How the VIEs work?

VIE - Variable Interest Entities

  • This is also known as “Sina” model, because it was first adopted by Sina to list in NASDAQ in the early 2000s
  • Adopted by companies operating in protected/restrictive industries (such as telecom, internet etc.) to seek for foreign financing and/or offshore listings
  • Chinese regulators officially neither approved or rejected this kind of legal entity setup

Typical VIE Structure

Image courtesy - Alibaba 2017 annual report


  • Offshore holding company (typically incorporated in Cayman) would form a wholly owned subsidiary (WFOE - Wholly Foregin Owned Entity) in China or Hongkong
  • Variable Interest Entity structure (VIE) is formed with People Republic of China (PRC) citizens being the 100% owners - most cases this is owned/controlled by the founders
  • Series of contractual agreements between VIE and WFOE to ensure that WFOE has the effective control over the VIE as well as to recognize the economic benefits
  • This means that the foreign equity owners do not have direct control over the VIEs
  • VIE, whose shareholders are PRC citizens, would hold the required licenses and assets to conduct the business - these licenses/assets legally can not be owned by WFOE
  • Contractual agreements for effective control
    1. Equity pledge agreement
    2. Call option agreement
    3. Voting rights agreement or proxy
    4. Loan agreements
  • Contractual agreements for Economic Benefits
    1. Exclusive service agreements
    2. Assets licensing agreements

Problems with VIE structure

  • Even thought VIEs are used everywhere, this is still not officially blessed by the Chinese regulating authorities
  • There are rumours that eventually there may be a crack-down on VIE structures by the authorities if required (refer to the Economist article for more info)
  • Recent issue with Alibaba deciding to separate out Alipay without any shareholder consultation is an example of the control the VIE shareholders have

Source(s)