At present, many enterprises in the process of international business, will be in Cayman, BVI, Hong Kong, China, Singapore, Luxembourg, Bermuda and other different countries and regions to set up offshore companies, and the domestic entity operating enterprises with the operation of the region's choice in addition to open up the regional market, enjoy tax incentives, and more importantly, through the reorganization of the shareholding structure of these offshore companies, to achieve the purpose of foreign listing. Due to historical reasons for foreign investment access, most Internet companies in China that have received investment from US dollar funds (including Internet giants such as BAT) have mostly adopted the VIE structure first adopted by Sina.
The construction of VIE structure is of great significance for domestic enterprises to realize overseas listing. In this way, enterprises can circumvent the restrictions imposed by domestic laws and regulations on the ratio of foreign capital in specific industries and maximize financing.
1. Establishment of Special Purpose Vehicle (SPV)
Choose a suitable country or region (e.g. BVI, Cayman, etc.) to register the SPV, which usually have advantages such as tax incentives, information confidentiality and financing convenience. Define the functions and roles of the SPV, which usually serves as a bridge between the offshore listed entity and the domestic operating entity, controlling the business and finances of the domestic operating entity through an agreement.
2. Entering into VIE agreements
VIE agreements are the core of the VIE structure and include exclusive cooperation agreements, exclusive right to purchase agreements and equity pledge agreements. These agreements ensure the effective control of the foreign listed entity over the domestic operating entity and realize the transfer of interests.
Emphasize the legally binding and controlling effect of the agreement to ensure that the rights and interests of all parties are safeguarded.
3. Shareholding arrangements and capital operations
Indirectly control the target company through SPV to realize the purpose of overseas listing. This kind of shareholding arrangement not only meets the requirements of laws and regulations, but also can maximize the protection of investors' interests. It should be noted that VIE structure does not involve the arrangement of virtual RMB (VIE) structure, and "VIE" here only refers to variable interest entities.
4. Business operations and regulation
Under the VIE structure, the domestic operating entity carries out its business activities and decision-making process in accordance with the provisions of the agreement to ensure that the interests of the overseas listed entity are maximized.
Referring to the reporting matters and procedures of the China Administration of Foreign Exchange (CAFE) in relation to Circular 37, enterprises are required to conduct ODI foreign exchange registration and reporting in accordance with the relevant regulations to ensure compliance when building VIE structures.
Establishment of a BVI company, the first tier of overseas equity entities
Incorporation of a first-tier BVI company in the British Virgin Islands (BVI) is mainly attributed to the simplicity of the BVI company registration requirements, the speedy incorporation process, the low cost of maintenance, the high level of confidentiality, and the lenient foreign exchange controls. In addition, a BVI company is not subject to any income tax, withholding tax, capital gains tax, capital transfer tax, inheritance tax, legacy tax or property tax. As the body of shareholdings of the founding shareholders, the shareholders hold their shares in the Cayman company through a BVI company held by 100%. In this way, if the Cayman company has dividends or income from the sale of shares, the income will first go to the BVI company rather than to the individual, thus avoiding immediate personal tax and functioning as a tax-deferred or possibly tax-exempt entity.
Establishment of Cayman Company, an overseas second-tier equity entity
Given that internationally recognized exchanges such as the New York Stock Exchange, the NASDAQ Exchange and the Hong Kong Stock Exchange accept companies registered in the Cayman Islands or the British Virgin Islands (BVI) for listing, but BVI-registered companies are not readily accepted due to their low transparency, Cayman has been chosen as the main body for listing. A Cayman company as a listing entity can provide companies with a more flexible and transparent shareholding structure, which is conducive to attracting investors and increasing market recognition.
Establishment of overseas third-tier equity entities - Hong Kong companies
There are corresponding tax incentives between Hong Kong and mainland China. Through the establishment of a layer of Hong Kong companies, mainland companies may enjoy some tax incentives in the future, such as dividends to shareholders. In addition, from the specific registration operation level, with a Hong Kong company as a shareholder in the territory of the establishment of foreign-invested enterprises (WFOE), the need to notarize the shareholders. Compared with the notarization of Cayman, the notarization cost and time cost of Hong Kong company are more economical.
Establishment of WFOEs (Wholly Foreign Owned Enterprises) in China by Hong Kong companies
A WFOE is a wholly owned subsidiary of a foreign investor established in China, usually for the execution of specific business operations. The establishment of a WFOE in China through a Hong Kong company can further realize the depth of foreign participation and control in the Chinese market.
Signing a series of control agreements with de facto controllers and in-country operating entities through WFOEs
Finally, a series of control agreements, known as VIE agreements, are signed through the WFOE with the de facto controller and the domestic operating entity, thus achieving the purpose of controlling the domestic variable interest entity OPCO (Operating Company).
1. Ensure the legality and compliance of the source of funds and avoid involvement in unlawful acts such as illegal fund-raising and money-laundering.
2. Pay attention to risk control to ensure the safety of funds. When building a VIE structure, it is necessary to fully consider various risk factors and take appropriate measures to prevent and respond to them.
3. It is recommended that professional organizations be consulted, especially for ODI investment filings, which need to be handled through professional organizations. These organizations usually have rich experience and professional knowledge, and can provide enterprises with all-round advice and services.
Hongkong Fung Group provides professional ODI overseas investment filing services, covering filing process guidance, material preparation, policy interpretation and risk assessment, helping enterprises to go overseas in an efficient and compliant manner. The senior team follows up the whole process, solves the filing problems in one-stop, ensures smooth approval, and helps enterprises to carry out overseas investment smoothly.
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