VIE, namely variable interest entity, also known as agreement control, is different from the general company adopting equity control method. VIE actually controls a company by signing an agreement instead of holding shares.

VIE structure and functions

VIE, namely variable interest entity, also known as agreement control, is different from the general company adopting equity control method. VIE does not control a company by way of holding shares but by signing an agreement.
The use of the VIE structure originally came from China, and an overseas company through its wholly-owned subsidiary in China (wholly foreign-owned enterprise, WFOE) controlled a Chinese domestic-funded company through agreement control, thereby realizing the consolidated statement of the foreign company to the domestic-funded company , to be able to raise funds or list overseas.
The agreements used for control include a series of contracts such as control rights, profit transfer agreements, and equity pledge agreements. Because China’s Sina is the first company to go public overseas in this way, it is also known as the Sina model.

The most typical application of the VIE structure is in the Internet or e-commerce fields where foreign investment is restricted by Chinese laws. An overseas company is established by a foreign investor and a Chinese founding shareholder, and then a wholly foreign-owned enterprise is established in China by the overseas company to engage in industries where foreign investment is not restricted, such as the most typical technology consulting company. Operating companies provide actual capital contributions, share profits and losses, and have control rights through contractual relationships, ultimately realizing indirect investment by foreign investors in areas that were originally restricted or prohibited.

In addition, overseas companies have obtained the control and management rights of domestic license companies, thereby realizing the consolidation of financial statements. These features are crucial for any company that intends to be listed on the international market in the future and optimizing the tax structure for cross-border transactions.