VIE architecture practice：Build path、Demolition steps vs. Cayman Advantage

Financing across borders、Overseas listing and group structure reorganization in progress，Cayman CompanyandBVI companyUsed by a large number of Chinese companies for a long time。Li Ka-shing once reorganized his group companies，and move the reorganized company registration location from Hong Kong to the Cayman Islands；Country Garden、Shimao Real Estate、Li Ning、Anta、Xtep，and Baidu、Alibaba、focus media、Renren、Well-known companies such as Qihoo 360，Cayman registration arrangements have also been adopted。

From the perspective of international capital market practice，The world’s 25 largest banks all have subsidiaries or branches in Cayman。over the past 20 years，Among the top 50 family businesses from the Mainland listed in Hong Kong and with assets scale，A total of 44 companies are registered in the Cayman Islands。2009Year，There are 1,145 listed companies in Hong Kong，388 of them are registered in Cayman；20108 months before，44companies listed in Hong Kong，Among them, 31 are Cayman registered companies.。

For plans to build a VIE structure、For companies that carry out overseas financing or promote overseas listings，Understanding Cayman Companies、BVI公司与境内运营实体之间的功能分工，Is the key to designing a compliance architecture。

What is VIE architecture

VIE（Variable Interest Entity），i.e. "Variable Interest Entity"，Also known as "Protocol Control"。Its core is that foreign investors control domestic operating entities through a series of agreements and arrangements.，Without directly acquiring equity interests in domestic operating entities，Obtain economic benefits from domestic operating entities。

The VIE structure is usually used by foreign investors to invest in operating entities in areas where foreign investment is restricted or prohibited in China.。at the same time，The VIE structure is also a common investment structure used by these domestic operating entities to achieve overseas listing.。

Currently, the more recognized market practice is，2000Sina first created the VIE model when it went public in the United States.。This model is recognized by GAPP in the United States，And thus formed the "VIE Accounting Standards"。thereafter，The VIE structure has been adopted by a large number of Chinese companies planning to list overseas.。

The main reasons for the emergence of VIE structure

Enterprise builds VIE structure，Mainly to circumvent the following three types of restrictions：

1. There are obstacles for Chinese registered companies to go directly to overseas listings。on the one hand，New York Stock Exchange、The places of registration accepted by overseas exchanges such as the Hong Kong Stock Exchange usually do not include China.；on the other hand，Even if overseas exchanges accept Chinese registered companies for listing，Chinese companies still need to obtain approval from China’s securities regulatory authorities to list overseas.。Except H shares，Previously, the probability of listing overseas and obtaining approval from Chinese regulatory authorities was low.。
2. Mainland China has restrictions on foreign investment access in some industries.。There are restrictions on the entry of foreign investment in some industries, including Internet Communications (TMT)。Theoretically，Overseas-registered companies can control domestic operating entities in China through foreign investment.，That is, WFOE direct equity investment in domestic companies in mainland China；However, due to the fact that some domestic companies are in industries that are subject to restrictions on foreign investment access,，Therefore, a series of agreements are required，Lock in the control of WFOE and its overseas shareholders over the operating rights of domestic companies，And meet the listing requirements of overseas exchanges。
3. "Order No. 10" imposes restrictions on related-party mergers and acquisitions。2006Year，China's Ministry of Commerce and six other ministries and commissions jointly issued the "Regulations on the Mergers and Acquisitions of Domestic Enterprises by Foreign Investors" (referred to as "Order No. 10")。Among them, the provisions on "related mergers and acquisitions"，It is regarded by the industry as tightening the approval requirements for Chinese domestic companies to indirectly list overseas.，Related party mergers and acquisitions were once a commonly used transaction structure for overseas financing of Chinese domestic enterprises.。

Since the promulgation of "Order No. 10"，Few companies have obtained approval from the Ministry of Commerce for “related-party mergers and acquisitions”，Some enterprises that are not in industries subject to foreign investment restrictions，We also began to try to build an overseas financing structure through VIE.，In order to avoid that its overseas financing structure needs to be submitted to the Ministry of Commerce of China for approval in accordance with "Order No. 10"。

VIE architecture construction path

The construction of VIE structure usually includes the following key steps:：

1. 国内创始人股东设立离岸公司。Domestic founder shareholders usually set up offshore companies，For example, BVI company。Generally speaking，Each shareholder can set up an independent offshore company。BVI company registrationrelatively simple、High level of confidentiality，Conducive to future income arrangements、Tax planning and flexible handling of equity transfers。
2. Establishing a listed entity in Cayman。Cayman companies are usually used as overseas listing entities。Cayman companies have tax-free advantages，and adopt the common law system。Britain、beautiful、Australia、New Zealand (New Zealand) and Hong Kong both belong to the common law system，Therefore, the Cayman structure is more easily understood and accepted by the international capital market.。
3. Established by Cayman CompanyHong Kong company。Hong Kong companies in the group structure can facilitate tax planning and future capital restructuring，Usually serves as an important intermediary layer connecting Cayman listed entities and domestic business entities.。
4. A wholly foreign-owned enterprise established in the territory by a Hong Kong company。Hong Kong companies set up wholly foreign-owned enterprises in China，i.e. WFOE company。WFOE is usually the contracting party that implements agreement control over mainland operating companies.。
5. WFOE signs a control agreement with a domestic company。Domestic foreign-funded companies and domestic-funded companies sign a series of agreements，Common documents include "Equity Pledge Agreement", "Business Operation Agreement", "Exclusive Consulting and Service Agreement", "Loan Agreement", "Entrusted Management Agreement", "Shareholder Entrusted Voting Agency Agreement", "Exclusive Option Agreement", etc.。

Dismantling steps of VIE structure

2014Year，Baofeng Video dismantled its VIE structure and landed on the A-share market，Created significant market capitalization performance，It also promoted a group of Chinese concept stocks to dismantle their VIE structures.、Return to A-share market craze。

From a practical perspective，The dismantling of the VIE structure can be roughly divided into the following four steps:：

1. A wholly-owned acquisition of WFOE company by a domestic investor，Transform it into a domestic-funded enterprise；
2. Buyback of shares held by foreign investors；
3. Lifting relevant agreement control arrangements；
4. Complete the cancellation of overseas companies。

The core advantages of registering a Cayman Islands company

In VIE architecture、Overseas listing entity establishment and cross-border holding arrangements are in progress，Cayman Islands companies have high market recognition and structural adaptability，Key advantages include：

1. The registration process is relatively simple，Only one shareholder is required、a director，And shareholders and directors can be served by the same person。
2. Registered capital is US$50,000，No capital verification required。
3. If the company’s business operations are not local，No need to pay local tax，And you can use Cayman companies to invest domestically。
4. Shareholder information is highly confidential。
5. The choice of company name is relatively free。
6. High market visibility，Mainland’s large private enterprise giants and some state-owned enterprises，Such as Alibaba、Baidu、Jingdong、China Unicom、Sina、Lenovo etc.，Its registered place is also in the Cayman Islands。
7. Cayman Islands offshore companies can choose to issue registered or bearer shares，Registered shares and bearer shares can be exchanged with each other。
8. Suitable for company structure construction、Group restructuring，And help promote overseas listing。

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