Why Set up Multiple Layers of Offshore Companies: VIE Structure
So the company used a multi-layer BVI structure: firstly, a BVI company (BVI1) was set up as a wholly-owned subsidiary of the domestic company. The subsidiary then registers a number of BVI a, BVI b… etc., each BVI corresponding to an overseas company. The subsidiary then registers a number of BVI a, BVI b…, etc., each corresponding to an overseas joint venture, and transfers ownership of the parent company to BVI a, b, c, d by way of equity transfer, with BVI 1 ultimately taking control of the company, and classifying all BVI a, b, c, d as wholly-owned subsidiaries of BVI 1.
In this way, the structure of overseas assets is sorted out through the form of multi-layer BVI, which is convenient for future equity operations and spin-offs. On the other hand, all overseas profits can be treated as investment income of the domestic company instead of operating profits, thus exempting or reducing the corporate income tax.
WFOE exclusively provides technical consulting services, business management and other servicesto the domestic operating entity and collects consulting service fees from the domestic operating entity;
Under the VIE structure, IP that can legally be held by the WFOE is often transferred to the WFOE, which then licenses it to the domestic operating entity and collects IP licensing royalties from the domestic operating entity.
The fees collected by the WFOE from the domestic operating entity in one or more of the above ways often account for all of the profits of the domestic operating entity, thus realizing the transfer of profits from the domestic operating entity to the WFOE.
In the VIE structure building process, BVI companies, Cayman companies, Hong Kong, China companies have their own division of labor and use, one is indispensable.
Red chip listing in Hong Kong, China, is most of the domestic Internet overseas listing enterprises respected way, its mode of operation is generally:
First in the British Virgin Islands (BVI), the Cayman Islands and other places to register offshore companies, and then use this offshore company agreement to control (VIE mode) domestic companies, the offshore company as a platform for the sale of preferred shares or convertible bonds to the fund or PE for private placement.
(ii) Cayman and BVI company law rules are flexible and easy to realize business purposes
In addition, Cayman and BVI company law rules are flexible, for example, share repurchase arrangements and even drag-along clauses, which are very important for investment and financing projects, are very difficult to be implemented under Chinese company law, but are much more flexible under Cayman and BVI company law.
listing for red-chip structures?
(ii) Historical differentiation of the Hong Kong Stock Exchange’s listing rules
In addition, prior to January 1, 2022, the Hong Kong Stock Exchange Listing Rules classified the domicile of the main body of the company to be listed into two categories:
Recognized Jurisdictions (Recognized Jurisdictions): Hong Kong, China, Cayman and Bermuda;
Acceptable Jurisdictions (Acceptable Jurisdictions): 21 jurisdictions including BVI. Compared to the Acceptable Jurisdictions including Cayman, company entities incorporated in the Acceptable Jurisdictions including BVI will need to additionally demonstrate in the Pre-A1 procedure that their rules do not provide less protection to shareholders than the Hong Kong law rules. Although the Hong Kong Stock Exchange Listing Rules, which will take effect on January 1, 2022, have deleted the above distinction between judicial regions, Cayman companies as listing entities in red chip structures are still the absolute mainstream, given that Cayman’s company law system and transparency are more complete than BVI, among other reasons.