If you’re a tech company with controlling interest in a Wholly Foreign-Owned Enterprise (WFOE) operating in China, read on. A new law proposal could mean the forced liquidation or sale of your operation.
How International Businesses Currently Navigate China’s Investment Laws
The Chinese government is protective of profit and investments in certain market sectors. Currently, laws prohibit outright foreign ownership of companies that primarily operate in China. The regulations affect a lot of tech and online companies. But, over the years, entrepreneurs have pioneered a win-win system that makes use of variable interest entities (VIEs) and wholly foreign-owned enterprises (WFOEs).
How does it work? Without diving into detail, foreign investors, who are eager to tap the increasingly wealthy Chinese market, establish an investment vehicle known as a wholly foreign-owned enterprise. What makes WFOEs unique is that a mainland Chinese partner is not required to create the outfit, legally. Once the wholly foreign-owned enterprise is in place, it contracts with a Chinese-owned operating company (the VIE), which can then invest in the restricted sector.
The WFOE / VIE system is not without its disadvantages; regardless, it has become a popular method for international investors to navigate the fertile Asian market. U.S. tech companies such as Amazon.com Incorporated, Pearson PLC, and CBS Corporation all use the system to operate in China.
China’s Ministry of Commerce Wants To Change The VIE / WFOE Rules
All good things must come to an end. And it looks like the WFOE / VIE structure is in its twilight year, as Chinese officials recently announced potential plans to uproot the system. The proposed law would essentially eradicate the current ecosystem by disallowing foreign control of entities that primarily operate in the Chinese marketplace.
Who are some of the mega players that stand to lose big if Chinese officials ratify the statute? Sina Corp. and Weibo Corp. are largely controlled by international investors and would be Hulk-slapped by the proposed change.
The Main Consequences For Businesses Affected By The Proposed Chinese Law Change?
To be clear: the law hasn’t yet passed; it’s only been proposed. If, though, Chinese officials do green light the statute, affected foreign investors will most likely have to sell their controlling stakes – or liquidate.
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