The Cayman Islands and other offshore havens have been used by domestic and foreign companies to circumvent murky Chinese regulations, the VIE´s, in jargon. Accounting professor Paul Gillis has fighting against this practice, and see some light at the end of the tunnel.
Here he is quoted at the Business Spectator:
Paul Gillis, a visiting professor of accounting at Peking University’s Guanghua School of Management, says that reform is needed in the foreign investment rules.
“If all they do is treat the VIE as an FIE [Foreign Invested Enterprise], it is a disaster” he said, “That means none of the VIEs in restricted sectors — nearly all of them — are legal.”
Paul Gillis, in his weblog:
Today, January 19, 2015, the Ministry of Commerce (MOFCOM) released a draft of a new foreign investment law for public comments. What is notable about this new law is that it appears to introduce an actual control rule for determining when an enterprise has foreign investment and is thus subject to regulation as such. What that appears to mean is that a VIE that is controlled by an offshore company will be treated as a foreign invested enterprise (FIE).
The nature of VIE arrangements in China is that they give control to an offshore company (typically the listed Cayman Islands company or its Chinese subsidiary (WFOE)), yet argue to Chinese regulators that the VIE is a local company owned by locals, and therefore not subject to foreign investment restrictions. The proposed law appears to change that interpretation. Instead, a VIE controlled by a foreign company will be treated as a foreign invested enterprise.
Since foreign investment is restricted in the sectors favored by most US listed Chinese companies (internet and education), the ruling could have significant impact. If implemented, most overseas listed Chinese companies, including giants Alibaba, Baidu, and JD.com would appear to have a big problem with their VIEs. They would have prohibited foreign investment in the Internet sector, which could lead to loss of their Internet content provider licenses.
More at the ChinaAccountingblog.
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