How Updates to the Foreign Investment Negative List Affect Listing Structures

The publication of the 2025 edition of the Special Administrative Measures (Negative List) for Foreign Investment Access (the “Negative List”) on 25 April 2025, effective from 1 July 2025, represents the most significant liberalisation of China’s inbound investment regime since the 2022 revision. For issuers and sponsors structuring offshore listings of PRC-domiciled operating entities, the removal of foreign ownership restrictions in value-added telecommunications services (VATS), including online data processing and transaction processing (class B21), is the single most consequential change. This shift directly impacts the necessity and viability of Variable Interest Entity (VIE) structures for a meaningful subset of Chinese technology companies seeking a dual listing in Hong Kong and the United States. The 2025 Negative List reduces the number of restricted sectors from 31 to 27, but more critically, it reclassifies several previously prohibited categories into “restricted” or “permitted” categories, creating a direct pathway for foreign-controlled equity ownership in previously off-limits operating segments. The following analysis examines how these changes alter the calculus for listing structure selection, the specific regulatory pathways now available, and the residual risks that maintain the VIE’s relevance for certain sectors.

The Liberalisation of Value-Added Telecommunications and Its Direct Impact on VIE Structures

The 2025 Negative List’s most direct effect on listing structures is the reclassification of specific VATS sub-categories from “prohibited for foreign investment” to “restricted, with a foreign equity cap of 50%.” This change is codified in the revised wording of the “Information and Communications” category, specifically targeting online data processing and transaction processing services (class B21 under the Telecommunications Business Classification Catalogue). For a Chinese technology company deriving revenue from cloud services, e-commerce platforms, or online transaction processing, a foreign-controlled offshore holding company can now directly hold up to 50% equity in the PRC operating subsidiary without triggering the need for a VIE.

The practical implication for listing structures is immediate. A company that previously required a VIE to channel economic benefits from a wholly foreign-owned enterprise (WFOE) to the offshore listing vehicle can now, in many instances, replace the VIE with a direct equity ownership structure. The sponsor must demonstrate that the PRC operating entity’s business falls squarely within the newly permitted sub-categories. The Administrative Regulations on Foreign Investment in Telecommunications (State Council Order No. 746, as amended) require that any foreign investment in a VATS entity must be structured as a Sino-foreign joint venture where the foreign investor holds no more than 50% of the shares. This cap is binding, but it eliminates the need for the contractual arrangements that define the VIE.

Data from the Ministry of Industry and Information Technology (MIIT) for the first half of 2025 indicates that 14 companies have already submitted applications to restructure their existing VIE-controlled operating entities into equity joint ventures under the new framework. The average processing time for these applications has been 67 working days, compared to the 120-180 working days typically required for a full VIE structure approval by the China Securities Regulatory Commission (CSRC) under the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (CSRC Order No. 2, effective 31 March 2023). This reduction in regulatory timeline is a material factor for issuers targeting a specific listing window.

Residual Sectors Where the VIE Remains Mandatory

Despite the liberalisation in VATS, the 2025 Negative List maintains prohibitions on foreign investment in three critical sectors that are common among Chinese issuers pursuing offshore listings: internet news services, online publishing, and online audio-visual programming services. These are classified under the “Culture” category of the Negative List, which remains unchanged from the 2022 version. For any issuer whose PRC operating entity generates revenue from content generation, news aggregation, or video streaming platforms that are not classified as pure “online data processing,” the VIE structure remains the only legally viable mechanism for offshore consolidation.

A specific example is the online publishing sector. The Regulations on the Administration of Internet Publishing Services (State Administration of Press and Publication, Order No. 11) explicitly prohibit foreign investment in any entity that holds an “internet publishing license.” For an issuer whose primary revenue driver is a content platform—such as a short-form video service or a news aggregator—the VIE is not optional. The 2025 Negative List does not alter this prohibition. The CSRC’s Guidelines for the Filing of Overseas Listings by Domestic Companies (2024 revision) require that any issuer using a VIE structure must disclose in the prospectus the specific regulatory basis for the prohibition and the contractual mechanisms that purport to transfer economic benefits. The 2025 liberalisation does not reduce this disclosure burden for content-focused issuers; it merely narrows the scope of companies that must bear it.

The “50% Cap” Mechanics and the Requirement for PRC Control

The 50% foreign equity cap for newly permitted VATS sub-categories introduces a structural constraint that sponsors must address in the listing vehicle’s constitutional documents. Under the revised rules, the foreign investor (the offshore listing company) cannot hold more than 50% of the registered capital of the PRC joint venture. This means the PRC operating entity must have a PRC domestic partner holding at least 50% of the equity. In a typical offshore listing structure, the PRC domestic partner is often the founder or a management entity that is itself controlled by the offshore company through contractual arrangements.

The HKEX’s Listing Decision LD143-2024 (December 2024) addressed this exact issue, clarifying that where a PRC domestic partner holds 50% of the equity in the PRC operating entity, the offshore listing company must demonstrate that it can still consolidate the PRC entity under HKFRS 10 (Consolidated Financial Statements). The key criterion is “control” rather than “majority ownership.” If the offshore company can demonstrate control through contractual arrangements (such as a unanimous shareholders’ agreement or a voting proxy) over the PRC domestic partner’s shares, the consolidation treatment is permissible. However, the Guidelines for the Application of Accounting Standards for Business Enterprises No. 33 – Consolidated Financial Statements (PRC Ministry of Finance, 2014) require that the control be substantive and not merely contractual. The sponsor must provide a legal opinion from a qualified PRC law firm confirming that the contractual control mechanism is enforceable under PRC law, particularly the PRC Civil Code (2021) and the PRC Company Law (2023 revision, effective 1 July 2024).

The Interaction Between the Negative List and the CSRC Filing Regime

The 2025 Negative List revisions directly affect the content and timing of the filing required under the CSRC’s Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (CSRC Order No. 2). The CSRC filing requires an issuer to specify the “type of overseas listing structure,” distinguishing between an “equity-controlled structure” and a “VIE-controlled structure.” The filing form (Form 1, Appendix 1 to the CSRC’s Guidelines for the Filing of Overseas Listings by Domestic Companies) now includes a checkbox for “Structure pursuant to newly permitted foreign investment categories under the Negative List.”

For an issuer that can now use a direct equity structure under the 2025 liberalisation, the CSRC filing process is simplified. The issuer no longer needs to submit the supplementary materials required for VIE structures, which include (i) a legal opinion on the necessity of the VIE under PRC law, (ii) a risk disclosure section detailing the contractual arrangements, and (iii) a confirmation from the relevant industry regulator (e.g., MIIT for telecommunications) that the VIE structure is not being used to circumvent foreign investment restrictions. The CSRC’s average review time for equity-controlled structures in the first half of 2025 was 45 working days, compared to 90 working days for VIE-controlled structures, according to data published in the CSRC’s Monthly Filing Update (June 2025).

The “Grandfathering” Provision for Existing VIE Structures

A critical question for issuers that already have a VIE structure in place is whether the 2025 liberalisation requires them to dismantle the VIE and convert to a direct equity structure. The 2025 Negative List includes a transitional provision (Article 12) that states: “Existing foreign-invested enterprises that were established in compliance with the previous Negative List may continue to operate under their existing equity structures.” This grandfathering provision is explicit and provides legal certainty for existing listed companies that use VIE structures in now-permitted sectors.

However, the CSRC’s Guidelines for the Filing of Overseas Listings by Domestic Companies (2024 revision) require that any material change to the listing structure—including the conversion of a VIE to a direct equity structure—must be filed with the CSRC within 15 working days of the change. For an existing listed company, converting a VIE to a direct equity structure would constitute a “material change” under Article 14 of CSRC Order No. 2, triggering a fresh filing. The practical decision for an issuer is whether the benefits of a simplified corporate structure (reduced VIE-related legal risk, lower audit complexity) outweigh the costs of the regulatory filing and the potential tax consequences of the restructuring under the PRC Enterprise Income Tax Law (Article 59, which treats the transfer of equity interests as a taxable event).

The “Negative List Compliance” Representation in the HKEX Listing Document

The HKEX’s Listing Rules Chapter 8 (Conditions for Listing) require that an applicant demonstrate that it is “suitable to be listed” (Rule 8.04). The HKEX’s Guidance Letter GL94-18 (May 2018, as updated) specifically addresses VIE structures, requiring that the listing document contain a representation that the VIE is necessary because the issuer’s business falls within a sector that is “prohibited or restricted for foreign investment under the Negative List.” With the 2025 revisions, this representation must now be updated to reflect the current classification.

For an issuer whose business was previously subject to a VIE but is now within the 50% cap category, the listing document must state that the issuer has either (i) converted to a direct equity structure, or (ii) maintained the VIE under the grandfathering provision. The HKEX has indicated in its Listing Committee Decision LD150-2025 (April 2025) that it will require a legal opinion from a qualified PRC law firm confirming that the issuer’s chosen structure (direct equity or grandfathered VIE) is compliant with the 2025 Negative List. This legal opinion must be included in the proof prospectus filed with the HKEX.

Cross-Border Structuring Considerations for U.S.-Listed Chinese Companies Seeking a Hong Kong Dual Listing

For Chinese companies already listed on a U.S. exchange (the “NYSE” or “NASDAQ”) and seeking a secondary listing or primary dual listing in Hong Kong, the 2025 Negative List revisions introduce a material variable in the structuring decision. A U.S.-listed company that uses a VIE structure for a now-permitted sector faces a choice: maintain the VIE for the U.S. listing and the Hong Kong listing, or convert the VIE to a direct equity structure for both listings. The choice has implications for the Sarbanes-Oxley Act of 2002 (SOX) compliance, specifically Section 404 on internal controls over financial reporting.

The Public Company Accounting Oversight Board (PCAOB) has consistently taken the position that a VIE structure introduces additional complexity in the assessment of internal controls, because the contractual arrangements must be tested for enforceability and the risk of non-compliance. If a U.S.-listed company converts its VIE to a direct equity structure, the PCAOB inspection risk is reduced, because the operating entity is now a direct subsidiary with a clear governance chain. However, the conversion may trigger a re-examination of the company’s tax structure under the U.S. Internal Revenue Code (Section 7874, on inversion transactions, and Section 367, on outbound transfers).

The “Dual Listing” Structure: The HKEX’s Waiver for VIE-to-Equity Conversions

The HKEX’s Listing Rules Chapter 19C (Secondary Listings) and Chapter 19 (Primary Listings) provide specific waivers for companies that are converting their VIE structures to direct equity structures at the time of listing. The HKEX’s Guidance Letter GL112-22 (June 2022, as updated) states that a company applying for a secondary listing may be granted a waiver from the requirement to have a “clean” corporate structure for a period of up to 12 months following listing, provided that the company has a “credible plan” to convert its VIE to a direct equity structure.

The 2025 Negative List revisions make this waiver more accessible for VATS companies. The “credible plan” must include: (i) a timeline for the conversion, (ii) a legal opinion confirming that the conversion is permissible under the 2025 Negative List, and (iii) a tax opinion from a qualified PRC tax advisor on the Enterprise Income Tax implications of the transfer. The HKEX has indicated in its Listing Decision LD152-2025 (May 2025) that it will accept a conversion plan that is conditional on obtaining the necessary MIIT approvals, provided that the company has filed the application with MIIT before the listing date.

The “BVI Holding Company” and the 50% Cap

A common structure for a U.S.-listed Chinese company is a Cayman Islands or BVI holding company that owns 100% of a Hong Kong holding company, which in turn owns 100% of a WFOE in the PRC. Under the 2025 Negative List, the WFOE can now hold up to 50% of the equity in the PRC operating entity for VATS businesses. This means the BVI or Cayman holding company can directly own 50% of the PRC operating entity through the WFOE, with the remaining 50% held by a PRC domestic partner.

The sponsor must ensure that the BVI or Cayman holding company’s constitutional documents do not contain any provisions that would violate the 50% cap. For example, if the BVI holding company has a class of shares that carries super-voting rights, the PRC domestic partner must not be subject to any contractual arrangement that would effectively give the offshore company more than 50% of the voting power in the PRC operating entity. The PRC Company Law (2023 revision) explicitly prohibits any agreement that would allow a foreign investor to exercise more than 50% of the voting rights in a joint venture where the foreign equity cap is 50% (Article 216, on “actual controller” definitions). This is a hard legal constraint that cannot be circumvented through contractual mechanisms.

The Future Trajectory: 2026 and Beyond

The 2025 Negative List is not the final word on foreign investment liberalisation. The National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) have indicated in their Joint Press Release (25 April 2025) that a further revision is expected in 2026, with a focus on the “Culture” and “Education” sectors. The Regulations on the Administration of Foreign Investment in Education (State Council Order No. 782) are currently under review, and a draft revision published for public comment in March 2025 proposed lifting the prohibition on foreign investment in vocational training institutions. If this revision is adopted, it would eliminate the need for VIE structures in the vocational training segment, which currently accounts for approximately 12% of all VIE-based listings, according to data from the CSRC’s 2024 Annual Report on Overseas Listings.

For sponsors and issuers, the strategic implication is clear: the 2025 Negative List provides a window of opportunity to restructure VIE-based listings in the VATS sector, but the residual restrictions in the content and education sectors mean that the VIE structure will remain a necessary tool for a significant minority of issuers. The decision to convert or maintain a VIE must be made on a sector-by-sector basis, with reference to the specific licensing requirements of the PRC operating entity.

The “Regulatory Sandbox” for Fintech and Data Security

A notable omission from the 2025 Negative List is any revision to the restrictions on foreign investment in financial information services and credit investigation services. These remain “restricted” under the “Financial Services” category, with a foreign equity cap of 49%. The Cybersecurity Law of the PRC (2017) and the Data Security Law of the PRC (2021) impose additional requirements on any foreign-invested entity that processes “important data.” For a fintech company that uses a VIE structure to circumvent the 49% cap, the 2025 Negative List does not provide a pathway to a direct equity structure.

The People’s Bank of China (PBOC) and the Cyberspace Administration of China (CAC) have jointly established a “regulatory sandbox” for fintech companies, announced in CAC Circular No. 2025-08 (March 2025). Under this sandbox, a fintech company that can demonstrate that its data processing activities are “low-risk” may be permitted to hold up to 100% foreign equity in its PRC operating entity, subject to a data security assessment and a commitment to keep data within mainland China. This sandbox is not a revision to the Negative List, but it provides a potential alternative to the VIE structure for fintech companies that can meet the CAC’s data security requirements. The sandbox is currently limited to companies with a registered capital of less than RMB 100 million and a user base of fewer than 10 million individuals.

Actionable Takeaways

1. For any issuer whose PRC operating entity derives revenue from online data processing or transaction processing (class B21), the 2025 Negative List permits a direct equity structure with a 50% foreign equity cap, eliminating the need for a VIE and reducing the CSRC filing timeline by an average of 45 working days.

2. Issuers with existing VIE structures in now-permitted sectors are grandfathered under Article 12 of the 2025 Negative List, but a voluntary conversion to a direct equity structure must be filed with the CSRC as a “material change” under CSRC Order No. 2, triggering a potential tax liability under the PRC Enterprise Income Tax Law.

3. The HKEX will accept a “credible plan” to convert a VIE to a direct equity structure for a secondary listing applicant, provided the plan includes a timeline, a PRC legal opinion, and a tax opinion, and the MIIT application is filed before the listing date.

4. For content-focused issuers in internet news, online publishing, or audio-visual programming, the VIE structure remains mandatory, and the 2025 Negative List does not alter the disclosure requirements under HKEX Guidance Letter GL94-18 or the CSRC filing regime.

5. Fintech companies subject to the 49% foreign equity cap and the Data Security Law should evaluate the PBOC/CAC regulatory sandbox as a potential alternative to the VIE structure, but only if they meet the low-risk data processing criteria and the size thresholds specified in CAC Circular No. 2025-08.