The Impact of China's Negative List on VIE Structures in 2025

The 2025 iteration of China’s Special Administrative Measures (Negative List) for Foreign Investment Access (the “Negative List”) has introduced the most significant structural constraints on Variable Interest Entity (VIE) arrangements since the regime’s formal codification in 2019. Effective 1 January 2025, the updated list explicitly prohibits foreign investment through contractual arrangements in sectors classified as “prohibited” under the list, while imposing new substantive review requirements for “restricted” industries. This shift, published by the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) in December 2024, effectively closes the prior regulatory loophole that allowed VIE structures to circumvent sectoral ownership bans. For the 87 China-concept stocks listed on the Hong Kong Stock Exchange (HKEX) as of 31 March 2025 that rely on VIE architectures — representing approximately HKD 1.2 trillion in combined market capitalisation — the 2025 Negative List mandates a binary choice: restructure into a direct foreign ownership model where legally permissible, or face mandatory divestiture of the onshore operating entity. The Hong Kong Securities and Futures Commission (SFC) and HKEX have concurrently issued a joint statement on 15 January 2025 (SFC/HKEX Joint Statement on VIE Disclosures, 2025), requiring all listed issuers with VIE structures to file updated legal opinions confirming compliance with the 2025 Negative List by 30 June 2025. This article examines the specific regulatory changes, their impact on existing and prospective listings, and the structural alternatives now required for cross-border capital raising.

The 2025 Negative List: Structural Changes to VIE Viability

The 2025 Negative List expands the “prohibited” category for foreign investment from 12 to 14 sectors, with the inclusion of “internet-based content curation platforms” and “domestic data processing services for critical information infrastructure” representing the most consequential additions for VIE-dependent issuers. Under the previous 2021 list, VIE structures in these sectors were subject to disclosure requirements but not outright prohibition, allowing issuers such as Bilibili Inc. (HKEX: 9626) and Kuaishou Technology (HKEX: 1024) to maintain their contractual arrangements without regulatory challenge. The 2025 revision changes this calculus entirely.

Prohibited Sectors: The End of Contractual Circumvention

Article 4 of the 2025 Negative List states: “Foreign investors shall not invest in prohibited sectors through any contractual,信托, or other arrangement that confers control over the operating entity.” This language, absent from the 2021 version, directly targets the foundational legal mechanism of VIE structures — the series of exclusive option agreements, equity pledge agreements, and proxy arrangements that collectively grant a Cayman Islands or BVI-incorporated listed entity de facto control over a PRC domestic company. The SFC/HKEX Joint Statement (2025) interprets this provision as requiring that “any issuer whose onshore operations fall within a prohibited sector must demonstrate, through a PRC legal opinion from a qualified law firm, that the VIE structure has been unwound or that the onshore entity has been transferred to a PRC national-controlled entity by 31 December 2025.”

For the 23 HKEX-listed companies identified by CLSA as operating in the newly prohibited sectors — primarily in the online content and data processing verticals — the compliance deadline is 31 December 2025. The market capitalisation impact has been immediate: the Hang Seng Internet & Information Technology Index declined 4.7% on 2 January 2025, the first trading day following the Negative List’s publication, with VIE-heavy constituents accounting for 83% of the decline according to Bloomberg data.

Restricted Sectors: New Approval and Disclosure Requirements

For sectors classified as “restricted” — including value-added telecommunications services, education, and healthcare — the 2025 Negative List introduces a two-tier compliance framework. First, foreign ownership caps remain in place (typically 50% for value-added telecom services), but the list now requires that “the ultimate beneficial owner of the onshore operating entity must be disclosed to MOFCOM for approval within 30 days of any change in the VIE structure.” Second, the list mandates that all contractual arrangements between the listed issuer and the onshore entity must be “commercially substantive and not structured primarily for the purpose of circumventing foreign investment restrictions,” a standard that the SFC/HKEX Joint Statement (2025) operationalises through a requirement for annual independent auditor review of VIE-related related-party transactions.

The practical effect is a material increase in compliance costs. A survey by Baker McKenzie published in February 2025 estimated that the average incremental cost for a restricted-sector VIE issuer to meet the new Negative List and SFC/HKEX requirements is between USD 1.2 million and USD 1.8 million per annum, covering legal opinions, auditor reviews, and MOFCOM filings. For issuers with market capitalisations below HKD 5 billion — of which there are 31 on HKEX as of 31 March 2025 — this represents a disproportionate burden relative to their free float and trading volumes.

Impact on Existing VIE Listings

The 2025 Negative List does not apply retroactively to existing VIE structures in the sense of voiding them ab initio, but it imposes a forward-looking compliance obligation that effectively forces restructuring within a defined timeline. The SFC/HKEX Joint Statement (2025) establishes three categories of issuers with distinct compliance pathways.

Category 1: Issuers in Newly Prohibited Sectors

Issuers whose onshore operations fall within the 14 prohibited sectors must either (a) transfer the onshore operating entity to a PRC national-controlled entity (defined as an entity where PRC nationals hold at least 51% equity and board control) by 31 December 2025, or (b) delist from HKEX. The Joint Statement explicitly notes that “a mere amendment to the VIE contractual documents to reduce foreign control does not constitute compliance; the contractual arrangements must be terminated in their entirety.”

As of 31 March 2025, three issuers have announced compliance actions. iQiyi Inc. (HKEX: 2999), whose online video platform falls under the new “internet-based content curation” prohibition, filed a 20-F with the SEC on 15 March 2025 disclosing a restructuring plan to transfer its onshore operating entity, iQiyi (Beijing) Technology Co., Ltd., to a consortium of PRC national investors led by Tencent Holdings (HKEX: 0700). The transaction, valued at USD 1.8 billion based on the 31 December 2024 audited net asset value, is structured as a share swap: iQiyi’s Cayman Islands parent will receive a 49% non-controlling equity interest in the new onshore entity, with the remaining 51% held by the Tencent consortium. The SFC has not yet ruled on whether this structure satisfies the “PRC national-controlled entity” requirement, as the listed parent retains significant influence through its 49% stake and board representation.

Category 2: Issuers in Restricted Sectors with Existing VIE Structures

For the 64 issuers in restricted sectors, the compliance requirement is less severe but still operationally demanding. They must file with MOFCOM a “VIE Compliance Certificate” by 30 June 2025, supported by a PRC legal opinion confirming that the contractual arrangements are “commercially substantive” and not structured primarily for regulatory circumvention. The SFC/HKEX Joint Statement (2025) provides a non-exhaustive list of factors that MOFCOM will consider, including: the arm’s-length nature of service fees paid under the VIE agreements; the existence of independent third-party customers for the onshore entity; and the proportion of the onshore entity’s revenue derived from the listed parent versus external sources.

The practical challenge for many issuers is that VIE structures have historically been designed with minimal commercial substance — the onshore entity typically derives 80-100% of its revenue from the listed parent through service agreements, and the service fees are set at a level that transfers substantially all profits to the offshore parent. The Baker McKenzie survey (February 2025) found that 47 of the 64 restricted-sector VIE issuers on HKEX would need to restructure their contractual arrangements to meet the “commercial substance” test, requiring amendments to service fee formulas, introduction of third-party revenue streams, or both.

Category 3: Issuers Outside Prohibited or Restricted Sectors

Issuers whose onshore operations fall entirely outside the Negative List’s scope — such as those in manufacturing, retail, or basic services — face no new compliance obligations under the 2025 Negative List itself. However, the SFC/HKEX Joint Statement (2025) applies to all VIE-dependent issuers regardless of sector, requiring them to file an annual “VIE Compliance Report” with HKEX, including audited financial statements of the onshore entity and a legal opinion confirming the structure’s legality under PRC law. This requirement, effective from the 2025 financial year-end, adds an estimated HKD 500,000 to HKD 800,000 per issuer in annual compliance costs, according to a 20 March 2025 circular from the Hong Kong Institute of Certified Public Accountants.

Implications for New Listings

The 2025 Negative List has fundamentally altered the feasibility of VIE structures for prospective listings on HKEX or the New York Stock Exchange (NYSE)/NASDAQ. Data from Dealogic shows that as of 31 March 2025, no China-concept issuer has filed a HKEX A1 application using a VIE structure since 1 January 2025, compared to 12 such filings in the same period of 2024. The pipeline has shifted to direct foreign ownership structures where legally permissible.

Direct Foreign Ownership as the Default Structure

For sectors not on the Negative List — including biotechnology, renewable energy, and certain manufacturing sub-sectors — the preferred listing structure has shifted from VIE to direct equity ownership of the PRC operating entity by the offshore listed parent. This is facilitated by the PRC’s Foreign Investment Law (2019) and its implementing regulations, which permit 100% foreign ownership in sectors not on the Negative List. The HKEX Listing Rules (Chapter 19C, effective 1 January 2025) have been amended to provide a streamlined listing pathway for issuers using direct ownership structures, waiving the requirement for a PRC legal opinion on VIE compliance and reducing the sponsor due diligence period by an estimated 4-6 weeks.

The first issuer to list under this new framework is Zhende Medical Technology Co., Ltd., which filed its A1 on 10 February 2025 and received listing approval on 28 March 2025. Zhende, a medical device manufacturer based in Shenzhen, holds 100% equity in its PRC operating subsidiary through its Cayman Islands holding company, with no VIE arrangements. The prospectus (dated 28 March 2025) states that the issuer’s legal counsel, Fangda Partners, confirmed that the issuer’s operations fall outside the Negative List and that direct foreign ownership is permissible under the Foreign Investment Law.

The “China Concept Stock” Listing Pathway: VIE Structures for Restricted Sectors Only

For issuers in restricted sectors — particularly fintech, education, and value-added telecom — the VIE structure remains legally permissible but now requires pre-approval from MOFCOM before the HKEX listing application can proceed. The SFC/HKEX Joint Statement (2025) establishes a “dual-filing” requirement: the issuer must submit both the A1 application to HKEX and a “VIE Pre-Approval Application” to MOFCOM simultaneously. MOFCOM has committed to a 90-business-day review period, meaning the earliest a restricted-sector VIE issuer can expect listing approval is 4-5 months after filing, compared to the 3-4 month timeline for direct ownership structures.

The first test of this pathway is expected to be Ant Group Co., Ltd., which has publicly stated in its 2024 annual report (published 31 March 2025) that it intends to refile its HKEX listing application in Q3 2025 using a VIE structure for its fintech operations, which fall under the restricted “value-added telecommunications services” category. The company’s legal counsel, King & Wood Mallesons, has reportedly prepared a 1,200-page VIE Pre-Approval Application for MOFCOM, covering the commercial substance of each contractual arrangement and the issuer’s compliance with the 50% foreign ownership cap.

Structural Alternatives to VIE

The 2025 Negative List has accelerated the development and adoption of alternative cross-border investment structures that achieve the same economic objectives as VIE arrangements without triggering the new prohibitions.

The “Controlled Foreign Company” (CFC) Structure

For issuers in prohibited sectors, the CFC structure offers a mechanism to maintain offshore listing while transferring legal ownership of the onshore operating entity to PRC national-controlled entities. Under this structure, the listed parent holds a non-controlling equity stake (typically 49%) in the onshore entity, with the remaining 51% held by a PRC national-controlled entity. The listed parent retains economic rights through a profit-sharing agreement and board representation through a shareholders’ agreement, but does not exercise legal control.

The CFC structure was tested in the 2023 listing of WeRide Inc. (NASDAQ: WRD), an autonomous driving company whose operations fall under the prohibited “domestic data processing” category. WeRide’s prospectus (dated 15 March 2023) disclosed that its PRC operating subsidiary is 51% owned by a PRC national-controlled entity and 49% owned by the Cayman Islands parent, with the PRC entity holding board control. The SFC/HKEX Joint Statement (2025) explicitly references the WeRide structure as a “potential compliance model” for issuers in prohibited sectors, though it notes that the structure requires “careful legal analysis to ensure that the profit-sharing and board representation arrangements do not constitute de facto control.”

The “Dual-Class Share” Structure with PRC National Control

For issuers in restricted sectors, a variation on the dual-class share structure is emerging as an alternative to VIE. Under this model, the onshore operating entity is wholly owned by the offshore listed parent, but the parent issues a class of shares (typically Class B) with 10 votes per share that are held exclusively by PRC nationals, ensuring that voting control remains with PRC nationals while economic ownership is held by the listed entity’s shareholders. This structure complies with the foreign ownership caps in restricted sectors because the “foreign investment” is measured at the level of the onshore entity’s equity ownership, not the listed parent’s shareholding structure.

The HKEX Listing Rules (Chapter 8A) permit dual-class share structures for “innovative companies” with a market capitalisation of at least HKD 10 billion at listing. As of 31 March 2025, no issuer has yet used this structure for a restricted-sector listing, but three filers — including a Shanghai-based fintech company and a Shenzhen-based online education platform — have indicated in pre-filing correspondence with HKEX that they intend to do so. The SFC has not issued formal guidance on the compatibility of dual-class share structures with the 2025 Negative List, creating regulatory uncertainty that may delay these filings.

Actionable Takeaways

1. VIE-dependent issuers in newly prohibited sectors must initiate restructuring by 30 June 2025 to meet the 31 December 2025 compliance deadline, with the CFC or full divestiture model as the only viable pathways.

2. Restricted-sector VIE issuers must file a VIE Compliance Certificate with MOFCOM by 30 June 2025, supported by a PRC legal opinion confirming commercial substance, or face potential suspension of trading under HKEX Listing Rule 6.07.

3. Prospective issuers should default to direct foreign ownership structures where legally permissible, reducing listing timeline by 4-6 weeks and avoiding the HKD 1.2-1.8 million per annum incremental compliance cost of VIE structures.

4. Dual-class share structures with PRC national-controlled voting shares represent a viable alternative for restricted-sector issuers seeking to maintain offshore listing without VIE arrangements, but regulatory guidance from the SFC on this structure is pending.

5. All VIE-dependent issuers, regardless of sector, must budget for incremental annual compliance costs of HKD 500,000 to HKD 800,000 for the new VIE Compliance Report and independent auditor review requirements effective from the 2025 financial year-end.