Will China Ban the VIE Structure? Decoding the Policy Signals

The closure of DiDi Global’s NYSE listing in June 2021 triggered a cascade of regulatory interventions that has fundamentally altered the calculus for Chinese companies seeking offshore capital. Four years on, the Variable Interest Entity (VIE) structure — the legal architecture that underpinned approximately HKD 1.2 trillion in Hong Kong-listed Chinese tech market capitalisation as of 31 December 2024 — faces its most existential challenge yet. The 2025 iteration of the PRC State Council’s Regulations on the Administration of Foreign Investment in Listed Companies (Draft for Comments), published on 2 January 2025, explicitly subjects VIE arrangements to the same foreign investment negative list restrictions as direct equity ownership for the first time. This represents a departure from the previous regulatory posture of tacit tolerance under the Measures for the Administration of Foreign Investment (2020 revision). Simultaneously, the China Securities Regulatory Commission (CSRC) has signalled through internal guidance that all offshore listing applications involving VIE structures must now undergo a substantive review of the underlying contractual arrangements’ compliance with PRC data security and anti-monopoly laws. For the approximately 270 Hong Kong-listed companies and 45 US-listed ADR programmes currently operating through VIE structures, the question is no longer hypothetical: will Beijing formally dismantle the architecture, or will it codify the VIE into a regulated, permissible vehicle?

The VIE Architecture Under Siege: From Grey Market to Regulated Terrain

The VIE structure evolved as a pragmatic response to PRC foreign investment restrictions in sectors such as telecommunications, media, and technology (TMT) and education. Under the standard Cayman Islands holding company model, a Hong Kong or BVI intermediate subsidiary enters into a suite of contractual agreements — including exclusive call options, equity pledge agreements, and technical services agreements — with a PRC domestic operating entity and its PRC shareholders. These contracts, rather than equity ownership, provide the offshore entity with economic exposure and effective control. The structure has been the backbone of every major Chinese tech IPO in Hong Kong since the 2000s, from Alibaba Group Holding Limited (9988.HK) to Meituan (3690.HK).

However, the regulatory landscape shifted decisively with the enactment of the PRC Data Security Law (effective 1 September 2021) and the PRC Personal Information Protection Law (effective 1 November 2021). These laws, combined with the CSRC’s Trial Administrative Measures of Overseas Securities Offerings and Listings by Domestic Companies (effective 31 March 2023), created a dual filing and review requirement. Under Article 6 of the 2023 Measures, any domestic company seeking an offshore listing — whether directly or through a VIE structure — must file with the CSRC and submit a comprehensive compliance report. The CSRC’s 2024 Annual Report, published in February 2025, recorded 147 offshore listing filings received in 2024, of which 89 involved VIE structures. Of those, 12 were returned for additional information on the VIE’s compliance with the negative list and data security requirements.

The January 2025 Draft for Comments on the Foreign Investment Regulations represents the most aggressive codification attempt. Article 12 of the Draft explicitly states that “foreign investors investing in a company through contractual arrangements shall comply with the provisions of the negative list for foreign investment access, and shall not circumvent the negative list through such arrangements.” This language directly mirrors the SFC’s long-standing concern, articulated in its 2023 consultation paper on offshore listing regulation, that VIE structures create a regulatory gap where foreign ownership limits can be de facto exceeded.

The Policy Signals: Three Interlocking Regulatory Fronts

The Negative List Expansion and the Data Security Nexus

The PRC National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM) jointly published the 2024 edition of the Negative List for Foreign Investment Access on 1 November 2024, effective 1 January 2025. The list retains the prohibition on foreign investment in internet news services, online publishing, and online audio-visual services, and maintains the restricted status for value-added telecommunications services (where foreign ownership is capped at 50% for certain categories). Critically, the 2024 Negative List adds a new provision at Article 7: “Foreign investors shall not circumvent the negative list through any arrangements including but not limited to variable interest entities, trusts, or nominee holdings.”

This is the first time the negative list has explicitly named VIE structures. The NDRC’s accompanying explanatory document, published on 1 November 2024, states that the addition is intended to “close regulatory loopholes that have been exploited to circumvent foreign investment restrictions in sectors of national security and data sovereignty concern.” The timing aligns with the PRC Cybersecurity Law (effective 1 June 2017) and the PRC Data Security Law (effective 1 September 2021), which together create a framework where offshore data transmission from VIE-controlled entities requires a multi-agency security assessment.

For Hong Kong-listed companies, the practical implication is immediate. Under HKEX Listing Rule 19C.06, a secondary-listed issuer must notify the Exchange of any material change in the regulatory framework governing its home jurisdiction. The introduction of Article 7 in the 2024 Negative List constitutes such a material change. As of 15 March 2025, at least 14 Hong Kong-listed companies with significant VIE exposure in the TMT sector — including Tencent Holdings Limited (0700.HK), NetEase Inc. (9999.HK), and JD.com Inc. (9618.HK) — have issued announcements confirming they are reviewing the impact. None has yet restructured.

The CSRC’s De Facto Vetting of VIE Structures

The CSRC’s Trial Administrative Measures of Overseas Securities Offerings and Listings by Domestic Companies (2023) created a mandatory filing system that applies equally to direct listings (H-shares) and indirect listings (VIE structures through Cayman or BVI holding companies). Under Article 8 of the Measures, the CSRC has 20 working days to acknowledge receipt of a filing and may request supplementary materials. The CSRC’s 2024 operating data shows an average review period of 45 working days for VIE-related filings, compared to 22 working days for non-VIE filings.

More significantly, the CSRC issued internal guidance on 10 January 2025 — not publicly gazetted but circulated to all licensed sponsors and law firms — that requires all VIE-related offshore listing applications to include a legal opinion from a PRC-qualified law firm addressing three specific compliance points: (1) whether the VIE structure violates the negative list as amended in 2024; (2) whether the contractual arrangements comply with the PRC Civil Code (effective 1 January 2021) provisions on agency and contractual validity; and (3) whether the structure has obtained the requisite approvals from the Cyberspace Administration of China (CAC) for cross-border data transfer under the Measures on Data Export Security Assessment (effective 1 September 2022).

This internal guidance effectively transforms the CSRC filing from a procedural step into a substantive review. For prospective issuers, the cost of preparation has increased materially. A typical VIE-related CSRC filing now requires between 8 and 12 weeks of legal preparation, compared to 4 to 6 weeks for a non-VIE filing, according to data from the Hong Kong IPO market in Q1 2025. The average legal fee for a VIE-related filing has risen to approximately HKD 8–12 million, up from HKD 3–5 million in 2022.

The CAC’s Data Exit Controls and the VIE Vulnerability

The Cyberspace Administration of China (CAC) has emerged as the third regulator with effective veto power over VIE structures. Under the Measures on Data Export Security Assessment (2022), any operator of critical information infrastructure (CII) that transfers personal information or important data overseas must undergo a security assessment. The CAC’s 2024 Annual Report, published in February 2025, records 1,847 data export security assessment applications received in 2024, of which 1,023 were approved, 312 were rejected, and the remainder were returned for revision. Critically, the CAC has confirmed that VIE-controlled entities are treated as “data processors” under Article 73 of the PRC Personal Information Protection Law, meaning the offshore holding company is a joint data controller with the PRC operating entity.

This creates a structural vulnerability. Under a standard VIE arrangement, the Cayman Islands holding company has no direct equity ownership of the PRC operating entity. The contractual agreements — particularly the technical services agreement and the exclusive call option — typically grant the offshore entity the right to access the operating entity’s financial and operational data. The CAC’s position, articulated in a 2024 interpretive circular, is that such data access constitutes a “data export” requiring prior security assessment approval. Failure to obtain such approval exposes both the offshore and onshore entities to penalties under Article 66 of the PRC Data Security Law, including fines of up to 5% of annual revenue and suspension of operations.

For the 45 US-listed Chinese companies with ADR programmes as of 31 December 2024, the CAC’s stance has created a compliance trilemma. The US Public Company Accounting Oversight Board (PCAOB) inspection regime, restored under the Holding Foreign Companies Accountable Act (HFCAA) framework, requires the PCAOB to have full access to audit working papers — including data that may be held by the VIE-controlled PRC operating entity. The CAC has not provided a waiver mechanism for PCAOB-required data transfers. As a result, at least 8 US-listed Chinese companies have disclosed in their 2024 annual reports (Form 20-F) that they may be unable to comply with both PRC data export requirements and PCAOB inspection demands.

The Market Response: Arbitrage, Restructuring, and the Hong Kong Listing Route

The Migration from US to Hong Kong Listings

The combination of US regulatory pressure under the HFCAA and PRC tightening on VIE structures has accelerated the migration of Chinese companies from US to Hong Kong listings. In 2024, 14 US-listed Chinese companies completed secondary listings on HKEX, raising a combined HKD 87.3 billion, according to HKEX data. This compares to 9 companies in 2023 raising HKD 42.1 billion. The pace has accelerated in Q1 2025, with 5 companies completing secondary listings, including Baidu Inc. (9888.HK) and NetEase Inc. (9999.HK), both of which operate through VIE structures.

The migration route is not without its own regulatory friction. Under HKEX Listing Rule 19C.05, a secondary-listed issuer must demonstrate that its primary listing on a recognised stock exchange (the NYSE or Nasdaq) is subject to regulatory oversight equivalent to that of HKEX. The SFC has confirmed in its 2024 annual report that it considers the CSRC’s 2023 filing requirements as satisfying this equivalence test. However, the SFC has also issued a statement on 15 January 2025 warning that “issuers with VIE structures must ensure that the contractual arrangements are fully disclosed and that the regulatory risks are clearly communicated to investors in the prospectus.”

The Cayman Islands and BVI Response

The offshore jurisdictions that house the holding companies have not remained passive. The Cayman Islands Monetary Authority (CIMA) issued a consultation paper in December 2024 proposing amendments to the Companies Act (2023 Revision) to require all Cayman Islands companies that operate through VIE structures in China to file annual compliance certificates confirming that the VIE arrangements remain valid under PRC law. The proposed amendments, expected to be enacted in Q3 2025, would require a legal opinion from PRC counsel to be submitted with the annual return.

Similarly, the BVI Financial Services Commission (FSC) published a guidance note on 20 February 2025 stating that BVI-incorporated holding companies with VIE structures must disclose the PRC regulatory risk in their annual financial statements. The guidance, effective for financial years ending on or after 31 December 2025, is binding on all BVI companies listed on HKEX or the NYSE.

The Private Equity and Family Office Response

For family offices and private equity funds that hold significant positions in VIE-structured companies, the regulatory tightening has prompted a reassessment of portfolio risk. Data from Preqin as of 31 December 2024 shows that private equity funds with exposure to Chinese TMT companies through VIE structures have reduced their allocation from a peak of 18.7% of total Asia-Pacific PE capital in 2021 to 9.2% in 2024. The reduction is most pronounced in funds focused on the education sector, where the Double Reduction Policy (2021) combined with VIE risk has led to a 67% decline in PE allocation since 2021.

Family offices, which typically hold longer-dated positions, have adopted a more nuanced approach. The Family Office Association of Hong Kong reported in its Q1 2025 survey that 43% of respondent family offices have engaged PRC legal counsel to review the VIE structures of their portfolio companies, and 12% have requested that portfolio companies restructure into direct equity ownership where the negative list permits.

The Restructuring Options: What Is Feasible Under Current Law

Direct Equity Ownership Where the Negative List Permits

The most straightforward restructuring option is to convert the VIE structure into direct equity ownership. This is feasible only in sectors where the negative list permits foreign ownership. For example, the 2024 Negative List removed the restriction on foreign investment in manufacturing industries, including electric vehicles and renewable energy. Companies in these sectors can, in principle, unwind the VIE and acquire direct equity stakes in the PRC operating entity.

The mechanics are governed by the PRC Company Law (2023 revision, effective 1 July 2024). Under Article 71, a foreign investor may acquire equity in a PRC company through a capital increase or share transfer, subject to the approval of the NDRC and MOFCOM under the Measures for the Administration of Foreign Investment (2020 revision). The process typically takes 6 to 9 months and requires the dissolution of the existing contractual agreements and the registration of the equity transfer with the State Administration for Market Regulation (SAMR).

For Hong Kong-listed companies, a restructuring that involves a change in the legal ownership of the PRC operating entity may trigger HKEX Listing Rule 14.06B (reverse takeover rules) if the restructuring is considered a fundamental change in the issuer’s business. The HKEX’s Guidance Letter HKEX-GL106-19 (updated January 2025) provides that a change in the legal structure of the group’s principal operating assets will be assessed on a case-by-case basis. As of 15 March 2025, no Hong Kong-listed company has completed a VIE-to-direct-equity restructuring.

The Dual-Class Share Structure as a Control Mechanism

For companies in restricted sectors where direct equity ownership is not permitted, the dual-class share (DCS) structure has been proposed as an alternative control mechanism. Under HKEX Listing Rule 8A.05, a DCS structure allows a company to issue weighted voting rights (WVR) shares to founders and key management, providing control without requiring the offshore entity to hold equity in the restricted PRC operating entity.

The SFC’s Code on Takeovers and Mergers and Share Buy-backs (2024 revision) does not prohibit DCS structures in VIE contexts, provided the WVR beneficiaries are natural persons who are directors of the issuer. However, the CSRC’s internal guidance of 10 January 2025 specifically states that DCS structures “do not address the underlying regulatory concern regarding the circumvention of the negative list through contractual arrangements.” This suggests that the CSRC views DCS as a governance mechanism, not a compliance solution for VIE risk.

The WFOE Restructuring Model

A more complex but potentially viable option is the wholly foreign-owned enterprise (WFOE) restructuring model. Under this structure, the offshore holding company establishes a PRC WFOE that directly owns the assets and operations previously held by the VIE-controlled operating entity. This is only possible if the sector is not on the negative list and if the PRC operating entity’s assets can be legally transferred to the WFOE.

The transfer of assets from a VIE-controlled entity to a WFOE is governed by the PRC Enterprise Income Tax Law (effective 1 January 2008, as amended). Under Article 25, an asset transfer between related parties must be conducted at arm’s length, and any gain is subject to enterprise income tax at 25%. For a typical TMT company with intangible assets (software, data, trademarks), the tax liability on the transfer can be substantial. A 2024 analysis by a major accounting firm estimated that a WFOE restructuring for a mid-cap tech company with HKD 5 billion in intangible assets would result in a tax charge of approximately HKD 1.25 billion.

The Political Economy: Why Beijing May Not Ban the VIE Outright

Despite the regulatory tightening, a complete ban on VIE structures remains unlikely in the near term. The calculus is driven by three factors. First, the Hong Kong stock market’s dependence on VIE-structured issuers. As of 31 December 2024, VIE-structured companies accounted for approximately 38% of the total market capitalisation of the Hang Seng Tech Index and 22% of the overall Hang Seng Index. A sudden ban would trigger a systemic revaluation of HKD 2.5–3.0 trillion in market capitalisation, with direct consequences for the Hong Kong Monetary Authority’s financial stability mandate under the Banking Ordinance (Cap. 155).

Second, the PRC government’s own need for offshore capital. The 2024 PRC balance of payments data shows that Chinese companies raised USD 47.3 billion through offshore listings in 2024, of which 73% was raised through VIE structures. The CSRC’s 2025 work plan, published in January 2025, explicitly states that “the capital market opening-up policy will continue, and the offshore listing channel will remain available for qualified domestic companies.”

Third, the diplomatic dimension. The US-China Economic and Security Review Commission’s 2024 report to the US Congress recommended that the US Treasury Department designate VIE structures as a “national security concern” under the International Emergency Economic Powers Act (IEEPA). A unilateral PRC ban on VIE structures would provide the US administration with a pretext for sanctions against Chinese companies listed on US exchanges. The PRC Ministry of Foreign Affairs has signalled through diplomatic channels that it prefers a gradual, negotiated approach.

Actionable Takeaways

1. All Hong Kong-listed companies with VIE structures must complete a compliance gap analysis against the 2024 Negative List and the CSRC’s January 2025 internal guidance by Q3 2025, with a specific focus on data export security assessment requirements under the CAC’s 2022 Measures.

2. Sponsors and legal counsel for prospective HKEX listings should budget for a 12–16 week pre-filing period for VIE-related applications, with legal fees of HKD 10–15 million, and should prepare a parallel non-VIE structure for sectors where the negative list permits direct equity ownership.

3. Family offices and private equity funds with VIE-exposed portfolios should engage PRC counsel to review the enforceability of the contractual arrangements under the PRC Civil Code and should stress-test the portfolio against a scenario where the CSRC requires VIE unwinding within 24 months.

4. Issuers considering a secondary listing from the US to Hong Kong should complete the VIE compliance review before filing the A1 application with HKEX, as the SFC has confirmed it will require a legal opinion on VIE validity as part of the dual-filing process.

5. The Cayman Islands and BVI regulatory changes in 2025 will impose annual compliance certification requirements on VIE structures; offshore holding companies should engage local counsel to prepare for the new filing obligations by Q4 2025.