The following layer by layer says why it should be built like this. Generally speaking, there are two issues to consider: 1) cross-border tax planning; 2) Where is the acceptable place of registration of the listed entity?
The first layer of VIE architecture-the establishment of BVI company
BVI is one of the fastest-growing overseas offshore investment centers in the world. The main body of BVI company was established mainly because the local government does not tax the income from overseas. For the shareholders of BVI company, if the dividends remain in BVI company, they do not need to pay personal income tax, so they can be exempted from paying personal income tax, and shareholders can continue to make related investments with BVI company. Setting up a first-class structure in BVI has the advantages of simple company registration procedures, low cost, no field operation and high confidentiality, and only needs to pay a small amount of management fee every year.
The second layer of VIE architecture-the establishment of Cayman Company
Take the listing of Hong Kong's main board as an example. Why are the top companies usually Cayman? Because the main board in Hong Kong, for example, can only be registered in Hong Kong, Chinese mainland, Cayman and Bermuda, it is very common for listed companies to be Cayman. As the main body of listing, investors' investment will be implemented at the level of the main body of listing, whether before listing or during IPO. Moreover, there is no withholding tax on dividends between Cayman and Hong Kong, and there is no capital gains tax on equity transfer.
The Third Structure of VIE —— The Establishment of China Hongkong Company
Why do Hong Kong companies usually set up WOFE to form a holding structure between Hong Kong and China Mainland? When China enterprises go public indirectly overseas, they usually choose Hong Kong as the last company, mainly because the business owners want to adopt preferential tax policies between China, Hong Kong and China. The general tax rate for the establishment of offshore companies in countries other than China and Hong Kong is 20%, but the minimum withholding income tax can be levied at the rate of 5% for eligible dividends from China and Hong Kong in China. Therefore, for the overseas listing of domestic enterprises, the holding structure of Hongkong-China Mainland is perfect.
VIE solved two problems through a series of protocols (refer to Storm Video for the following protocols):
1. Political rights arrangements, usually including:
Irrevocable proxy voting authorization-the nominal shareholder of the operating company entrusts the voting right to WOFE, making WOFE a shadow shareholder;
Equity pledge contract-making it impossible to transfer the equity or make other arrangements to strengthen WOFE's control over the rights attached to the equity;
Exclusive purchase contract-when WOFE has priority, the equity cannot be transferred to others, preventing the nominal shareholders from diluting WOFE's rights by increasing capital.
2. Economic rights arrangement, usually including profit transfer and asset control:
Exclusive technical consultation and service agreement-transfer the profits of the operating company to WOFE through service fee;
Non-patented technology transfer agreement and non-patented technology license agreement-WOFE owns and controls non-patented technology;
Exclusive subscription contract for domain name and website copyright-the same reason as above;
Exclusive subscription contract for intellectual property rights-the same reason as above.
Through this series of framework construction and agreement arrangement, we can see that although the operating company has no equity relationship with WOFE, it is actually equivalent to a wholly-owned subsidiary of WOFE. This has formed a capital chain across China and the United States. Using this model, domestic enterprises can successfully raise funds; Foreign investors can also indirectly invest in enterprises in domestic restricted or prohibited fields, and can also realize overseas listing. As for the country, it has also developed the Internet economy. It can be said that VIE architecture has created a win-win situation.