The LEHMAN, Lee & Xu
China Law Newsletter keeps you up to date on recent developments in China Law and Legal Practice
So you Want to Start an Internet Company In China
Let’s be clear. Business activities involving hosting websites and delivering online content are prohibited to foreign investment in the PRC. Think that great new idea you have will be a hit in China, and all you need to is put up a website and start selling? Think again.
Keep in mind, your website hosted outside of China can be blocked at time, for any reason or no reason. For websites hosted in China, the law requires an Internet Content Provider license. The license is prohibited to Foreign Invested Companies.
For determined companies, there are ways around this. You may have heard of Variable Interest Entities, or VIEs. These are basically a fully Chinese entity existing solely to obtain required licenses and approvals which for forbidden to foreign invested companies. A WFOE invested by the foreign company would then sign a series of contracts with the VIE. The contracts are designed to give all control over the VIE to the WFOE.
The biggest problem in a VIE arrangement is finding a willing Chinese individual which will act as shareholder to the VIE company, but agree to give up management and profits. If not handled properly, the VIE arrangement will result in this individual potentially having the capability to hold the entire project hostage.
The biggest problem in a VIE arrangement is finding a willing Chinese individual which will act as shareholder to the VIE company, but agree to give up management and profits. If not handled properly, the VIE arrangement will result in this individual potentially having the capability to hold the entire project hostage.
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