Variable interest entity definition
/What is a Variable Interest Entity?
A variable interest entity (VIE) is a legal entity in which an investor holds a controlling interest, despite not having a majority of its share ownership. This controlling interest is achieved through a contractual relationship, rather than the direct ownership of shares in the VIE. Variable interest entities are used as special purpose vehicles to finance certain investments without putting the parent entity at risk of loss. A VIE has the following characteristics:
The entity's equity is not sufficient to support its operations
Residual equity holders do not control the VIE
Residual equity holders are shielded from the gains and losses normally associated with ownership
Examples of Variable Interest Entities
Several examples of variable interest entities are listed below:
Structured finance. A bank establishes a VIE to purchase loans from the bank, package them, and issue securities to investors.
Joint venture. Two companies form a joint venture to develop a technology, but one company guarantees the venture's debt or has priority in receiving residual benefits.
Offshore holding company. A technology firm in China is structured as a VIE to comply with foreign ownership restrictions.
Energy project. A utility company sets up a project-specific entity with significant influence over its operations but no outright voting majority.
Healthcare provider. A hospital management company owns the operational rights but does not directly hold real estate assets.
In each of these cases, the entity is a VIE because the primary beneficiary (the party consolidating the entity in its financial statements) controls it through agreements, economic interests, or guarantees rather than voting power.
Presentation of a Variable Interest Entity
If an investor is the primary beneficiary of a variable interest entity, the investor must consolidate its financial statements with those of the VIE. The primary beneficiary is the one that can direct the most significant economic activities of the VIE.