What is a variable interest entity?

A variable interest entity (VIE) is a type of legal business structure in which an investor has a controlling interest that is not based on ownership of a majority of voting rights. VIEs are often used in situations where an investor wants to exert control over an entity without consolidating its financial statements.

VIEs are commonly used in industries with complex ownership structures, such as the financial services sector, where regulations may restrict foreign ownership or where there are various stakeholders with different levels of influence.

One of the key features of a VIE is that the investor with the controlling interest is typically required to absorb a majority of the entity's expected losses and receive a majority of its expected profits. This allows the investor to effectively control the entity's activities and decision-making processes.

However, VIEs can also pose risks, as they may be used to obscure the true financial health of an entity or to shift liabilities off the balance sheet. In recent years, regulators have increased scrutiny of VIEs to ensure transparency and prevent abuse of these structures.

Overall, while VIEs can be a useful tool for structuring complex business relationships, investors and regulators need to be aware of the potential risks and implications of using these entities.