China: Analysis of the Latest BIS “50% Association Rule” in the United States

1. Introduction

On September 29, 2025, the U.S. Department of Commerce’s Bureau of Industry and Security (U.S. The Department of Commerce, Bureau of Industry and Security (BIS) officially released the “Affiliates Rule” (also known as the “50% Rule”) and updated the relevant operational guidelines for export control.

The core content of the BIS association rules is that for any entity that is not explicitly listed on the relevant list, if its equity is directly or indirectly held, individually or collectively held by one or more listed entities, individually or collectively, up to 50% or more, the licensing requirements and other relevant restrictions of the listed entity will apply to the listed entity.

BIS is concerned that the entities listed on the Entity List and the Military End-User List (MEU List) may circumvent controls by establishing new companies. In response to such evasion, BIS has introduced a new 50% rule based on the relevant regulations of the U.S. Department of the Treasury’s Office of Foreign Assets Management (OFAC). The 50% rule will apply to both the Entity List, the MEU List, and the List of Specially Designated Nationals (SDN List) related to specific OFAC sanctions items under EAR Section 744.8. The purpose of the new 50% rule is to fill the loopholes in the control of related entities between the Entities List and the Military End-User List under the framework of the previous Export Administration Regulations, strengthen the overall implementation effectiveness of the U.S. export control system, and further regulate the cross-border flow of sensitive technologies and items.^[1]

Different from the previous regulatory model that mainly relied on “roll call”, this BIS has introduced OFAC’s 50% rule and the most restrictive rule to achieve penetrating coverage with the help of its automatic application mechanism, further extending the scope of application of relevant restriction measures from individual listed entities to its affiliates. On the one hand, the 50% rule attempts to block the circumvention path of listed entities to continue to carry out restricted item transactions through newly established companies; On the other hand, global companies are subject to higher standards of due diligence obligations in cross-border transactions due to the new 50% rule.

2. The core content of BIS association rules

The new association rule, that is, the “50% rule”, is a major expansion of the scope of BIS control over the list of entities and MEU lists, and the core is to include “equity association” in the control identification criteria, breaking the previous limitation of only “listed entities”.

2.1 Definition and applicable premise of the rules

According to the official interpretation of the BIS, the core content of the “50% rule” includes two things: if an entity (hereinafter referred to as “related entity”) is aggregated by one or more entities on the entity list or MEU list, the related entity is automatically included in the control scope of the corresponding list, and the same licensing requirements and review policies as the entity listed on the list apply. If a related entity holds a “substantial minority stake” by a listed entity (BIS does not specify the specific proportion, in practice it usually refers to a situation where it holds more than 25% of the shares or has actual control), the transaction entity needs to conduct additional due diligence on the related entity to confirm whether it has the risk of indirectly evading export controls.^[2]

2.2 Applicable thresholds and ownership determinations

The key to the application of the “50% rule” lies in the calculation of equity ratio and the determination of ownership type, which is clearly defined by BIS:

• Threshold standard: “50%” is the core threshold, and the shareholding ratio is calculated according to the “total shareholding” (the shareholding of multiple listed entities can be accumulated), and there is no distinction between direct and indirect shareholding.

• Ownership type: The listed entity directly holds the equity of the related entity, and the shareholding ratio is directly included in the total ratio. If the listed entity indirectly holds the equity of the related entity through a third party (such as a subsidiary or affiliated enterprise), it needs to undergo a “penetrating review” – that is, trace back to the ultimate beneficial owner (UBO), and the indirect shareholding ratio is converted according to the actual control relationship of the equity chain and included in the total ratio.^[3]

Downward penetration: Similar to previous OFAC rules, this penetration rule is still downward penetration, that is, more than 50% of the subsidiaries controlled by the listed entities included in the rules will automatically be considered to be listed entities. At present, the rule does not involve the identification of upward penetration (i.e., the controlling parent company). However, in the practice of previous sanctions business, we have found that even if the parent company cannot be directly identified according to the 50% rule, if the parent company has some specific circumstances (such as business mixing, asset mixing, personality mixing), it may be implicated by sanctions, especially in central enterprise group companies.

In addition, the BIS also emphasizes that the penetrating review of indirect ownership is the core requirement of the “50% rule”, and the transaction entity needs to conduct a “full-chain investigation” of the shareholding structure of the related entity until it confirms whether the ultimate beneficial owner is a list entity, and the review must not be omitted due to the complexity of the equity level.

3. The core list system of U.S. export controls

Before the introduction of the “50% rule”, BIS implemented export control through two core lists, both of which are based on EAR, but there is a clear distinction between the objects, scope and intensity of their controls.

3.1 BIS Entity List^[4]

1. Legal positioning and regulatory purposes

The Entity List is a trade control list established and maintained by BIS in accordance with EAR § 744, and its core control purpose is to prevent foreign entities from obtaining relevant items “detrimental to U.S. national security or foreign policy interests” by restricting the export, re-export, and domestic transfer of sensitive items containing goods, software, and technology.

2. Control objects and measures

• Targets of control: including foreign individuals, enterprises, research institutions, government departments and non-governmental organizations, etc., whose activities are determined to “endanger U.S. national security or foreign policy interests” through BIS cases.

• Controls: Rather than being completely prohibited from trading, the listed entities are subject to additional licensing requirements – any entities that export, re-export, or transfer EAR items to such entities, including U.S. businesses and third-country companies using U.S. technology, are required to apply for an export license from BIS in advance.

• Licensing Review Policy: BIS applies a “constructive refusal” principle for most license applications, meaning that the license application will be rejected unless the applicant can demonstrate that the transaction does not pose a risk of endangering U.S. national security or foreign policy interests. This policy leads to extremely high legal obstacles in practice for transactions with listed entities, and relevant entities need to bear strict compliance risks.

3.2 Military End User (MEU) List^[5]

1. Legal basis and scope of control

The MEU List is a special control list established by BIS pursuant to EAR §744 Supplement No. 7 to strengthen controls on specific state entities that “may use U.S. items for military purposes.” The applicable countries include China, Russia, Belarus, Myanmar, Cambodia, Nicaragua and Venezuela.

2. Objects of control and obligations

• Control objects: mainly covering the armed forces, government intelligence agencies, state-owned enterprises and other entities that support military activities of the listed countries, and the list published by BIS shall prevail.

• Control measures: Entities on the MEU list need to apply for a license from BIS when importing sensitive items subject to EAR (such as specific electronic equipment, semiconductor manufacturing technology, aerospace components, etc.), and the license review is also based on the principle of “presumptive refusal” (except for some low-risk items).

• Corporate obligations: The MEU list does not exhaust all “military end users”, and the BIS clearly requires the transaction entity to undertake statutory due diligence obligations – even if an entity is not included in the MEU list, if its business nature meets the AIR definition of “military end user” (such as supporting the research and development and production of military equipment), the transaction entity still needs to apply for permission according to the regulatory standards of the MEU list entity.

3.3 Special application of the MEU list

There are exceptions to the MEU List under the “50% Rule”, and it is important to note that if an entity only “meets the EAR’s definition of a military end-user” but is not explicitly listed on the MEU List (i.e., does not appear in EAR §744 Supplement No. 7), its affiliated entities with more than 50% of the shares are not automatically included in the MEU List control.

Therefore, whether such affiliated entities are regulated will be subject to independent judgment as to whether they meet the EAR’s definition of “military end users”: if so, they are regulated as MEU list entities; If not, the licensing requirements of the MEU Manifest do not apply.

The core purpose of this exception is to avoid overly expanding the regulatory scope of the MEU list, but it also increases the judgment obligation of the transaction entity – it is necessary to examine both the requirements of “whether the parent company is a listed MEU entity” and “whether the related entity itself is a military end-user”.

3.4 Linkage between the 50% rule and the FDP Rule

The “50% rule” is not applied in isolation, but has a linkage effect with the Foreign Direct Product Rule (FDP Rule) under the EAR framework. For example, if a listed entity (parent company) applies specific FDP rules (e.g., FDP rules for military end users in Russia and Belarus), the same FDP rules are automatically applied to affiliated entities (or subsidiaries) in which it holds more than 50% of the shares. Even if affiliated entities are not separately subject to the FDP Rules, they are still subject to the FDP Rules’ regulatory requirements for “foreign direct products” (e.g., third-country products produced using U.S. technology), further expanding the scope of control of sensitive technologies.

3.5 Application of the “Strictest Limit” Principle

When a related entity is subject to multiple control policies at the same time, the BIS explicitly applies the principle of “most stringent restriction”, that is, if the related entity is owned by multiple listed entities (e.g., partly from the entity list and partly from the MEU list), and the licensing review policies applicable to different list entities are different (e.g., “presumptive refusal” applies to the entity list, and “case review” applies to certain types of items in the MEU list), the policy with the strictest transaction restrictions will take precedence.

The “Strictest Review Policy” applies uniformly to all transactions of the affiliated entity. For example, Entity X (listed on the Entity List, “Presumptive Denial” applies to all item licensing applications) and Entity Y (listed on the MEU List, and some low-risk items are subject to “case review”) collectively hold 50% of the equity of Affiliated Entity A (40% for X and 10% for Y). According to the “strictest restrictions” principle, all transactions of Company A are subject to a “presumptive refusal” license review policy, even if the transaction items fall within the scope of “case-by-case review” under the MEU list.^[6]

4. The legal impact and compliance challenges of the “50% rule” on Chinese entities

The impact of the “50% rule” on Chinese entities is concentrated in three aspects: sensitive industry control, corporate compliance obligations and supply chain risks.

4.1 Regulatory risks in key industries have intensified

1. Semiconductor and artificial intelligence industry

Key items such as lithography machines and EDA software relied on by Chinese semiconductor companies are subject to EAR, and the “50% rule” may lead to their overseas related entities (such as overseas subsidiaries holding more than 50% of the shares) being automatically included in the control, further compressing technology access channels.

The artificial intelligence industry faces the risk of computing power supply chain: If companies such as Nvidia and AMD restrict the supply of related entities of Chinese AI companies due to the “50% rule”, the procurement of computing power equipment by domestic AI companies will face greater obstacles, which may affect the progress of R&D and production.

2. Dual-use technology-related industries

Chinese entities involved in dual-use technologies (e.g., aerospace components, precision instrument manufacturing) will face stricter licensing scrutiny and even stalled transactions if their overseas affiliated entities are identified as “MEU List related entities.”

4.2 Compliance obligations at the business level of enterprises are increased

1. Compliance requirements for equity structure adjustment

If Chinese technology enterprises need to conduct business through overseas investment, joint ventures, etc., they need to avoid being included in the control due to “holding more than 50% of the shares”, and may be forced to adjust the equity structure (such as reducing their holdings to less than 50%), but they need to pay attention to the determination of “actual control” in the adjustment process – although they hold less than 50% of the shares but have actual control (such as decision-making power through the articles of association), they may still be recognized as “substantial association” by the BIS and trigger control.

2. Obligation to review third-party cooperation

When working with U.S. companies or third-country companies that use U.S. technology, Chinese entities need to additionally review whether the partner is an affiliated entity under the “50% rule” to avoid violations of their own transactions due to the control of the partner. Enterprises need to invest more resources to establish an “equity penetration review” mechanism, including hiring professional institutions to verify the equity structure of overseas related entities, tracking BIS list updates and changes in rule interpretation, etc.

4.3 Upgrade of compliance requirements for supply chain and due diligence

1. Increased complexity of refusal screening

Previously, enterprises only needed to confirm whether the counterparty was a list entity through “name screening”; After the implementation of the “50% rule”, it is necessary to upgrade the screening tool to achieve “ownership penetration screening”, covering multi-level related entities such as parent companies, subsidiaries, and joint ventures to avoid violations caused by omission of related entities. Complex shareholding structures (such as cross-border multi-tier shareholding and proxy holding) may cause the screening tool to fail to accurately identify correlation relationships, which need to be combined with manual verification and supplementary verification.

2. Ownership mapping and dynamic monitoring

BIS requires enterprises to draw an “ownership map” of the shareholding structure of the counterparty, clarify the ultimate beneficial owner and the relationship with the listed entity, and dynamically monitor equity changes (such as capital increase and equity transfer) – if the change in the shareholding structure of the counterparty triggers the “50% rule”, the enterprise needs to immediately suspend the transaction and apply for permission.

3. Geopolitical risk transmission

China may take countermeasures against the “50% rule” (such as strengthening market access reviews for US companies), and cross-border supply chains may face the risk of “two-way control”.

5. Conclusion

The introduction of the BIS “50% rule” marks the deepening of the U.S. export control system to “related entity penetration control”, and puts forward higher compliance requirements for Chinese entities, especially sensitive industry entities. Chinese enterprises need to focus on legal risk prevention and control, ensure compliance with EAR and BIS control requirements by establishing equity penetration review mechanisms, improving due diligence processes, and dynamically tracking rule updates, while actively responding to supply chain fluctuations in geopolitical contexts to reduce the adverse impact of rule implementation on operations.

Exegesis:

[1]https://www.BIS.gov/press-release/department-commerce-expands-entity-list-cover-affiliates-listed-entities。

[2] https://www.visualcompliance.com/blog/the-bis-50-rule-is-coming-what-it-means-for-export-compliance-and-how-to-prepare/#%3A~%3Atext%3DThe%20BIS%2050%25%20rule%2C%20similar%2Cto%20operate%20through%20unnamed%20affiliates.

[3]https://www.descartes.com/resources/knowledge-center/preparing-bis-50-rule-export-compliance-risks-and-readiness

[4]https://www.bis.gov/entity-list

[5]https://www.ecfr.gov/current/title-15/subtitle-B/chapter-VII/subchapter-C/part-744/appendix-Supplement%20No.%207%20to%20Part%20744

[6] https://www.steptoe.com/en/news-publications/international-compliance-blog/bis-significantly-expands-restricted-parties-through-a-new-50-percent-rule.html#:~:text=On%20September%2030%2C%202025%2C%20the%20US%20Department%20of,Entity%20List%20or%20the%20Military%20End-User%20%28%E2%80%9CMEU%E2%80%9D%29%20List.

Anjie Broad, China, a Transatlantic Law International Affiliated Firm.  

For further information or for any assistance please contact china@transatlanticlaw.com

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