BIS revised the export management regulations to strengthen the control of foreign affiliates
On September 30, 2025, the U.S. Department of Commerce's Bureau of Industry and Security (BIS) published an affiliates rule known as the "50% Rule" in the Federal Register. The new rules aim to fill long-standing regulatory loopholes by amending the Export Administration Regulations (EAR) to automatically add certain foreign affiliates to the export control list[1]. Under the new rules, foreign enterprises that directly or indirectly hold more than 50% of the shares of an entity on the export control list will automatically be considered restricted and subject to the same licensing requirements as the listed parent company [2]. This standard is in line with the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) "50% Rule" [3]. Below we will analyze the scope of application, compliance considerations and impact on enterprises in chapters.
1. Scope of Application and Core Standards
Covered entities: The new rules apply to foreign enterprises, including any Non-U.S. company in which one or more parties listed on the Entity List, Military End-User List, or certain sanctions list (OFAC sanctions listed in EAR Section 744.8(a)(1)) directly or indirectly hold an aggregate of 50% or more equity[2]. Once the shareholding conditions are met, the foreign enterprise will automatically be subject to the same export licensing requirements and restrictions as its relevant parent company. This change replaces the previous standard of "legally independent entities are not regulated", thereby closes loopholes that allowed unnamed affiliates to circumvent regulations [1]. It is important to note that the new rules apply only to entities outside the United States; U.S. domestic companies are not included. In addition, if the export control list only lists a specific address of a company, it does not mean that other branches of the same group at different addresses will be automatically included in the rule coverage - but BIS cautioned that such situations may still carry a high risk of circumvention and should be closely monitored. [4].
Cumulative principle: When a foreign enterprise is jointly owned by multiple listed entities and their aggregate shareholding reaches 50%, the enterprise will be subject to the strictest set of export control restrictions among those applicable to its parent entities [5]. In other words, if multiple parent companies appear on the export control lists with different restrictions (for example, licensing review policies, license exception eligibility, or notes under the “Foreign Direct Product” (FDP) rules), then the affiliate must comply with the most stringent requirements [5]. For example, if a foreign company is owned 35% by one listed entity (noted with "Footnote 1", license policy of “presumption of denial”) and 15% by another listed entity (noted with "Footnote 3", license policy of “case-by-case review”), bringing the combined ownership to 50%, then the foreign company will be bound by the stricter restriction. In this case, it would require a license as if exporting to the "Footnote 1" entity holding 35%, and under the FDP rules, it would need to meet both the standards of "Footnote 1" and "Footnote 3" simultaneously [6]. Therefore, regardless of how the shareholding percentages of the listed entities are divided, once their aggregate reaches 50%, the affiliate will face the same restrictions as imposed on the strictest parent entity.
Covered sanctions: In addition to the Entity List and MEU List, the BIS Rules have also been extended to some objects subject to U.S. financial sanctions. Under EAR Section 744.8(a)(1), the new rules apply to Specially Designated Nationals (SDNs) listed by OFAC on specific sanctions items (e.g., Russia, Belarus, terrorism-related, proliferation of WMD, drug trafficking, etc.)[7]. This means that any foreign entity that is more than 50% owned by the above specific SDN will also be considered a restricted affiliate. It is worth mentioning that for the Military End-User (MEU) sector, the new rules do not intend to automatically include companies that are only owned by unlisted "military end users" (unless the affiliate itself also meets the definition of "military end user"), so as to avoid excessive spillover to related enterprises that have not yet been officially listed [8]. Overall, the new rules adopt a standard consistent with OFAC's long-standing “50% rule”, with both direct and indirect holdings counted, and the shareholding ratios of different restricted parties can be aggregated [9]. BIS believes that this will reduce the burden on enterprises to adapt to the new rules while ensuring that there are no loopholes in control [3].
2. Compliance Requirements of "Red Flag 29"
In this revision, BIS has updated the "Know Your Customer" (KYC) guidelines and added "Red Flag 29" to strengthen the due diligence obligations of enterprises[10]:
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When an exporter, re-exporter or intermediate transferor learns that part of the equity of a foreign enterprise is held by a listed entity (enterprise on the Entity List or MEU List) in its counterparty, but the exact shareholding percentage cannot be determined, it must take one of the following measures before executing the transaction:
a. Verify the actual shareholding percentage of the relevant listed entity in the foreign enterprise;
b. If the percentage cannot be verified, and a license would otherwise be required under the listed entity’s license requirements, then submit a license application to BIS [11];
c. Or confirm that a lawful license exception applies to exempt the transaction.
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No transaction until doubts are cleared: If such doubts cannot be resolved, and no necessary license has been obtained nor a license exception confirmed, the company must not proceed with the transaction [12]. BIS clearly states that if it is found that the counterparty actually meets the restricted conditions of the ownership rules, and the enterprise has not fulfilled its obligation to verify or apply for a license in the first place, the continuation of the transaction will be regarded as the enterprise has "knowledge" (subjective intent), and may be recognized as a willful violation of export controls [13]. Under EAR sections 764.2(e) and 736.2(b)(10), companies may face more severe enforcement penalties for "knowingly violating the law" [14]. In other words, "not knowing the shareholding percentage" is no longer an excuse for exemption, and enterprises have the responsibility to take the initiative to ascertain ownership structures.
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Special Warning for Key Regions: BIS specifically reminds exporters to be specifically cautious in some jurisdictions with low transparency of equity information (such as certain emerging markets or offshore financial centers) [15]. Difficulty in obtaining information is not a justification for “willful blindness.” On the contrary, this itself constitutes a red flag, and companies should devote additional efforts to conduct shareholder penetration checks. If a company proceeds with exports on the sole basis of “unclear ownership” and later faces regulatory scrutiny, it will be difficult to avoid liability [16].
3. Temporary General License (TGL) Buffer
To avoid disruption of normal business immediately after the new rules come into effect, BIS has issued a Temporary General License (TGL) as a transitional measure [17]. The TGL has been incorporated into the EAR in the form of General Order No. 7, with the main provisions as follows:
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Validity Period: TGL is valid for 60 days from the date the new rules take effect, i.e., temporarily release certain transactions within two months of the official publication of the Federal Register[17]. Based on this calculation, if the new rules are published on September 30, 2025, the TGL will be valid until about November 28, 2025. If there is no special extension at that time, the relevant grace period will automatically expire at that time.
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Scope of application: The TGL provides only a limited waiver of certain licensing requirements during the transitional period and is subject to strict conditions [18]. Generally, transactions involving newly restricted affiliates with destinations in U.S.-allied countries/regions (most countries listed in EAR Country Groups A:5 or A:6) may continue to be exported, reexported, or transferred during the TGL period [18]. Beyond this, transactions with destinations outside these allied countries (but excluding the highest-risk sanctioned countries in Groups E:1/E:2, such as Cuba, Iran, North Korea, and Syria) may only proceed within the 60-day window if the restricted affiliate is a joint venture with a U.S. or A:5/A:6 country partner that is not itself subject to the affiliate rule restrictions[19]. In other words, if a company on the Chinese Entity List has a wholly-owned affiliate in China or a third country, the affiliate does not qualify for the TGL exemption mentioned above – exports to such companies are subject to licensing as soon as the rules come into effect[20]. The TGL is thus intended primarily to provide a short-term buffer for projects involving Western joint venture participation, and should not be interpreted as a general or long-term waiver.
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Compliance with Other Requirements: Even if a transaction qualifies under the TGL, companies remain subject to all other EAR requirements. In particular, recordkeeping obligations continue to apply. Under the new rules, all exports, reexports, or transfers conducted pursuant to the TGL must be fully documented and preserved in accordance with Part 762 of the EAR [21]. BIS may review such transactions in the future; therefore, companies must ensure they can provide sufficient written records to demonstrate compliance.
4. Concurrent Adjustments to the Foreign Direct Products (FDP) Rule
The new rules not only affect the direct export licensing requirements, but also expand the scope of application of the Foreign-Direct Product (FDP) rules. For example, in the past, only certain listed entities (such as Huawei) were subject to additional FDP controls when they were marked with "Footnote 1" or "Footnote 3". Under the new affiliate rule:
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Extension of Footnote Rules: Any foreign affiliate meeting the “50% rule” will also be subject to the corresponding FDP restrictions if any of its parent companies is designated with an FDP-related "Footnote 1" or "Footnote 3" in the Entity List entry [6]. In other words, as long as one of the parent companies triggers an FDP rule, the affiliate's access to U.S. goods, technology, and software is also subject to that rule.
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Combined Scenarios: If an affiliate is jointly owned (50% aggregate) by multiple listed entities that carry different footnotes, the affiliate must comply with the strictest requirements of all applicable footnotes. For example, if a foreign company is 50% jointly owned by one Entity List company designated with "Footnote 1" (involving enhanced FDP controls over advanced semiconductors and high-performance computing) and another designated with "Footnote 3" (involving Russia/Belarus military end-user FDP controls), then exports to that foreign company would not only require a license but also, in determining whether a foreign-produced item is subject to the EAR, both the "Footnote 1" and "Footnote 3" standards would need to be applied simultaneously [6] . BIS made clear in the IFR that such scenarios must take into account all FDP restrictions of the relevant parent companies [6].
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Impact assessment: BIS does not expect this simultaneous expansion of the FDP rules to generate a large number of new licensing applications (official estimates may be in the single digits per year)[22]. However, since the FDP rules are mainly aimed at high-tech and dual-use fields, the impact of this adjustment is particularly significant on high-tech industries such as semiconductors, computers, and high-performance chips [23]. When carrying out international cooperation and technology introduction, Chinese enterprises in related industries need to pay special attention to whether the shareholding structure of their affiliates triggers the US FDP rules, so as to predict compliance risks in advance.
5. List Modification and Appeal Channels
For foreign affiliates that are "automatically restricted" by the new rules, BIS provides appeal and exemption channels:
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Application for Modification/Exemption: The new rules add relevant elements of §744.16(e) (List of Entities) and §744.21(b)(2) (MEU List) of the EAR, allowing eligible foreign companies to submit a written application to remove them from the parent company's listing restrictions[24]. In other words, if an enterprise is automatically deemed to be included in the Entity List under the new rules, but believes that it is not involved in the parent company's non-compliance activities or risks, it can submit an application to the BIS stating the situation and requesting the amendment of the parent company's entries on the list to exempt the affiliate from applicable [24]. Applications can be submitted by mail to the Chair of the BIS End User Review Committee (ERC) or by email to ERC@bis.doc.gov[25]. This mechanism provides an opportunity for affected enterprises to appeal.
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Expected volume of appeals: BIS estimates in its rule assessment that this change is expected to result in approximately 30 additional appeal requests per year[26]. Although the number is not huge, the actual number of complaints remains to be seen, given the large number of companies that are "automatically covered" after the 50% rule comes into effect (according to third-party analysis, thousands of new affiliates may be included in the regulation [27]). BIS said it would carefully evaluate each request based on national security and foreign policy interests.
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Regulatory discretion reserved: Notably, the BIS emphasizes in its rule document that the government will retain discretion over special cases. On the one hand, if an foreign enterprise is not meeting the 50% shareholding threshold but has clear evidence that it is being used to circumvent export controls, BIS can still directly list it on the Entity List or MEU List [28]. In other words, "50%" is not an absolute safe harbor, and enterprises below this proportion may also be named and sanctioned if they engage in evasion. On the other hand, BIS also has the right to exclude the application of restrictions at its discretion for enterprises that meet the 50% shareholding standard but can prove that there is no significant risk of evasion [28]. This may be achieved through the appeal mechanisms mentioned above, such as companies that demonstrate that their business is independent of the sensitive activities of the listed parent company, or that exports to the United States do not involve controlled items, to persuade the BIS to approve a waiver of affiliate restrictions. In short, BIS preserves flexibility both to prevent abuse by bad actors and to give compliant enterprises an avenue to appeal and correct unjustified restrictions.
6. Other Compliance Reminders
Ownership below 50% still requires caution: While shareholding relationships that below the 50% threshold do not automatically trigger the restriction of listed entities, the BIS explicitly considers such situations as potential red flags [29]. In particular, when the listed entity has a significant minority stake in a company, or has close ties to the board of directors and senior management, the company may be used to circumvent control [29]. BIS warns exporters not to take it lightly, and should strengthen due diligence on such "shadow shareholder" backgrounds, conduct in-depth verification of their backgrounds, and submit doubts to BIS for consultation or approval before taking action if necessary[30].
Aligning with OFAC's compliance framework: The BIS "50% rule" clearly draws on OFAC's long-standing 50% ownership principle [3]. This is favorable for companies – most multinational companies and financial institutions already have corresponding sanctions compliance screening mechanisms in place, which can be smoothly ported to the field of export controls. For example, incorporating the shareholding structure review of foreign partners into the trade compliance process alongside the screening of existing sanctions lists (e.g., SDN List). This helps establish a unified risk management and control system, avoids fragmented approaches and improves compliance efficiency. In other words, companies can quickly adapt their internal export control compliance procedures to the new BIS requirements by referring to existing OFAC compliance practices.
Official lists no longer exhaustive: BIS emphasizes that with the new automatic coverage mechanism, government-published restricted party lists are no longer comprehensive [31]. Previously, companies often relied on official Entity List/MEU List publications for screening, but now thousands of affiliates not specifically named may fall outside of those lists [27]. The focus of compliance has thus shifted to the company itself: exporters must proactively understand the shareholder background of their counterparties and cannot assume safety merely because an entity does not appear on the list [31]. The BIS even directly states in the rule document that the U.S. government's integrated export control screening list (CSL) will no longer include all restricted foreign entities [31]. This means companies must update internal databases and third-party screening tools to ensure they can identify entities that are subject to the “50% rule” but not yet publicly listed.
7. Enforcement and Liability
Strict liability principle: According to the EAR, export control obligations fall under a strict liability regime, which is reaffirmed in the implementation of the "50% rule" [32]. The BIS clearly states that there is no need to prove that the enterprise subjectively knew about the violation, and that a regulated transaction with a listed affiliate constitutes an offence in itself[32]. In other words, once the rule is violated, liability may be imposed regardless of a party’s claimed lack of knowledge (although actual knowledge or lack thereof may affect the severity of penalties). Companies should abandon any “gambling mentality” and take proactive steps to ensure compliance with the new rule.
Implication across the entire trade chain: The “50% Rule” affects not only exporters themselves. Parties along the entire trade chain—including freight forwarders, banks, insurance companies, distributors, logistics and warehousing, etc.—may be liable for participating in a transaction involving a restricted affiliate [33]. In particular, transactions involving goods or U.S. technology may fall under the jurisdiction of the EAR even if the parties are located overseas[33]. For example, financial institutions should include this rule in their anti-money laundering/sanctions screening procedures, and logistics companies should be vigilant about the flow of goods they carry to avoid unknowingly being involved in export control violations.
Penalty Risks: The legal consequences for violating this rule are severe. Once confirmed, companies may face heavy fines, revocation of export privileges (placement on the export rejection list), and even criminal charges in serious cases. Past cases show that U.S. enforcement agencies may impose fines ranging from tens of thousands to millions of dollars per violation, and serious breaches may lead to individual criminal liability. Given that the “50% Rule” is a new requirement, early enforcement is likely to have a signaling effect—BIS and the Department of Justice may choose to penalize certain representative cases to send a strong deterrent message across the industry.
Compliance Recommendations: Given the widespread impact and immediate effect of the new rules, companies should act without delay to strengthen their compliance systems. First, update internal trade compliance policies and screening tools to include shareholding structure investigations in customer and supplier due diligence checklists. Second, review existing business relationships to identify whether any current counterparties fall under the scope of the new rule; if so, determine whether they qualify for TGL relief or whether deliveries should be paused pending license applications. Third, employees should be trained to understand the essence of the "50% rule", especially for frontline business and legal compliance staff who must be able to identify red flag indicators [34]. Finally, in uncertain situations, it is better to take the initiative to consult or apply for permission from BIS than to rush forward with the transaction. A proactive, self-disciplined compliance posture will help mitigate potential penalties and demonstrate the company’s seriousness in meeting export control obligations.
Conclusion
The "50% rule" (Affiliate Rule) introduced by BIS this time can be described as a major jurisdictional expansion in the history of U.S. export controls. It takes into account foreign affiliates that have been in the regulatory gray area in the past, closing long-standing compliance loopholes [1]. For Chinese companies with U.S. capital or U.S.-related business, the impact of this move should not be underestimated
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First, due diligence must extend to the shareholder level. Companies can no longer rely solely on official sanctions/control lists to judge the compliance risks of counterparties, but need to proactively verify the shareholder background behind the other party. Even if the other company itself is not "on the list", it must proactively investigate whether it is controlled or substantially controlled by a restricted party. Only by understanding the "equity ownership chart" can we avoid inadvertently engaging with restricted affiliates.
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Second, export control compliance must be integrated with sanctions compliance. Since BIS drew on OFAC’s long-standing practice, enterprises should integrate export control risk control measures into the existing trade sanctions compliance framework to achieve full-chain and gap-free coverage. From supplier selection and customer screening to contract terms, logistics, and payment, every step should be simultaneously examined for the influence of restricted shareholders. Internalizing export control requirements as part of daily operations is essential to thrive in the ever-changing regulatory landscape.
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Finally, rapid response and upgraded internal control are critical. With the new rules effective immediately and a limited buffer period for companies (only 60 days and harsh conditions), Chinese companies must quickly upgrade their internal processes, IT systems, and personnel training if they wish to maintain normal trade with U.S. [34]. This includes deploying equity investigation tools, adjusting the transaction approval process, and providing targeted guidance to business teams. In the face of the new "red line", any delay or complacency could result in severe consequences, and only proactive compliance and strict adherence to requirements can minimize risks.
In summary, the implementation of the BIS "50% rule" marks a new stage of more refined and comprehensive coverage of U.S. export controls. Chinese enterprises should take this opportunity to re-examine their global operational compliance strategies and plan ahead to ensure a steady progress in international trade. As BIS officials put it, the rule changes are to make export controls truly effective[35]. In the face of this trend, strengthening compliance is the only way to maintain an advantage in today’s complex and shifting international business environment.
References:
[1] [35] Department of Commerce Expands Entity List to Cover Affiliates of Listed Entities
[2] [3] [5] [6] [21] [22] [26] [28] Expansion of End-User Controls to Cover Affiliates of Certain Listed Entities
https://public-inspection.federalregister.gov/2025-19001.pdf
[4] [9] [15] [17] [23] [27] [29] [30] [31] [33] US Expands Export Controls with Long-Awaited ‘50% Rule’ — Here’s What To Know | Kharon
https://www.kharon.com/brief/bis-50-percent-rule-entity-list-meu-export-controls
[7] [8] [18] [19] [20] BIS Expands Export Restrictions to Foreign Companies 50% or More Owned by Listed Entities
[10] [11] [12] [13] [14] [16] [24] [25] [32] Entity List FAQs
https://www.bis.gov/media/documents/entity-list-faqs.pdf
[34] BIS Adopts ‘50% Rule’: Key Takeaways for Trade Compliance – Publications
[36] Department of Commerce Expands Entity List to Cover Affiliates of Listed Entities
