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Whether substantially all of the legal entity’s activities involve or are conducted on behalf of a variable interest holder can be a quantitative analysis, a qualitative analysis, or both. This is a facts and circumstances evaluation.

A qualitative analysis would look at the activities of the legal entity and those of the company. Some strong qualitative indicators include:

  • Substantially similar operations;
  • Substantially all assets were acquired by the legal entity from the company, or are leased by the company to the legal entity;
  • Employees, related parties and/or de factor agents of the company are actively involved in management of the legal entity’s activities;
  • The company is obligated to fund operating losses of the legal entity;
  • Other investors in the legal entity have the option to put their interests to the company;
  • The company holds an option on the interests of other investors in the ┬álegal entity.

A quantitative analysis would look at the level of transactions between the legal entity and the company relative to the total amount of business conducted by the legal entity. For example, if the legal entity sells 80% of its output to the company, then the legal entity is probably operating substantially on behalf of the company.

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