Affiliates Rule Returns on 10 January 2027: Asia's Semiconductor Sector Faces New Compliance Demands
Updated: 6 hours ago
By Roderick Mackenzie-Smith, New York Attorney / Hong Kong Solicitor / England & Wales Solicitor
Partner, David Cameron Law Office (DCLO)
On 29 September 2025, the United States Department of Commerce, Bureau of Industry and Security (“BIS”) announced the introduction of the 50% affiliates rule (“Affiliates Rule”) into the Export Administration Regulations (“EAR”). Although the equivalent rule has long existed in U.S. sanctions practice, this was the first time it was formally incorporated into the export control framework. BIS subsequently suspended its application for twelve months to reflect the U.S.–China Busan Agreement of 30 October 2025. That suspension was further extended by two months on 5 November 2026, and is now scheduled to end on 10 January 2027, meaning the upcoming deadline will mark the first real application of the Affiliates Rule in practice, unless the suspension is extended again.
The Affiliates Rule will not only affect buyers and sellers, but almost every participant in Asia’s consumer and advanced semiconductor ecosystems. For equipment and tool makers, manufacturers, distributors, brokers, insurers, logistics providers, and financiers alike, this represents a sector‑wide legal and compliance turning point.
From Targeted Designations to Structural Coverage
Historically, BIS additions to the Entity List have been intentionally targeted actions. Only the named entity was restricted, which meant its subsidiaries or affiliates which were not specifically listed could continue trading. Some companies exploited this by creating new subsidiaries or affiliates to sidestep restrictions.
The application of the Affiliates Rule is designed to close that loophole. Its effect, however, will be far broader. Restrictions will automatically extend to any affiliate that is 50% or more owned, directly or indirectly, individually or in the aggregate, by an entity on the Entity List, thereby potentially sweeping in a vast number of entities which were not originally intended by BIS to be listed. For Asia’s semiconductor sector, this shift from targeted designations to structural coverage multiplies the legal and compliance risk throughout the supply chain and its service providers.
Why Hong Kong’s Semiconductor Market Is Especially Relevant
The Affiliates Rule will apply worldwide and across all industries, but Hong Kong’s semiconductor market is especially relevant because of its position at the intersection of global trade and finance. The city’s strengths as a free port, logistics hub, and capital market centre make it a natural gateway for semiconductor flows between mainland China and international partners. As a result, majority‑owned affiliates of mainland semiconductor companies are deeply integrated into Hong Kong’s trading, financing, and professional services networks.
According to “Booming AI chip trade seals Hong Kong's role as gateway to China,” by Bloomberg News, Hong Kong re‑exported more than US$124 billion worth of semiconductors to mainland China in the first five months of 2026, accounting for 52% of China’s total chip imports.
Hong Kong functions primarily as a trading hub for semiconductors, with brokers, distributors, financiers, and logistics providers facilitating flows between mainland China and global markets. By contrast, mainland China is both a consumer and a producer, with numerous design houses, manufacturers, and end users driving demand and capability. The Affiliates Rule will connect the two markets: once it is applied, Hong Kong’s trading ecosystem will be pulled further into the EAR compliance net through its extensive engagement with mainland affiliates, magnifying the impact far beyond the relatively small number of Hong Kong entities which are specified in the Entity List. Far from being a vulnerability, this reflects Hong Kong’s central role in global semiconductor commerce, which is precisely why awareness and preparation are so critical in Hong Kong.
Division of Markets: EAR99 vs. ECCN Controlled Semiconductors
Hong Kong’s semiconductor market operates in two parallel streams. On one side is the consumer chip trade in “commodity” semiconductors, which has traditionally moved quickly and with simplified processes. If made outside the U.S., these semiconductors are generally subject to the EAR (typically as EAR99) only where controlled U.S. origin content exceeds the 25% de minimis threshold. On the other side is the advanced chip trade in Export Control Classification Number (“ECCN”) classified, industrial-grade and high-performance semiconductors. Generally, if made outside the U.S., these advanced semiconductors are caught within the Foreign Direct Product (“FDP”) rules with higher EAR compliance costs and EAR licensing and exemption requirements applying, in many cases, to the entire supply chain, often including the suppliers of the equipment and tools with which the advanced semiconductors are manufactured (see below).
The new Affiliates Rule changes the landscape for both these categories. While direct sales to listed entities were always prohibited, the Affiliates Rule extends restrictions to 50% or more owned affiliates. This means that the increased risk from the proliferation of listed entity affiliates applies to both the consumer and advanced semiconductor categories. The practical concern is not limited to brokers or traders, it will also be felt acutely by financiers, insurers, and logistics providers, whose ability to release funds, provide coverage, or clear shipments depends on counterparties proving they are not affiliates of listed entities.
For trades in commodity semiconductors within EAR99, the impact of a listed entity or affiliate being involved in the transaction as a purchaser, intermediate consignee, or end‑user, is to make that transaction unlawful without a licence or a licence exception. This means many market participants who have not previously considered the EAR will need to perform EAR analysis of U.S. origin content and counterparty due diligence for most of their trades.
For trades in advanced, ECCN‑classified semiconductors, EAR compliance depends on the integrity of all transactions across the supply chain. Accordingly, the involvement of a listed entity or majority‑owned affiliate as purchaser, intermediate consignee, or end‑user can cascade both downstream and upstream. Where an upstream supplier has knowledge, or reason to know, of a possible downstream affiliate relationship, that awareness extends the compliance obligation and may render the upstream transaction non‑compliant and unlawful absent a licence or licence exception. In practice, this means that the presence of a listed affiliate anywhere in the chain, combined with upstream knowledge of that affiliation, can expose the entire supply chain to non-compliance and unlawfulness risk.
Licence review policies vary depending on the specific Entity List entry, but for many Chinese semiconductor entities a presumption of denial applies, and licence exceptions are generally unavailable.
Upstream Impact on Semiconductor Manufacturers
Hong Kong’s semiconductor supply chains originate in fabrication hubs such as Taiwan, South Korea, Singapore, and Malaysia. Advanced, ECCN classified semiconductors covered by the FDP rules, produced in these jurisdictions are routinely routed through Hong Kong for financing, logistics, and re‑export. Once the Affiliates Rule takes effect, advanced semiconductor supply chains originating in these fabrication hubs, especially those passing through Hong Kong, will also be exposed to the increased risk of listed entity affiliates. This means that fabricators, Outsourced Semiconductor Assembly and Test companies, and distributors in Taiwan, South Korea, Malaysia and Singapore must anticipate and mitigate increased EAR risks even before their products leave the country of origin.
Upstream Impact on Semiconductor Manufacturing Equipment Suppliers
For suppliers of advanced ECCN classified Semiconductor Manufacturing Equipment (“SME”), the Affiliates Rule will have direct commercial significance even though they are not the exporter of the finished semiconductor. The Entity List FDP rule covering SME also includes the advanced semiconductors produced using the SME. This exposes SME suppliers to increased risk: if they know or have reason to know that a downstream customer is, or may become, an affiliate of a listed entity, their upstream sale of SME can be rendered unlawful absent a licence or licence exception. In effect, affiliate proliferation extends the reach of Entity List FDP restrictions into the SME supply chain.
Financiers, insurers, and logistics providers may refuse to support shipments of tools if there is a credible risk that the resulting semiconductors will be diverted to an Entity List affiliate. In practice, this will require advanced equipment and tool suppliers to adopt contractual warranties, supply‑chain screening, and diversion monitoring to protect their access to finance, insurance, and logistics.
Risk Mitigation Strategies
Participants throughout Asia’s semiconductor market can take practical steps to protect themselves before the Affiliates Rule takes effect:
Legal strategy: Engage specialist U.S. and locally qualified legal counsel to:
advise on the complex issues resulting from the extra‑territorial impact of the EAR and the Affiliates Rule in Hong Kong, such as enforceability of warranties and recognition of foreign regulatory regimes;
interpret beneficial ownership disclosures from IFRS filings and companies registries, provide legal opinions on counterparty ownership and affiliate exposure and deliver reliance documents for financiers’ credit committees;
incorporate EAR‑related conditions precedent, warranties, covenants, and compliance undertaking clauses into supply, financing, and insurance agreements so that obligations are clearly defined and enforceable; and
structure EAR‑related force majeure and material adverse change clauses, indemnities and termination rights that allocate liability for shipment disruption, insurance denial, reputational damage, and financial exposure, thereby strengthening contractual certainty and protecting commercial interests.
Compliance strategy:
Require counterparties to certify awareness of Foreign Direct Product Rule and Entity List restrictions.
Conduct layered screening by combining denied party checks with ownership tracing to capture both direct and indirect risks, while recognising that screening alone is not sufficient and that the Consolidated Screening List of the International Trade Administration of the Department of Commerce will no longer be complete because it will not list the affiliates.
Monitor counterparties continuously by screening for red flags not only at onboarding but throughout the transaction lifecycle.
Train and monitor teams in finance, logistics, and compliance to interpret screening results and escalate red flags.
A Temporary Reprieve
On 23 September 2026, U.S. Treasury Secretary Scott Bessent announced that the United States and China had agreed to extend the Busan Agreement for two months, until 10 January 2027, and on 5 November 2026 BIS issued a final rule adopting this extension in relation to the Affiliates Rule. This extension appears to reflect both governments’ expectation of the impact that the Affiliates Rule may have on relevant U.S.–China trade flows, with semiconductors forming a major part of that exposure. The shorter, two-month extension may reflect heightened concerns over the rapid pace of AI advancement.
Conclusion
The first real application of the Affiliates Rule is imminent. For Asia’s semiconductor market, this is not a narrow issue for buyers and sellers but a sector‑wide legal and compliance turning point.
Integrating export control checks into risk discipline, alongside AML and sanctions compliance, is essential. By embedding specialist U.S. and local legal advice into risk planning and trade documentation, semiconductor market participants can move beyond compliance to build resilience. Proactive legal structuring ensures that trade financing, insurance, and logistics arrangements remain secure, while contractual clarity protects against shipment disruption, reputational damage, and financial loss. In this way, participants in Asia’s semiconductor market, including those in upstream fabrication hubs whose products transit through Hong Kong, can approach the Affiliates Rule not only as a challenge but as an opportunity to reinforce their commercial strength and credibility.
If you would like further information, please contact Roderick Mackenzie-Smith: roderick.mackenzie-smith@dc-lo.com.
Roderick Mackenzie-Smith, Partner
Roddy is an experienced international corporate, commercial, corporate finance and regulatory lawyer. Prior to joining David Cameron Law Office, Roddy was a partner of a well-known Hong Kong law firm for more than four years and he was a senior lawyer at major international law firms including Linklaters and Clifford Chance in London and New York. Learn more about Roddy here.
