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When structuring your investment into China, it is not only important to consider different vehicles available in China (e.g. a representative office, a joint venture or a wholly foreign-owned enterprise) but also the jurisdiction through which the Chinese vehicles is held. You can use your existing company or set up a special purpose vehicle (“SPV”) to remove your venture risk. By SPV, you have a choice of using offshore jurisdictions (such as British Virgins Islands, Seychelles, Mauritius, Samoa or Labuan, etc.) or Hong Kong to hold the China investment. We would like to outline the differences between using offshore or Hong Kong companies as your China SPV:
Using Offshore Company as the Holding Company?
1. Advantages: i. Management and Administration. Offshore companies are famous for ease of administration and management. The fundamental obligation of operating an offshore company is to pay the annual government fee & registered agent fee and maintain accounting record at your choice of location. ii. Benefits.It may be possible to have profits held by an Offshore holding entity, tax free, prior to further repatriation to the parent company.
Ease of application depending on jurisdiction location. The holding company corporate documentation must be in Chinese for registration in China, jurisdiction such as Samoa has Chinese constitutional documents and Chinese embassy for documents authentication. Seychelles or Mauritius has Chinese embassy but B.V.I. does not have Chinese embassy yet.
2. Disadvantages: If you want the offshore company to maintain a bank account in Hong Kong, it may sometimes a lengthy process. You have to match with the right bank to open the bank account.
Some Chinese licensing authorities may sometimes reluctance to register the offshore company as the holding company of the China investment. Check before you decide the holding vehicle.
Advantages of using Hong Kong Company as the Holding Company? 1. Legal benefits. With the well establishment English common law system, foreign investors have advantages of entering into contractual obligation under Hong Kong law with independent judiciary. Hong Kong is a reputable international arbitration centre. It is at the advantage for foreign investors to enter into China market via Hong Kong.
Since 2006, an arrangement between Hong Kong and China enables the reciprocal enforcement of court judgments. The arrangement applies to final and conclusive financial judgments and to arbitral awards. That means businesses that choose to use the Hong Kong courts may have more confidence that judgments will be upheld in China. This is especially true for intellectual property (IP). Businesses operating in China may wish to register their IP rights through a Hong Kong holding company to ensure infringements are dealt with appropriately.
2. Potential tax benefits. When investing in China through a Hong Kong company, double tax agreement (DTA) between Hong Kong and China can reduce tax, on the condition that the HK company has business substance in Hong Kong, as follows:
3. Dividends. Dividends paid by a Chinese company to a foreign investor are subject to withholding tax at the rate of 10% unless reduced under a DTA. Under the DTA between Hong Kong and China, dividends paid by a Chinese company to a Hong Kong parent are subject to withholding tax at the reduced rate of 5%, provided the DTA conditions are met.
4. Interest and royalties. Interest and royalties received by a Hong Kong parent company from a Chinese subsidiary also benefit from the DTA – the maximum rate of withholding tax on both is reduced to 7% as compared to 10% to other jurisdictions.
In addition, Hong Kong is only subject to a corporate tax rate of 16.5% (net of expenses) if the profits derive and arise in Hong Kong. Hong Kong does not charge tax on dividends received by a Hong Kong company or withholding tax on dividends paid to shareholders (local or overseas).
5. Simple and cost-effective administration. Incorporating a company in Hong Kong is quick and easy. It can be completed within 24 hours and requires only one (1) individual director (additional corporate and individual directors may be appointed), one (1) shareholder, a HK company secretary and a HK registered office. No resident requirement for director and shareholder.
6. Non-Hong Kong residents can be directors of Hong Kong companies, and can establish accounts for their HK company. To service your China entity, funds would normally be channeled into China from this account via local currency changer.
Summary China has retained its top-three ranking in the 2017 edition of A.T. Kearney's Foreign Direct Investment Confidence Index and remains as a destination for global trading (sourcing business) and Investment.
Hong Kong has always been the preferred jurisdiction for structuring both China inbound investments. From January to July 2017, US$52.6 billion is invested via Hong Kong, which far exceeded direct investments into China by the top 2 Taiwan US$3.3 billion or the top 3 Singapore 2.8 billion (source: Investment Promotion Agency of MOFCOM).
Need Assistance INTERSHORES has over 20 years of corporate services experience and can assist you to set up your preferred structure. Please do not hesitate to contact us at info@intershores.hk or by whatsapp at (852) 6499 4686.
Whatsapp : (852) 6499 4686 Phone : (852) 2186 6936 Email : info@intershores.hk
Disclaimer: Whilst reasonable care has been taken in provision of information above, it does not constitute legal or other professional advice. INTERSHORES does not accept any responsibility, legal or otherwise, for any error omission and accepts no responsibility for any financial or other loss or damage that may result from its use. In particular, readers are advised to take appropriate professional advice before committing themselves to any involvement in jurisdictions, vehicles or practice.
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