Chinese official statistics on foreign investment in China have indicated that Hong Kong has been the biggest source of inbound foreign investment in the mainland China. In addition to the common advantages of having an offshore structure, namely, easier transfer of equity interests in the Chinese entity, better financing access and higher appraisal of Chinese assets, the decisive factor for considering Hong Kong over other offshore hotspot like Cayman and BVI is the income tax favorable treatment made available to HK by the mainland China, a unique advantage enjoyed only by Hong Kong.
Tax benefit
Hong Kong also has the lowest corporate income tax rate in China at 16.5 per cent. In comparison, the PRC has a standard corporate income tax rate of 25 percent. By using transfer-pricing techniques, a PRC foreign-owned factory can sell its products to its Hong Kong holding company at a low price, which in turn can sell the products to third-party foreign customers at a higher price. By this means, a larger portion of the pro?ts can be realized in Hong Kong and will therefore be taxed at the lower Hong Kong rate. In terms of the repatriation of pro?ts from the foreign company’s perspective, the repatriation of pro?ts from China to the foreign jurisdiction is generally the same whether the pro?ts ?ow directly from the PRC entity or through a Hong Kong intermediary. The foreign parent company with a Hong Kong holding company, therefore, has the option of keeping the pro?ts in Hong Kong; such funds can be reinvested for other offshore purposes by the Hong Kong Company. Another benefit is that HK company is not required to declare taxation to HK government for its dividends made from China company.
Legal system benefit
A JV or WOFE established in China, will, of course, be subject to PRC law. If a Hong Kong holding company is used, agreements with third parties can be signed by the Hong Kong holding company which will be governed by Hong Kong law. Companies may ?nd that new customers may also take comfort in the fact that agreements are signed in Hong Kong as opposed to China, as Hong Kong is seen as a lower risk jurisdiction. Hong Kong’s legal system remains based on the rule of law. Its courts are independent of the government and are open to the public. Another unique opportunity may soon arise as Hong Kong; the mainland authorities are currently negotiating a reciprocal enforcement of judgments agreement that, when adopted, will be an additional advantage to executing contracts in Hong Kong. The result will be that Hong Kong judgments, unlike those of any other jurisdiction, will be recognized and immediately enforceable in the PRC.
Restructuring benefit
Using a Hong Kong holding company also affords greater ?exibility in the case of restructuring the mainland entity. Transfers of ownership of Hong Kong companies do not require much approval and can be done immediately. While Transfers of ownership of other foreign company will be time consuming and vetting of transfer agreement would be required.
Another benetfit is that transfer tax must be paid for the transfer of an interest in a PRC entity, whereas Hong Kong only levies a 0.02per cent (on net asset value) ‘stamp duty’ on the transfer of shares. The result is that a foreign company that wishes to sell or restructure its holdings in a PRC entity can do so much more easily and quickly if it has the option of carrying out such sale or restructuring at the Hong Kong holding company rather than at the PRC company level.
Liability issues
Inserting a holding company between the parent and the WFOE also affords the parent company some protection from liability. On the mainland, the corporate veil is lifted much more easily than in western jurisdictions. By using a holding company between the foreign parent company and its PRC WFOE or JV, the foreign company can insulate itself to some degree if problems arise at the WFOE or JV level. In this situation, the Hong Kong holding company will be held responsible rather than the foreign parent company.
Ease of registration
One other simple advantage of using a Hong Kong company is that Chinese authorities are very familiar with Hong Kong companies and Hong Kong corporate documents (not to mention the fact that Hong Kong companies can be established with both Chinese and English articles of association). Both upon the set up and at certain other times, the WFOE or JV will be required to submit the corporate documents of its parent company to the PRC authorities. If the parent company is a Hong Kong company, the local PRC authorities will recognize the documents and will have an easier time processing them than would be the case for jurisdictions they have less exposure to. This makes the incorporation process (and to a more limited extent the ongoing operation) of the PRC entity more efficient.
Benefts granted by PRC government
In the last number of years there has been a concerted effort by the PRC government to integrate the economy of Hong Kong into China (particularly with the so-called ‘Pearl River Delta’13). The Chinese government has actively looked at ways to make it easier for Hong Kong companies to do business in China. The most obvious example of this is the so-called ‘Closer Economic Partnership Agreement’ (CEPA) that was signed between Hong Kong and the mainland on29 June 2003.
Free Foreign Currency Circulation
Some foreign countries will have strict foreign currency restriction when they use the foreign company to do the investment in China, while in HK, it is very easy and convenient to solve this problem if you keep a company there and open a corporate bank account, since HK does not have much limitation to foreign currency transfer, the invest capital can be transferred from HK to China very quickly without any approval steps.
Hong Kong has historically been a gateway to China. Despite the rise of major financial and trading centers in the mainland (Shanghai, Shenzhen, Beijing, Guangzhou etc.), the city has remained attractive for foreign companies expanding into the region because of its free market system, clean government, low taxes, world-class infrastructure, skilled workforce and international lifestyle, among other advantages.
For China residents, especially foreign nationals, incorporating in Hong Kong has always been a very strong alternative to setting up a business in a mainland Chinese city, where start-up. Consulting and trading are two areas where using Hong Kong has become a trend.
Consultants in China can use their Hong Kong company to bill their customers, both in China and overseas. For their China customers, providing services as company would definitely be better perceived than doing it as an individual. For international clients, one can provide China-related consulting services by using a Hong Kong company, which technically is part of China, without the price tag that comes with incorporating in mainland China.
Sole traders living in China can use a Hong Kong company to receive payments from international clients and pay their Chinese suppliers. Considering that China doesn’t tax offshore profits, and mainland China is considered offshore, this is a very attractive solution to conduct international trade without the need to rent and operate an actual office.
There are disadvantages for using Hong Kong companies to operate in China however. The first one would be the inability to receive RMB payments and bill your Chinese customers in RMB. Indeed, Chinese firms and individuals will require in most cases to pay in Chinese Yuans (or RMB, the official currency), and will need an official tax receipt (“fapiao”) to justify their expenses in their accounting records. A Hong Kong company is legally a foreign company in mainland China and as so is not able to issue such invoices. Furthermore, Chinese Yuans/RMB cannot be sent from mainland China to your Hong Kong company bank account, meaning the need for your customers to change their money into USD/HKD first which can be a burden.
Another disadvantage would be the visa and other tax/legal issues if you live in China. As we said earlier, a Hong Kong company is considered a foreign company in China and as does not entitle the owner for a residence permit in mainland China. In face of the increasing tightening of the visa regulations in mainland China, this may mean frequent trips to Hong Kong or even to your home country. This can be solved however when you set up a representative office for your Hong Kong company in a Chinese city
We are experts in Hong Kong company registration, and will get your Hong Kong company up and running with the minimum of hassle for you. You do not even need to be in Asia for us to do this for you!
Contact Tom Lee now for setting up your Hong Kong company
Email: tomlee@tommyconsulting.com,
tomlee_cn@163.com,
WhatSapp/Wechat/Cell Phone: +86 18926401128, Skype: tomleeli
Tel: 86-755-25809219,Fax: 86-755-83256658
WhatSapp/Wechat/Cell Phone: +86 18926401128, Skype: tomleeli
Tel: 86-755-25809219,Fax: 86-755-83256658
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