Using a Hong Kong Entity to invest in China in 2023
Hong Kong tax regulations allow foreigners to register companies in Hong Kong which can be legally exempt from Hong Kong corporate income tax. Such entities can be registered with a paid-up share capital of only US$1 and are usually “paper companies”, that is to say business without any staff in Hong Kong.
Please read the page below for further details on the advantage of doing business in China with a Hong Kong holding company.
Why Hong Kong
- Hong Kong, which has been ranked the ‘World’s Freest Economy’ for over a decade, is a regional business hub in Asia. Hong Kong’s proximity to China, its similarities in terms of culture, social customs and language, and its international business environment, have made it an ideal base for foreign investors;
- The most common and efficient structure for foreign investment into China is a Hong Kong holding company. This holding company can be used as parent to the Chinese foreign investment enterprise as well as to structure other investments into the region;
- To structure a holding vehicle, Healy Consultants Group usually recommends to register a private limited company. It is governed by the Hong Kong Companies Ordinance, has its own independent legal personality and liability is limited to a shareholder’s subscribed capital;
- The Hong Kong holding company is fully liable for the China investment and protects your existing foreign (e.g. home country based) company from all liability;
- The Mainland and Hong Kong Closer Economic Partnership Arrangement (‘CEPA’), CEPA brings with new business opportunities to China, Hong Kong and foreign investors. By establishing business in Hong Kong, foreign investors would enjoy the CEPA benefits and tap in the opportunities of the China market.
10 Benefits of using a Hong Kong Offshore company
- Strong legal system
- Hong Kong has a stable, mature and accessible legal system, based on the familiar concept of English Common law and supported by a fully independent judiciary;
- Hong Kong is a leading center for international arbitration. Hong Kong’s courts are renowned for upholding arbitral decisions, and awards granted under Hong Kong arbitration are consistently recognized in jurisdictions around the world.
- Easy to set up
- Setting up a Hong Kong company is well regulated and very quick and simple. Within one week from receiving the due diligence, Healy Consultants Group can incorporate the company;
- The minimum issued share capital is only HK$1. It requires only one shareholder and one director and can be 100% foreign owned.
- Easy corporate restructuring
- Transferring or restructuring shareholdings in a Chinese company is a lengthy process that requires compliance with Chinese regulations and cooperation of government authorities as well as extensive documentary approvals as compared to Hong Kong that has a straight forward process of registration and filing;
- A Hong Kong company enjoys the ease and freedom of selling and reallocating shares to other parties.
- Financial Centre
- Hong Kong is a well-established financial center with a i) stable and efficient banking system, ii) a robust regulatory system and iii) an effective and clean government;
- Financing in Hong Kong is more accessible than in China, and there are a better varieties of options at hand. Hong Kong has very high standards in technology and security, and all major international banks are located in Hong Kong.
- No storage costs and less financial risk
- Using a Hong Kong Holding company allows the option of selling goods “Free On Board” from China. This has become a huge success factor for foreign companies.
- Lower risk of suppliers being disclosed
- To channel the business through a Hong Kong Company lowers the risk of Chinese suppliers being disclosed to customers overseas. When the final goods are shipped, all documents, labels, addresses are rewritten in Hong Kong so that customers as well as suppliers only know the Hong Kong Company, but not each other.
- Low tax jurisdiction
- The current profit tax rate stands at 16.5% in Hong Kong compared to approximately 25% in China;
- Hong Kong has no capital gains tax, tax on share capital, tax on dividends, tax on interest from financial institutions, value added tax (VAT) and estate duty;
- Hong Kong has signed a Double Tax Agreement (“DTA”) with China (1998, second protocol 2006) to prevent double taxation on income of a company that is incorporated in Hong Kong.
- Movement of capital
- There is no restriction on capital transfer in/out of Hong Kong as compared to China with restricted currency controls that is regulated by the State Administration of Foreign Exchange (SAFE);
- Hong Kong, banks allow and provide a wider currency selections (i.e. including USD, EUR, GBP, CHF, CAD, AUD, NZD, CNY, HKD, JPY, SGD) for companies to tailor their business operation needs as compared to China.
- Flexibility in managing exchange risks through Renminbi deposits
- Hong Kong is covered by the Renminbi trade settlement pilot scheme which allows companies to deposit RMB at participating Banks in Hong Kong;
- This provides companies with the possibility to deposit their RMB income in a safe and stable financial environment without being exposed to the risk of currency fluctuations.
- Intellectual Property protection
- An attractive feature of Hong Kong’s legal system is the protection offered to intellectual property (IP). This is more extensive and enforceable in Hong Kong than in China, and many businesses operating in China may wish to register their IP rights through a Hong Kong holding company to ensure infringements are dealt with appropriately.
- Strong legal system
Comparison Table: Investing Directly in China via a Hong Kong Holding company
Scenario 1 Scenario 2 Parent Company Directly investing in China Parent Company investing into China via a HK holding company China Operating Company Profit before tax 100 100 China CIT 100 x 25% = 25 100 x 25% = 25 Distributable dividend 100 – 25 = 75 100 – 25 = 75 Hong Kong Holding Company China withholding income tax NA 75 x 5% = 3.75 Distributable Dividend NA 75 – 3.75 = 71.25 Parent Company China withholding income tax 75 x 10% = 7.5 NA Total dividend received 75- 7.5 = 67.5 71.25 Overall China and HK tax burden 32.5% 28.75%
- The withholding income tax rate on dividends under China‘s domestic tax law is 10%;
- The withholding income tax rate on dividends is 5% under the double tax agreement between China and Hong Kong if the Hong Kong Holding Company owns not less than 25% capital of the China Operating Company;
- Hong Kong does not levy withholding income tax on dividends.