Structuring your China investment in a smart way

THIS OVERVIEW DEMONSTRATES HOW A HK COMPANY CAN BENEFIT YOUR CHINA INVESTMENT.

The German Business Magazine Wirtschaftswoche recently held a quiz on its website asking participants to name the ten biggest investor countries in China. The true answer was surprising as the top ten are Hong Kong (HK), British Virgin Islands, Japan, South Korea, USA, Singapore, Taiwan, Cayman Islands, Germany and Samoa. The reason why HK heads this list is because investors from Taiwan, HK or China use HK companies as a vehicle to invest in projects in China.

In many cases companies from Western countries still opt for the direct investment approach, be it in a subsidiary company (WFOE), or a Joint Venture without giving muchconsideration for possible alternatives. But there are some exceptions for foreign companies using HK companies.
Many investors experienced that setting up a company in China still presents formidable bureaucratic and regulatory obstacles, so it is not surprising that the recent "Doing Business 2009" study from the World Bank - which compares the ease of starting a business - sees China rank 151 out of 178 countries. The same applies for changes in the ownership structure. As a comparison, a change in the shareholding structure in China may take two months to accomplish whereas in HK it takes a few days. In practice this means that a change in the shareholding structure of the Chinese entity takes place in the HK Company only. Especially real estate and property in China are often owned by an offshore company who can change ownership through selling the HK holding company rather than a sale of the property.

Geographically and politically, HK is part of China hence providing clear advantages like proximity and language. However, its legal and business structure are distinctly different and valid until 2047. Combining the two jurisdictions for China investments may provide opportunities that are fitting for challenges which continue to exist.

Advantages of Using HK Companies

• Stronger legal security as HK's Company Law is based on the UK company law (this applies to Hong Kong's entire legal system).
• Setting up a company in HK is quick and straight forward. Set-up and maintenance costs are comparatively low.
• The law provides room for different shareholding classes, mortgages and lien on assets.
• Ease of changes in the shareholding structure ¨C be it a partial sale (e.g. taking on a partner) or an outright sale.
• Easier access to bank finance (an important aspect in light of China's current restrictions on the banks' credit policy)
• Dividends paid by a China entity to a HK based shareholder are taxed at a preferential rate of up to 5% (standard withholding tax rate is 20%) if the Double Taxation Agreement (DTA) criteria between HK and China are met.
• Dividends paid by a HK Company are tax free in HK (making use of existing DTAs can allow a tax free dividend transfer to the ulti- mate parent company).

» Latest News Index
» Subscribe Fiducia Newsletter