There are four types of bonded warehouse:

1. A public bonded warehouse, operated by a third party, where companies can deposit their goods.
2. A private bonded warehouse, used exclusively for the storage of goods belonging to or consigned to the proprietor.
3. A special bonded warehouse, used to store hazardous goods, goods containing liquids, raw materials, spare parts (known as a Technical Service Station), and other goods with a special purpose.
4. Bonded logistics parks, also known as special economic zones. These are a more expensive option than a public bonded warehouse as they cover a greater geographical area, but feature tax reimbursement upon goods entry.

By using a bonded warehouse, our client could fulfil its commitments to its customers in China with a shorter lead time and lower cost, without the need to disclose suppliers’ information. It also allowed the company to defer duty payments and taxes associated with global trade, creating inventory and cash flow efficiencies.  

In this case, some Chinese customers requested a shorter lead time. We managed this by using a special U-turn operation approach, whereby the exported goods from the Chinese vendor to bonded warehouse are subsequently re-imported to a domestic customer within a 48-hour window.   

The operation of such an action, however, requires us to pay attention to some issues in advance to mitigate additional taxes, disruptions, and logistical issues.

MNE Group’s HK companies with no substantial economic activities will be affected

This new regime concerns Hong Kong companies that are part of a MNE Group.

A MNE Group is defined as a group that includes:

• at least one entity that is not located in the jurisdiction of the ultimate parent entity, or
• at least one permanent establishment that is outside the parent entity’s jurisdiction

The new regime does not apply to:

• Individuals
• Companies that are not part of a multinational group
• Regulated financial entities that handle passive income of affected companies, or
• Entities covered under the Preferential Tax Regime, such as shipping and aircraft leasing companies.

Under the regime, passive income received by a qualifying company – such as interest, dividends, disposal gains from the sale of shares or other equity interests, and income from intellectual property – will be deemed as Hong Kong sourced and taxable.

Meet the economic substance test to qualify for tax exemption

The new regime continues to allow taxpayer to claim tax exemption based on fulfilling criteria, or to apply specific exemption requirements:

• Non-IP passive income: Companies with substantial economic activities in Hong Kong
• IP-related income that meets specific nexus requirements, and
• Dividends and equity disposal gains that meet the participation requirements

The key question for companies is the ‘economic substance’ test, which will be used to assess the extent of a company’s operations and activity in Hong Kong. To meet the test, the company will need to employ an adequate number of qualified employees and incur an adequate amount of operating expenditures in carrying out relevant economic activities onshore.  A pure equity holding company might further qualify under a “reduced economic substance test”, fulfilling compliance requirements under Companies Ordinance.

Exemption for dividend income or gains from the sale of equity interests can be claimed through the participation requirement, provided the company is:

• Resident in Hong Kong, or has permanent establishment in Hong Kong
• Holds at least 5% of the investee company’s share or equity interest, and
• Has held the investment for at least 12 months.

However, certain anti-abuse rules are in place to disallow the participation exemption. The rules include: 1] Switch-over rule (to make sure tax is paid somewhere); 2] Anti-hybrid mismatch rule (to avoid double tax benefits); 3] Main purpose rule (to avoid aggressive tax planning).

RCEP: A Milestone for Hong Kong

The Regional Comprehensive Economic Partnership (RCEP), signed in 2020, is the world’s largest free trade agreement. In September, it was announced that Hong Kong, with the support of all 10 ASEAN members, has applied for fast-track admission. Hong Kong becoming a member of the RCEP re-affirms China’s commitment to strengthening the city’s status as an international trade centre.

John Lee Ka-chiu, Chief Executive of Hong Kong, has said that the city will provide ‘enormous value’ to RCEP, but what will this mean in practice for you?

Taking advantage of improved tariff rules and broader market access to East-Asia will further boost Hong Kong’s unique position as a trading hub for the APAC region. However, RCEP is a double-edged sword for European firms, as it will increase both market access and competition. Locally sourced products by Hong Kong trading companies will become cheaper because of lower tariffs, for example, but the Chinese market for high-end goods is likely to become more competitive.

Almost a third of global trade stems from the 15 members of RCEP and the agreement has created a gateway to investment opportunities in Asia Pacific markets. The agreement simplifies existing trade agreements and unifies customs and rules of origin procedures, which will mean lower supply chain costs for multinationals.

While the agreement is yet to be fully implemented, it is clear that greater economic integration will benefit RCEP members and foreign companies. But it will also increase the complexity of business. Companies that are already active in Asia should be looking closely at their global production and sales strategy to make sure that their supply chain and manufacturing strategies are suitable for a RCEP world.

Unique E-commerce Environment

China’s online marketplaces are highly dynamic and vastly different from the US and Europe. Companies looking to enter the market via E-commerce channels should be wary of not underestimating the cost and overestimating the return.

The cost items to consider in your E-commerce budget are:

• Content creation and advertising.
• KOLs and influencers.
• Logistics and fulfilment. 
• Customer service.
• Platform fees.

As the budget allocation is highly dependent on brand recognition and maturity, a worldwide known brand will allocate less capital on KOLs as opposed to a midsize brand that requires more public exposure/awareness.

China’s E-commerce Environment 

Policy Changes Affecting FIEs 

Key to the goal of greater self-reliance is the Chinese government’s Dual Circulation Strategy, the emphasis of which is on domestic production and consumption as the catalyst for growth and stability. 

This policy consists of two circular economies that aim at increasing resilience against external disruptions. The internal circle focuses on strengthening the domestic market by:  

• Increasing the role of consumers by enabling greater access to e-commerce.
• Fostering technological focus through dedicated clusters (e.g., Greater Bay Area).
• Pushing for “Made in China 2025″ to improve the technological level of locally produced content.

The external circle refers to China’s cross-border economy through: 

• Integration through trade agreements such as the Regional Comprehensive Economic Partnership (RCEP).
• Economic reforms and liberalisation.
• RMB internationalisation.

The focus on self-reliance is evident in local content requirements – measures that limit market access for imported goods and promote the development of local brands. For instance, if we look at China’s growing healthcare market, we see an increase in locally produced medical devices. For many industries, localised production and sales – “In China For China” (ICFC) – becomes progressively the only viable approach to stay competitive in the mainland. 

However, the government is not closing doors to foreign investment. FIEs in “encouraged industries” can be incentivised through tariff exemptions on imported equipment, lower corporate income tax, relaxed regulation of land use and access to preferential land prices.

In the Dual Circulation concept, domestic and international economies are connected through special economic zones, which includes Free Trade Zones, bonded warehouses, and special administrative regions such as Hong Kong. These areas play a key role in attracting foreign investments into China. 

1. Rethinking Your Sourcing Strategy  

Pre-Pandemic Challenges Remain 

China’s COVID lockdowns are inflicting a heavy toll on businesses and have disrupted supply chains. While we expect restrictions to ease over time, other challenges remain.

Even before the pandemic supply chains faced geopolitical and environmental disruptions as well as growing requirements to comply with environmental, social, and corporate governance (ESG) goals.

Developing a dynamic sourcing strategy must be a strategic priority for European-based companies operating in the APAC region.  

Taking Advantage of the RCEP 

Many of our Clients are shifting their gaze from China as a single-sourcing solution to alternative markets and suppliers in the region amid concerns around trade tariffs, rising labour costs and sustainability. Trade agreements such as the RCEP will enable companies to make use of a “China+1” sourcing strategy more systematically.    

Multiple sourcing locations can help spread risk by:

• Building flexibility into supply chains, allowing companies to pivot in response to unforeseen disruptions or changing consumer demands.
• Enabling faster resolution of regional issues, with local managers better placed to react to changing market conditions.
• Encouraging healthy competition between sourcing organisations.

However, diversification brings potential problems. As supply chains become more complex, developing a strategy to ensure streamlined operations and compliance is crucial. Each sourcing location is separated not only by location but by different regulations and priorities. It is vital to introduce digitisation across the supply chain to increase transparency and facilitate collaboration between all APAC offices and company headquarters.   

New Sustainability Standards

From 2023, large SMEs and MNCs based in Germany should comply with the German Supply Chain Law(GSCL). Similar laws are expected to be introduced in other EU member states.

Directly affected companies have to ensure that suppliers across all tiers of their supply chain remain compliant. This means establishing effective risk management strategies and reporting processes.  

Fiducia can help you identify how the new regulations will affect your company and provide advice to minimise compliance risks.   

A market leader in the development and distribution of power and garden tools, our Client processed sales orders valued at more than USD 500m in 2021.   

As part of a partnership spanning over 25 years, we support our Client with non-core business processes like order and shipment handling, AR/AP, and money collection.

We lay a constant focus on improving operational efficiency by jointly reviewing existing processes and digitising systems.   By adopting Fiducia’s end-to-end order management service, the Client benefited from:   

• Highly efficient, lean operations.
• Minimal offshore company management effort.
• Flawless execution of instructions.    
• Unbiased professional service to all parties.
• Continuous access to specialised HR services.

“The cooperation between Einhell AG and Fiducia has been a great pleasure from its very beginning in 1993. We are particularly pleased with the correctness Fiducia has shown and exercised from day one.”     

— Josef Thannhuber, Board of Directors, Einhell Germany AG    

How can Fiducia help?

With a strong presence in five key locations, Fiducia’s executive search team can act as a trusted local partner to assist companies headquartered outside of China with high-level recruitment.

Our consultants engage closely with each client and candidate to ensure understanding, confidentiality, and trust throughout the process. Contact us now to find out how we can provide tailored support for your business.

Connect with our expert teams, who can identify best-fit banks and help you prepare the necessary documentation for your application. 

Key considerations for business owners  

1. Documentation: Banks in Hong Kong and Singapore will carry out an internal risk assessment to determine the financial stability of a company. The greater the risk posed, the greater scrutiny a company will face. Typically, companies are expected to provide: 

• Business plan 
• Tax-related information 
• Certificates of incorporation 
• Articles of association  
• Financial statements and financial standing forecast 
• Owner identification documents 
• Details of corporate ownership and management structures 

2. UBO checks: In both jurisdictions, banks require Ultimate Beneficial Owners (UBOs) to undergo Anti Money Laundering (AML) and Counter-Financing of Terrorism (CFT) checks to comply with financial regulations. UBOs must also comply with international tax regulations like the Common Reporting Standard (CRS), and Foreign Account Tax Compliance Act (FATCA). 

3. Overseas owners: Business owners residing overseas are usually required to be present for a face-to-face meeting in Hong Kong and Singapore to open an account, although some banks in Singapore are now allowing video communications. An existing relationship with the bank in another territory may also be beneficial. 

Annual bank account maintenance 

In Singapore, annual bank account reviews are not mandated by the Monetary Authority. However, in Hong Kong, it is now a standard practice among all financial institutions. Companies must provide up-to-date legal and financial documents or risk hefty fines and account closure. 

How can Fiducia support you?  

Fiducia Management Consultants supports numerous international businesses to handle applications and conduct annual reviews.  

Bank account opening and annual review  

• Liaise and arrange appointments with banks
• Verify and gather due diligence documents
• Arrange certification of required documents  

Trusted bank signatory  

• Provide bank signatories to sign banking transactions

Provision of company secretary and registered office  

• Act as Company Secretary for the company, a mandatory requirement in Hong Kong and Singapore
• Keep track of annual filing requirements, such as Annual Returns and Business Registration
• Provide a nominee director

Tax services   

• Authorised tax representative
• Corporate health check to ensure fiscal compliance
• Individual cross-border tax advisory
• Individual income tax handling

Contact us to get support from our knowledgeable Corporate Services and Tax teams, based in Hong Kong and Singapore. 

• Cost Factors: Labour and distribution costs, foreign investment incentives, access to free trade zones, e.g. RCEP.
• Business Environment: Availability of skilled labour, infrastructure and logistics, distance to market.
• Risk Factors: Political stability, environmental concerns, the social and cultural environment for foreign employees.