Using a Hong Kong Holding Company

to Start a Business in China

Recently, many foreign companies and investors decide to set up a  “special purpose vehicle” (SPV) or holding business in Hong Kong to start a business in China.

Using-a-Hong-Kong-Holding-Company-to-Start-a-Business-in-China - China WFOE setup

This approach gives their corporate structure more flexibility and higher security. Foreign investors have often selected to set up a holding company or SPV in Hong Kong.

There are various reasons for this choice-Hong Kong is close to China, a key hub in Asia, with a highly developed and transparent legal financial system. In addition, Hong Kong remains one of the most appropriate company locations, ranking fourth out of 190 countries in 2019, much greater than China, which was only ranked 48th.

While there have been some recent concerns about tightening anti-money laundering regulations in Hong Kong, these changes offer greater certainty to foreign investors than legislation that guarantees financial system integrity and stability.

Furthermore, to encourage investment by SMEs, Hong Kong has introduced a two-tier profit tax scheme.

The reality is, while the company climate in Hong Kong is becoming increasingly difficult for foreign investors, Hong Kong still retains many important benefits for companies, stemming from its free economy, low tax rates, and easy-to-understand and transparent regulation.

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Why Start a Holding Company in Hong Kong?

There are three main advantages to opening a holding company in Hong Kong, especially if investors want to set-up a Wholly Foreign Owned Entity (WFOE) in China.

Benefiting from Hong Kong’s Corporate Structure

A holding company in Hong Kong can act as a solid foundation for any investors looking for a potential avenue into China’s markets. An entity in Hong Kong can provide such corporate structure, giving investors much more flexibility when it comes to managing their finances in China.

For example, a US company that owns an entity in Hong Kong can then benefit from any China based assets or entities that the Hong Kong company owns as a Wholly Foreign-Owned Enterprise (WFOE).

Under the same example, the US company can use its Hong Kong entity that manages these China-based assets to sell any China based entities through a variety of methods, such as disposing its shares through the Hong Kong company. Of course, in recent years, the People’s Republic of China has enacted strict laws to clamp down on indirect sales of taxable entities within the country. Thus, it is important to remain aware of any applicable policies.

Favorable Taxing Structures

Hong Kong has a much more favorable taxing structure comparable to China, as it adopts a territorial taxation base.

Everyone (including companies, partnerships, and sole proprietorship) who engages in commercial or professional business within Hong Kong are subject to pay a profit tax. These profit taxes cover any profits derived from any economic activity that takes place within Hong Kong. Thus, any profits made from economic activity outside of Hong Kong would not be considered taxable.

The tax rates within Hong Kong are also comparatively very low rates, Embedded entities within Hong Kong are subject to pay profit taxes on a two-tier system.

The first 2,000,000 HKD of profits earned is subject to an 8.25% profit tax, while any profits earned after this margin will be subjected to a 16.5% profit tax. This is considerably lower when you compare it to the whooping 25% Corporate Income Tax (CIT) rate that China imposes. Furthermore, both capital gains and income are not subjected to a tax.

Hong kong also has a very extensive tax treaty network that does not impose upon withholding taxes on either dividend or interest payments.

In the recent years, China has concluded a double taxation agreement (DTA) with Hong Kong. This treaty provides a preferential withholding tax rate on dividends of up to 5%, provided that certain conditions are met. If these necessary conditions are met, then this can greatly benefit HQ or Hong Kong efficiently, as profits can be repatriated, preventing withholding losses.

Offshore Cash Holdings

If a foreign investor wanted to direct a Foreign Invested Enterprise (FIE) abroad, then a holding company is one of the best options to accomplish that task, effectively eliminating the need to return the profits to the parent company.

Funds can then be transferred and grouped into an offshore holding abroad (FIE), where the potential transaction taxes are often lower than where it was initially stored.

Hong Kong would be one of the best options for a holding company, as it is one of the largest offshore RMB clearing centers. This implies that Hong Kong is one of the best places to manage RMB denominated finances, which includes managing receipts of dividends and other commission of WFOEs based within China. This allows the holding company to acquire cash pooling functions.

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Ensure Holding Company’s Compliance

Considering the Organization for Economic Co-operation and Development (OECD) and BEPS (Base Erosion and Profit Shifting ) program, tax officials around the globe are repressing companies who conduct transactions without adequate business substance and exist to primarily receive a tax benefit / benefit.

For instance, China has rigorous anti-circumvention laws on indirect transfer of taxable assets.

It is thus important to remain aware of the various legislation upon the subject in order to avoid any unlawful actions. In almost all cases, the proper administrative and filing requirements must be adhered to, even for conducting indirect transfers with a valid commercial reason.

Recently, both Hong Kong and the People’s Republic of China formalized transfer pricing laws to guarantee that companies pay their fair share of taxes linked to their domestic legislation.

With the tightening of these regulations, alongside the increased scrutiny from the transaction tax commissions, a company must be careful in regard to its operations; it is always important to provide a justifiable business reason for a transaction, in order to make such actions legitimate.

Final Points of Discussion

Despite the clear benefits of setting up a holding company in Hong Kong, businesses should continue to remain cautious, ensuring further consider on what is the most suitable corporate structure for them, weighing the advantages and disadvantages, and also carrying out thorough research into the potential cost-benefit of such endeavors.

In addition, once a holding company is formed in Hong Kong, it is prudent to consult local financial advisors to guarantee that the company’s structure and entities meet the necessary legal legislation and regulations.

How Can FDI China Help You?

Starting a company in China can be very challenging task for any investors, especially given the amount of regulations and procedures that must be followed, losing valuable time and resources in the process.

FDI China can help you to quickly register a business in Greater China! We are a company that understands the processes needed in setting-up a company in Hong Kong and China, providing a whole range of company setup support services. Such services include both incorporating up a holding company in Hong Kong and a WFOE in China, plus any post-setup services that your company may need. These post-setup services include functions such as employee and tax management, as well as accounting and bookkeeping services. We take care of all the time-consuming and arduous tasks, so you can concentrate on running an effective business!

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