Hong Kong Incorporations for Mainland China Business

June 11, 2010 Posted by China Briefing Reading Time: 3 minutes

HONG KONG, Jun. 11 – Multinational companies looking at the Mainland China market often look at tax efficient or other legal ways to prepare and protect themselves from directly triggering bilateral interactions between the mainland and the ultimate parent company. In such instances, Hong Kong incorporations are a useful tool to utilize to “hold” a mainland China entity and take advantage of both financial and operational considerations in doing so.

The advantages of using a Hong Kong incorporation vary from the pragmatic to the financial. Here are several reasons why Hong Kong incorporations continue to be the investment vehicle of choice to hold mainland China-based investments.

Rule of law
Hong Kong has a transparency of law under the British-based system. As such, the domicile provides for British-based legal resolution and a “precedence” based system that will be familiar to most Western attorneys.

Language
Parent company documents for the purposes of incorporating in Mainland China need to be translated into Chinese. Hong Kong company documents are already in Chinese-English bilingual format, negating the need for expensive legal translations into Chinese.

Corporate restructuring
When a mainland entity needs to be altered in terms of directors or equity, Chinese government permission has to be sought. If these structural processes can be enacted within the Hong Kong entity, Chinese permission does not have to be sought.

Expense
Hong Kong incorporations can be on a “shelf” basis, meaning they exist only in the company green box sitting on the shelf in the company registration agent’s office. Of course, office facilities can be obtained as normal if required. If all that is needed is the pure legal entity with no actual administrative infrastructure or personnel, having a shelf entity is both legal and does away with any office expenses. Hong Kong also remains an inexpensive jurisdiction to both incorporate and maintain a limited liability company.

Re-Invoicing
Hong Kong is highly useful as a re-invoicing facility to protect delivery from the China supplier to clients. It means re-invoicing can be carried out in Hong Kong and sent onto clients directly, protecting client identities from the supplier and without the expense of a full back office operation at U.S. or European level costs to do so.

Aged incorporations
Mainland China has begun to insist on certain standards from investing companies, and these can and do include a need for companies to be a minimum of two years old. That can be difficult for many jurisdictions. Hong Kong allows the provision of aged companies that are incorporated but have not traded. This facility allows investors to purchase an aged company to meet the Chinese requirements at low cost and no risk.

International tax treaties
Hong Kong is increasingly signing preferential tax treaties directly with other countries. These can be extremely beneficial, and should be considered if applicable to international companies investing in China.

Tax and finance
Hong Kong remains a low tax treaty, which means that profits remitted to it from outside its own territory (Mainland China is considered an external territory) are not subject to additional profits tax and may be distributed at will with no further penalty in Hong Kong. The benefits for this may be negated if all the profits are intended to be returned to the true parent. However, often having the option to park profits in Hong Kong to distribute elsewhere – especially for MNC’s with operations in other Asian countries – can be highly attractive. It makes far more sense, for example, to keep Mainland China taxed profits in Hong Kong then redistribute for business development elsewhere, than to remit directly back to the United States where the IRS will levy an additional amount as U.S. tax is higher than that in Mainland China. Consequently, tax planning should be a major part of any check list when investing in China or anywhere else. Hong Kong, as regards the Mainland China route, should be seriously considered as such a jurisdiction under all such circumstances.

Joe Sze is the manager of Dezan Shira & Associates Hong Kong office, and is responsible for the incorporation, management and administration of several hundred Hong Kong limited companies on behalf of Mainland China investing clients of the firm. He may be contacted at hongkong@dezshira.com.

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