Using Hong Kong Incorporation to Qualify for 100% Equity in China Restricted Industries
Op-Ed Commentary: Chris Devonshire-Ellis and Richard Cant
Jan. 21 – Hong Kong’s “Closer Economic Partnership Arrangement” (CEPA) with Mainland China has been in effect now since 2003. Drafted to cater for the fact that prior to this, Hong Kong companies were effectively treated in Mainland China as completely foreign entities, CEPA recognizes that Hong Kong businesses are ultimately under Chinese control and jurisdiction, and irons out parts of the investment playing field in the mainland to lessen discrimination between them and domestic mainland companies.
The objectives of CEPA have been defined, and are:
To strengthen trade and investment cooperation between Mainland China and Hong Kong and promote joint development of the two sides, through the implementation of the following measures:
- To progressively reduce or eliminate tariffs and non-tariff barrier on substantially all the trade in goods between the two sides;
- To progressively achieve liberalization of trade in services through reduction or elimination of substantially all discriminatory measures;
- To promote trade and investment facilitation
Annual supplements have been signed between the mainland and Hong Kong governments. The most recent, Supplement VII, was signed on May 27th last year. These agreements have increasingly opened up the mainland market for Hong Kong companies in ways that are often still restricted to foreign investors.
How these are activated varies depending upon industry sector, and there are additional variations in how each of these sectors may be applicable in terms of requirements from the registered Hong Kong entity. What is interesting about the CEPA arrangements are that they do not necessarily preclude foreign invested Hong Kong companies from taking advantage of the CEPA framework. This means that it is possible in certain industries, particularly in the services sector, to acquire a Hong Kong company and then use that, under CEPA regulations, to participate in services areas that are still otherwise subject to restrictions concerning total foreign ownership in mainland China. These include:
As mentioned, these industries may all take advantage of the CEPA frameworks; however the benefits to Hong Kong companies in each of these vary from sector to sector. Examples include sectors such as logistics, freight forwarding, architectural and engineering, real estate, transport, management consulting, advertising and exhibitions, in that Hong Kong companies may establish WFOEs in these areas, while other foreign investors are forbidden from doing so. In this way, CEPA permits the 100 percent Hong Kong ownership of investment into otherwise restricted industries. However, the ownership of the Hong Kong company is not regarded as an issue. Other benefits may include lower asset, capital, turnover and operational requirements.
Qualification as a Hong Kong company for CEPA treatment also varies. However, with the exception of law firms, and the banking and insurance industries, most Hong Kong companies are required to fit the following criteria:
- Be incorporated in the Hong Kong SAR, and have a valid business license;
- Follow the same scope of intended business in Mainland China that it does in Hong Kong;
- Have been incorporated and engaged in “substantial business operations” in Hong Kong for a minimum of 3-5 years;
- The company should have paid profits tax in accordance with Hong Kong law;
- The company should either own or be renting business premises in Hong Kong consistent with its operations;
- More than 50 percent of the staff employed in Hong Kong should be Hong Kong residents, or Mainland Chinese staying in Hong Kong on a one-way permit.
For exceptional cases, some of these points may be rendered flexible. However, the CEPA arrangements mean that the acquisition of suitable existing Hong Kong companies may be an early way into the China market – indeed our firm is handling such cases on behalf of a number of foreign investors at this time. Of course, many Hong Kong businesses may already fulfill CEPA requirements and be eligible for CEPA assistance and fast track into the Mainland China market. If so, now is the time to take advantage of the CEPA partnership and to gain a foothold into the China market ahead of all other foreign investors.
Hong Kong has been actively pursuing Double Tax and Free Trade Agreements with a number of regions and countries recently, including ASEAN and RCEP, as well as South Korea, Italy, and Vietnam. These agreements mean that for example, when the ASEAN FTA kicks in as expected later this year, Hong Kong companies, even if subsidiaries of foreign companies, may enjoy the benefits of the ASEAN FTA. At present the U.S. and E.U. agreements with ASEAN are still pending and likely to be some years off in conclusion. A Hong Kong subsidiary offers a viable solution for accessing the benefits of these agreements prior to the U.S. or E.U. signing off on them. There are numerous, often unspoken reasons for using a Hong Kong holding company to invest assets into China. Readers are advised to look into the subject in detail to ensure that they do not miss out on tax or free trade benefits worth far more than the relatively small cost of Hong Kong incorporation.
Chris Devonshire-Ellis is the founding partner and principal of Dezan Shira & Associates, established in 1992. The practice handles foreign direct investment into Hong Kong and China, with nine offices on the mainland and one in Hong Kong.
Richard Cant is an international lawyer/CPA holding a LLB from University of Adelaide and an LLM from University of Sydney. He has 26 years of international and China experience and is part of the Dezan Shira & Associates legal services team.
The practice can advise on the use of CEPA structures to facilitate investment into China through the use of qualified Hong Kong companies. Please email the practice at firstname.lastname@example.org for assistance or download the firm’s brochure here.
Using Hong Kong for China Operations
An examination of the different types of holding companies that are available to foreign investors and the advantages they can impart, from ease of incorporation to a favorable tax regime. We also run through the incorporation procedures for establishing a company in Hong Kong and lay out the accounting and financial requirements that affect Hong Kong companies. A brief introduction to Hong Kong’s double tax agreements is also provided. (PDF US$10)
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