Luka Lu, Capital Associates. Presentation at CNY in Copenhagen 2011


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Luka Lu, Capital Associates. Presentation at CNY in Copenhagen 2011

  1. 1. How to Take Advantage of Hong Kong's Business Platform for Expansion in China Capital Associates Luka Lu February 14, 2011 Opening Remarks 15:05-15:10 Ms Lore Buscher, Regional Director Europe Hong Kong Trade Development Council
  2. 2. Agenda <ul><li>Introduction </li></ul><ul><li>Cases Study – using HK companies for the legal structure for expansion in China </li></ul><ul><li>Advantages of Hong Kong </li></ul><ul><li>Conclusions with Q&A </li></ul>
  3. 3. Personal Background <ul><li>Married to a Dane with three children </li></ul><ul><li>One of the first commercial lawyers in China </li></ul><ul><li>Helping foreign companies’ entrance to China </li></ul><ul><li>Working on solutions to China </li></ul><ul><li>Being board members for many foreign companies and Chinese companies, in the board of NCO/China Consult which also specialize in setting up Hong Kong and offshore companies </li></ul><ul><li>Combining legal, political and commercial considerations when advising companies </li></ul>
  4. 4. Case Study 1 <ul><li>A Nordic company with the current structure </li></ul><ul><li>HoldingCo </li></ul><ul><li>NordicCo USCo UKCo ChinaCo </li></ul><ul><li>TradingCo Production Co </li></ul>
  5. 5. Case Study 1 <ul><li>The company is growing and it was suggested to take the following restructuring </li></ul><ul><li>Holding Co </li></ul><ul><li>NordicCo InternationalCo </li></ul><ul><li>USCo UK Co Chinaholding </li></ul><ul><li>ProductionCo TradingCo </li></ul>
  6. 6. Case Study 1 <ul><li>However, they have done the USCo and UKCo but it was very difficult to do the restructuring on the ChinaCo due to the following reasons: </li></ul><ul><ul><li>They would need to pay huge amount of tax for the share transfer even though it is only internal restructuring. </li></ul></ul><ul><ul><li>Even it is internal restructuring, approvals from Chinese government are still required and it was estimated that it would take at least 6 months to obtain them. </li></ul></ul>
  7. 7. Case Study 1 <ul><li>If the following structure were created in the beginning, it would be much easier: </li></ul><ul><li>Holding Co </li></ul><ul><li>NordicCo USCo UKCo HKCo </li></ul><ul><li> ChinaCo </li></ul><ul><li>TradingCo Production Co </li></ul>
  8. 8. Case Study 1 <ul><li>It could be even better if it were the following structure </li></ul><ul><li>Holding Co </li></ul><ul><li>NordicCo USCo UKCo HKCo </li></ul><ul><li>HKCo MalaysiaCo </li></ul><ul><li>ChinaCo </li></ul><ul><li>TradingCo Production Co </li></ul>
  9. 9. What is Hong Kong? <ul><li>The “One Country, Two Systems” policy means that Hong Kong is part of China. China is trying to promote Hong Kong. </li></ul><ul><li>It has separate legal system (common law). </li></ul><ul><li>Hong Kong companies’ investment into China is regarded as foreign investment. However, the government’s attitude towards Hong Kong investors is a bit different. </li></ul>
  10. 10. What is Hong Kong? <ul><li>It is a gateway to China. The territory is connected to China, easy to travel (one hour by train to Shenzhen from Central Hong Kong, visa is also easier). </li></ul><ul><li>Very easy to use Hong Kong companies as holding companies. Cheap to create the Hong Kong companies and also to maintain them. </li></ul><ul><li>Hong Kong companies can also be used to hold business in other parts of Asia. </li></ul><ul><li>There are a lot of tax advantages in Hong Kong. </li></ul>
  11. 11. Case Study 2 <ul><li>A European company in the food industry. Business is very good in the home country. </li></ul><ul><li>A Malaysian company approached them wanting to set up a joint venture in China to distribute their products. </li></ul><ul><li>The European company has very limited resources in sending the people and managing the company. However they have all the know how and they want to have majority shareholding. </li></ul>
  12. 12. Case Study 2 <ul><li>So the big question is how to better control this joint venture. </li></ul>
  13. 13. Case Study 2 <ul><li>We then proposed and compare the following structures: </li></ul><ul><li>Structure 1 (suggested by the Malaysian company) </li></ul><ul><li>EuroCo MalayCo </li></ul><ul><li>JV China </li></ul><ul><li>In this Structure 1, EuroCo will make a joint venture directly with </li></ul><ul><li>MalayCo and the joint venture will be set up in China. </li></ul>
  14. 14. Case Study 2 <ul><li>Structure 2 </li></ul><ul><li>EuroCo MalayCo </li></ul><ul><li>JV HK </li></ul><ul><li>China Sales Co </li></ul><ul><li>In this Structure 2, Eruoco will set up a joint venture with MalayCo in Hong Kong, i.e. JV HK first, and the JV HK will own 100% of the China Sales Company. </li></ul>
  15. 15. Case Study 2 <ul><li>Structure 3 </li></ul><ul><li>EuroCo </li></ul><ul><li>HKCo MalayCo </li></ul><ul><li>JV HK </li></ul><ul><li>China Sales Co </li></ul><ul><li>In this Structure 3, EuroCo will set up a Hong Kong company first, </li></ul><ul><li>which it owns 100% and then use such Hong Kong company to </li></ul><ul><li>form a joint venture with MalayCo in Hong Kong, i.e. JV HK, and </li></ul><ul><li>the JV HK will own 100% of the China Sales Company. </li></ul>
  16. 16. Case Study 2 <ul><li>Advantages and Disadvantages of Each Structure </li></ul><ul><li>By having a joint venture in China, it means even if you have a majority shareholding, by law there are certain matters that requires unanimous approval of the joint venture partners. It is easier for the majority shareholder to control the company if the joint venture is in Hong Kong. </li></ul><ul><li>It is easier to exist out of a Hong Kong company. </li></ul><ul><li>There are tax benefit to use a Hong Kong company . </li></ul><ul><li>Structure 3 allows the EuroCo to use the HK Holding Co to expand in other places in Asia. </li></ul>
  17. 17. Case Study 2 <ul><li>The client has chosen Structure 3. </li></ul>
  18. 18. Case Study 3 <ul><li>A Danish retail company located in the pedestrian street in Copenhagen. </li></ul><ul><li>They found out that 53% of their customers are Chinese tourists. </li></ul><ul><li>They want to set up in China, very ambitious plan, 80 stores in all locations. </li></ul>
  19. 19. Case Study 3 <ul><li>They also need to raise money to invest in all the stores. </li></ul><ul><li>We suggest to have a Hong Kong holding company to hold all the shares in the stores. It will be easier for them to attract international private equities. </li></ul>
  20. 20. Advantages of Hong Kong <ul><li>Hong Kong Company VS. BVI company </li></ul>
  21. 21. Advantages of Hong Kong <ul><li>Using the judicial reciprocal arrangement to earn comfort against local protectionism </li></ul>
  22. 22. Judicial Reciprocal Arrangement <ul><ul><li>Pursuant to the Reciprocal Arrangement , both governments have agreed to recognize and enforce judgments made in each other’s courts </li></ul></ul>
  23. 23. Advantages of Hong Kong <ul><li>Utilize the tax advantages of Hong Kong. </li></ul>
  24. 24. Double Tax Treat <ul><li>Arrangement for the Avoidance of Double Taxation on Income and Prevention of Fiscal Evasion (the “Double Tax Treaty ”) </li></ul><ul><li>Eases the tax burden for the growing number of H ong K ong companies doing business in the PRC </li></ul><ul><li>Saves H ong K ong and PRC companies with cross-border operations from double taxation </li></ul>
  25. 25. Double Tax Treat <ul><li>Withholding tax rates on dividends, interest and royalties offered under the new agreement are among the lowest rates available compar ing with the other double tax treaties that China has entered into </li></ul><ul><li>Dividend Interest Royalty </li></ul><ul><li>Hong Kong 5 to 10% 0 to 7% 7% </li></ul>
  26. 26. Double Tax Treaty <ul><li>The Double Tax Treaty make it better to use </li></ul><ul><ul><li>H ong K ong company to provide short term cross border consultancy projects in the PRC </li></ul></ul><ul><ul><li>H ong K ong company as an intermediate holding company for investments in the PRC </li></ul></ul><ul><ul><li>H ong K ong company to license intellectual property to the PRC </li></ul></ul><ul><ul><li>H ong K ong company for financing investments in the PRC </li></ul></ul>
  27. 27. Advantages of Hong Kong <ul><li>Using CEPA for easier access to Chinese market. </li></ul>
  28. 28. CEPA <ul><li>The PRC government has actively considered various ways to promote Hong Kong by mak ing it easier for H ong K ong companies to carry out business in the PRC . </li></ul><ul><li>A lot of concessions have been given to Hong Kong and o ne of these concessions is CEPA . </li></ul>
  29. 29. CEPA <ul><li>CEPA provisions cover 3 broad areas: </li></ul><ul><ul><li>Trade in Goods : Hong Kong can f unction as a free trade p ort between H ong K ong and the PRC . Almost all goods qualified as “made in Hong Kong” can be exported into China duty free. </li></ul></ul><ul><ul><li>Trade in Services : easier access to the Chinese market by Hong Kong suppliers in the selected areas. </li></ul></ul><ul><ul><li>Trade and Investment Facilitation : more preferential treatments and more protections are given to Hong Kong based companies comparing with other foreign investment. </li></ul></ul>
  30. 30. CEPA <ul><li>However, you need the following qualification : </li></ul><ul><ul><li>It is incorporated in H ong K ong </li></ul></ul><ul><ul><li>It has a 3-5 year operative history (depending on the business sector) </li></ul></ul><ul><ul><li>It is liable to pay H ong K ong tax </li></ul></ul><ul><ul><li>It employs 50% of its staff locally </li></ul></ul>
  31. 31. CEPA <ul><li>Foreign investors may take advantage of these CEPA concessions </li></ul><ul><li>by partnering with, investing in or buying into a business in H ong </li></ul><ul><li>K ong which qualifies for CEPA . </li></ul><ul><li>Foreign investors may also partner with or outsource to a CEPA- </li></ul><ul><li>qualified HK manufacturer or service provider . </li></ul>
  32. 32. Conclusions <ul><li>There are many advantages in using Hong Kong as springboard to do business in China. </li></ul><ul><li>However, comparison of the direct investment is necessary. Always compare! </li></ul><ul><li>Whether it is useful for you depends your own business case. </li></ul>
  33. 33. Q & A
  34. 34. Thank You <ul><ul><li>Capital Associates </li></ul></ul><ul><ul><li>25I Block A, Oriental </li></ul></ul><ul><ul><li>International Plaza, </li></ul></ul><ul><ul><li>2B Dongzhimenwai Xiaojie </li></ul></ul><ul><ul><li>Dongcheng District, </li></ul></ul><ul><ul><li>Beijing 100027, P. R. China </li></ul></ul><ul><ul><li>Tel: (86-10) 8447 9588 </li></ul></ul><ul><ul><li>Fax: (86-10) 8447 9349 </li></ul></ul><ul><ul><li>Email: [email_address] </li></ul></ul><ul><ul><li>Contact: Luka Lu </li></ul></ul><ul><ul><li>天咨律师事务所 </li></ul></ul><ul><ul><li>中国北京东城区东直外小街甲 2 </li></ul></ul><ul><ul><li>号正东国际大厦 A 座 25I </li></ul></ul><ul><ul><li>邮编: 100027 </li></ul></ul><ul><ul><li>电话: (86-10) 8447 9588 </li></ul></ul><ul><ul><li>传真: (86-10) 8447 9349 </li></ul></ul><ul><ul><li>电子邮件: </li></ul></ul><ul><ul><li>联系人:路宇 </li></ul></ul>