2011 Jan CBN


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Benefits of Doing Business in China through Hong Kong, by Barrett Bingley, ICS Trust.

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  • I’m here to talk to you about a specific way of doing business in China, a topic that is virtually beaten to death in current literature and on the speaker circuit. I’m hoping to give you a different twist by explaining how Hong Kong can be used to maximize you chances of success in Asia, and minimize the tax you pay.
  • A little bit about our company. We also have 3, soon to be 4, Securities and Futures Commissions Licenses and a Hong Kong Trust license. We are heavily regulated and longstanding, strong member of the American Chamber of Commerce in HK. Note: ICS TRUST is an approved Business Service Provider listed on the US States Commercial Service ELT is a lawyer in 4 jurisdictions, our Director KKS is a former investment banker now runs our trade and private wealth division. My background is actually government and trade, as I was most recently the Senior Policy Advisor to the Canadian Minister of International Trade and Foreign Affairs. We employ numerous CPAs, China tax experts, Company Secretarial folks and international trading experts. With 30 Years of experience, ICS TRUST has the context, experience and connections to advise on and resolve just about any corporate issue.
  • Hong Kong is a part of China, and yet apart from China. I can confidently say it provides the best legal and financial structures to access the Mainland Chinese market, which I’ll explain in more detail in this presentation. 114 companies, most of them Chinese, listed in Hong Kong last year, and Hong Kong was the world leader in IPOs last year with over 57 Billion USD raised.
  • Simply put, Hong Kong is open for business and consistently ranked as the world’s most open economy by the Heritage Foundation and other.
  • Ho ng Kong well equipped, in a lot of ‘soft’ infrastructure ways China isn’t yet. This is why most multinationals still use Hong Kong as their regional base.
  • The mainland legal system is indeed improving, particularly in business disputes, but from a very low base. Given the option, Hong Kong is and will remain for some time, a much better legal recourse choice. For instance, Judges in Hong Kong are not party members, hence are not incented to rule in a Chinese party’s favour.
  • Non-residents can open bank accounts, HSBC, Standard Chartered, CitiBank are the biggest full service providers. Lots of trade financing and non-traditional financing means available. With so many banks, hedge funds, and private equity funds with different focusses there will always be someone with an “Open for Business” sign. Ex. 1: ICS TRUST found a client factoring from an Indonesian bank after their US/HK Service provider dropped them. Ex. 2: Non-traditional financing to bring a gold mine into production through a high-interest term loan from a hedge fund.
  • Essentially don’t let a legal problem in your China operation affect your entire US or global operation. Always have a Hong Kong structure in between. Whistle-blower- Employees incented to report issues that will get the company fined, then difficult to fire them. China ‘s legislation allows for piercing of the corporate veil under more circumstances than in Canada or Hong Kong. Highlights the importance of the ‘Firewall Concept”.
  • Pay close attention to point 1 if you are a Trader. Through an offshore tax exemption application in Hong Kong you should be able to achieve a 0% tax rate in Hong Kong. Pay close attend to point 2 if you are planning to sell in China. This point alone makes Hong Kong a must in your corporate structuring.
  • This slide shows the flow of dividends back to the parent company. Although recent tax changes such as Circular 698 will make it more difficult to claim this 5% advantage, as Chinese tax law will now require more substance in the Hong Kong company. This substance, while still being defined, will include having an office, at least a virtual office, and doing banking transactions through Hong Kong.
  • Let me simplify this for you: China is #2 on the Forbes Tax Misery Index (France is 1 st ). HK is 3 rd last on the list, beaten only by Qatar and the UAE.
  • Unfortunately, no clear idea when US tax treaty negotiations will be initiated.
  • You will really appreciate Hong Kong’s use when and if you try to sell the China company. Although, again Circular 698 is starting to reach across all borders and may complicate this process.
  • 3 main types of entities for non-public foreign companies doing business in China. Each has unique characteristics which can make them suitable or not for your type of business. Each is also quite different from the standard American corporation.
  • Rep offices are limited to non-profit making activities, can only employ a few people. Mainly for marketing and liaison, not an incorporated entity. This structure is clearly on its way out. Its taxes on a gross-up basis of expenses. JVs are used in industries that are restricted to foreign companies, the list of which is decreasing (though at a lower rate than before). These can be Equity or Contractual Joint Ventures. WFOEs are limited liability, share based companies with a defined business scope and a registered capital requirement that is established by examining the business scope and 2-3 years of pro-forma financials. We haven’t listed Joint Ventures because they are of decreasing relevance, particularly to SMEs. If you want a Chinese partner, we generally recommend to jointly own equity in the Hong Kong Subsidiary, which will wholly own the WFOE.
  • Also, note that for the setup of a Rep Office, the parent Company must be at least 2 years old, unless it’s a Hong Kong Company, then it can be a brand new structure.
  • While I don’t have a slide showing it, there are good advantages to using Hong Kong to facilitate exports including the timezone advantage, ability to book revenue in Hong Kong and the use of offshore Renminbi accounts to settle invoices in RMB where your China buyer prefers to do so.
  • Notable in the context of following procedure to win your IP case is the 2006 win by StarBucks against Xingbake in Shanghai. Xingbake was clearly ripping off Starbuck’s Chinese name, logo and store design but following a 3 year court case Starbucks won, arguing their Chinese name was correctly registered in 1996. This was a landmark case and has set the tone for gradual improvement and remedy.
  • I know NW China Council has looked at these issues before so here’s our quick take on the state of play regarding IP in China.
  • 2011 Jan CBN

    1. 1. Doing Business in China Through Hong Kong By : Barrett Bingley Venue: NorthWest China Council Date: 19 th , January 2011
    2. 2. Intro <ul><li>ICS TRUST (Asia) Limited was founded in 1980 by Ms. Elizabeth L. Thomson, who has been based in Hong Kong since 1977. </li></ul><ul><li>Private Hong Kong-based corporate, trust and commercial services company </li></ul><ul><li>Provides integrated business solutions for corporations doing business in China or using Hong Kong as the gateway to export to China; </li></ul><ul><li>Sets up HKCos, Wholly-Foreign-Owned Enterprises (WFOEs) and Representative Offices (ROs) in China; </li></ul><ul><li>ICS TRUST is a preferred partner of major banks, law firms, and government entities seeking a full end-to-end business system for important clients. </li></ul>© ICS TRUST (ASIA) LIMITED. All rights reserved.
    3. 3. Why Does Hong Kong Matter? HK’s relationship with China <ul><li>Hong Kong is a Special Administrative Region (SAR) of China </li></ul><ul><li>50% world population within a five-hour flight </li></ul><ul><li>About 32% of China’s imports and 28% of exports handled via HK </li></ul><ul><li>Largest external investor in China, accounting for US$223 billion or 45% of total </li></ul><ul><li>Over 300 Chinese companies listed in HK (US$250 billion market cap). </li></ul><ul><li>(cont.) </li></ul>Page © ICS TRUST (ASIA) LIMITED. All rights reserved.
    4. 4. HK’s Relationship with China © ICS TRUST (ASIA) LIMITED. All rights reserved. <ul><li>Handles 80% of Pearl River Delta’s trade (Shenzhen, Guangzhou, Dongguan, Zhuhai etc.) </li></ul><ul><li>One of the world’s busiest container port (+22 mTEUs) </li></ul><ul><li>World’s busiest international air cargo hub </li></ul><ul><li>Constant upgrading of infrastructure links, including road, rail and recently, barge. </li></ul><ul><li>Regular use of English, Cantonese and Mandarin </li></ul>
    5. 5. Why does Hong Kong work? <ul><li>Preferential treatment from the Chinese authorities </li></ul><ul><li>Well regarded, common law environment </li></ul><ul><li>Educated, “worldly” population </li></ul><ul><li>English as official language </li></ul><ul><li>Free trade, free market, free flow of capital </li></ul>Page © ICS TRUST (ASIA) LIMITED. All rights reserved.
    6. 6. Why does Hong Kong work? <ul><li>Visa free access for most countries </li></ul><ul><li>Low and stable taxes </li></ul><ul><li>Excellent communication / physical / medical / educational / financial infrastructures in place </li></ul><ul><li>Exceedingly safe place to live </li></ul>Page © ICS TRUST (ASIA) LIMITED. All rights reserved.
    7. 7. Hong Kong Legal System <ul><li>British Common Law </li></ul><ul><li>English as medium of communication in courts </li></ul><ul><li>Independent Judiciary - no home team advantage </li></ul><ul><li>Vibrant legal profession (solicitors / barristers) </li></ul><ul><li>Many international law firms have offices in HK </li></ul><ul><li>Accountable local administration </li></ul><ul><li>Internationally recognized arbitration and mediation centre </li></ul>Page © ICS TRUST (ASIA) LIMITED. All rights reserved.
    8. 8. <ul><li>Infrastructure </li></ul><ul><li>Well regulated by HKMA / SFC </li></ul><ul><li>142 licensed banks plus 82 representative offices of banks from 38 countries </li></ul><ul><li>Liquid, well regulated stock exchange </li></ul><ul><li>Established asset management industry </li></ul><ul><li>Hong Kong offers offshore Renminbi (RMB) settlement </li></ul><ul><li>Hong Kong’s external orientation </li></ul><ul><li>6 th largest foreign exchange market in the world (based on turnover) </li></ul><ul><li>Complete absence of foreign exchange controls </li></ul><ul><li>More than 55% of domestic banking business conducted in foreign currencies </li></ul>Hong Kong – Business Friendly Banking and Finance © ICS TRUST (ASIA) LIMITED. All rights reserved.
    9. 9. <ul><li>IPR </li></ul><ul><li>Enforcement in Hong Kong simpler than in China </li></ul><ul><li>Transparency in HK Companies Ordinance </li></ul><ul><li>Laws online - http://www.legislation.gov.hk </li></ul><ul><li>Defined rights and privileges </li></ul><ul><li>Protection for minority shareholders, redress through court system </li></ul><ul><li>Firewall concept </li></ul><ul><li>A buffer in case of dispute between the parent company and the Chinese venture </li></ul><ul><li>Protection against “Whistleblower” and “Piercing of the Corporate Veil” legislation in China </li></ul>Protection Lower Risk Profile © ICS TRUST (ASIA) LIMITED. All rights reserved.
    10. 10. Hong Kong Tax System © ICS TRUST (ASIA) LIMITED. All rights reserved. <ul><li>1. Territorial Tax System </li></ul><ul><li>Profits Tax = Onshore profits = 16.5 % Offshore profits = Zero % </li></ul><ul><li>No capital gains tax </li></ul><ul><li>Inbound dividends not taxed </li></ul><ul><li>No withholding tax on outbound dividends </li></ul><ul><li>No VAT or sales tax </li></ul><ul><li>No estate duty </li></ul><ul><li>AND Government consistently runs a surplus </li></ul><ul><li>2. Preferential Tax Agreement with China </li></ul><ul><li>Dividends from China to US – 10% </li></ul><ul><li>Dividends from China to Hong Kong – 5% </li></ul>
    11. 11. Profit Flow for ParentCo / Hong Kong / China US Parent Co . Hong Kong Co Chinese WFOE Dividends subject to W/H tax of 5% for HK. 10% + for other jurisdictions No HK tax on dividends received Chinese Customers $ Goods Profits Tax at 25% No dividend withholding tax VAT on domestic sales $ $ © ICS TRUST (ASIA) LIMITED. All rights reserved.
    12. 12. Hong Kong vs. China Tax System <ul><li>HONG KONG </li></ul><ul><li>Profits Tax: 16.5% or 0% </li></ul><ul><li>Salaries Tax: 15% </li></ul><ul><li>Stamp Duty: up to 4% </li></ul><ul><li>Business Tax: N/A </li></ul><ul><li>VAT: N/A </li></ul><ul><li>Consumption Tax: N/A </li></ul><ul><li>Withholding Tax: N/A </li></ul><ul><li>Capital Gains Tax: N/A </li></ul><ul><li>Estate Duty: N/A </li></ul><ul><li>CHINA </li></ul><ul><li>Enterprise Income Tax: 25% </li></ul><ul><li>Individual Income Tax: 5% to 45% </li></ul><ul><li>Business Tax: 5% to 20% </li></ul><ul><li>VAT: 2% - 17% </li></ul><ul><li>Consumption Tax: 3% - 45% </li></ul><ul><li>Withholding Tax: 5-20% (dependent of jurisdiction) </li></ul><ul><li>Capital Gains Tax: 10% - 20% </li></ul><ul><li>Education Surcharge: 3% (new) </li></ul><ul><li>Urban Construction Charge: 1-7% (new) </li></ul><ul><li>Estate Tax: N/A </li></ul>© ICS TRUST (ASIA) LIMITED. All rights reserved.
    13. 13. Hong Kong Tax System <ul><li>Tax Treaties </li></ul><ul><li>Hong Kong has signed, operational tax treaties with </li></ul><ul><li>Belgium Luxembourg Mainland of China Thailand Vietnam </li></ul><ul><li>Treaties with the following countries are awaiting notification </li></ul><ul><li>Austria Brunei Hungary Indonesia Ireland Kuwait Liechtenstein Netherlands United Kingdom Switzerland </li></ul><ul><li>Discussions are ongoing with </li></ul><ul><li>France </li></ul>Page © ICS TRUST (ASIA) LIMITED. All rights reserved.
    14. 14. <ul><li>Geographic location </li></ul><ul><li>Closer to customers / suppliers in China </li></ul><ul><li>Extended business day </li></ul><ul><li>Corporate structuring in Hong Kong </li></ul><ul><li>Incorporation 7 working days </li></ul><ul><li>No residency requirements for directors and shareholders </li></ul><ul><li>No requirement for multitude of licenses </li></ul><ul><li>Flexibility in terms of changing nature of business, shareholder mix, capital structure etc. </li></ul><ul><li>Restructuring </li></ul><ul><li>Restructuring easier in HK than in China. </li></ul><ul><li>Selling </li></ul><ul><li>Allows the choice between FOB Hong Kong / China or home country </li></ul><ul><li>Financing </li></ul><ul><li>Easier in Hong Kong </li></ul>Flexibility re: China Operations © ICS TRUST (ASIA) LIMITED. All rights reserved.
    15. 15. Page © ICS TRUST (ASIA) LIMITED. All rights reserved. <ul><li>Types of Chinese Business Entities </li></ul><ul><li>Representative Offices (ROs) </li></ul><ul><li>Joint Ventures (JVs) </li></ul><ul><li>Wholly Foreign Owned Enterprises (WFOEs) </li></ul>
    16. 16. Two Main Types of Chinese Entities Parent Company Hong Kong Co WFOE PRC Representative Office <ul><li>Branch office only / NOT a billing entity </li></ul><ul><li>Hire Marketing, Engineers and QC staff </li></ul><ul><li>Hire Managers to liaise with factories and Head office re purchases / shipment </li></ul><ul><li>Negotiation of business contacts & strategic alliance agreements with PRC Companies </li></ul><ul><li>Subsidiary company </li></ul><ul><li>Can engage in manufacturing, trading </li></ul><ul><li>and services. </li></ul><ul><li>3. Selling domestically where permitted </li></ul>© ICS TRUST (ASIA) LIMITED. All rights reserved.
    17. 17. Page © ICS TRUST (ASIA) LIMITED. All rights reserved. <ul><li>Using a HK and Chinese Entity for: </li></ul><ul><li>Marketing your US products in China </li></ul><ul><li>Buying from 3 rd party Chinese factories and selling to customers around the world. </li></ul><ul><li>Setting up your own manufacturing facilities in China for export sales. </li></ul><ul><li>Setting up your own company in China for domestic sales/ongoing maintenance of goods or services. </li></ul><ul><li>Advantages of a two tier Structure: </li></ul><ul><li>Revenue recognition in either HK or China </li></ul><ul><li>Tax arbitrage between HK and China </li></ul><ul><li>Significantly greater flexibility for corporate actions and financing </li></ul>
    18. 18. HK as an Import / Export Centre US Parent Co . Hong Kong Co Chinese Factory Customers in various jurisdictions © ICS TRUST (ASIA) LIMITED. All rights reserved. 1) US Parent handles sales process and liaison with customers 2) Purchase Order and 6) Payment Flow 4) Invoice for goods sold 5) Invoice for goods sold 3) Factory delivers to customers’ Asian freight forwarder 7) Sales commission to Parent
    19. 19. <ul><li>Registered Capital Requirements </li></ul><ul><li>Myth – You must lock up a large amount of capital to start a company in China. </li></ul><ul><li>Reality – You must inject a certain amount of capital, and as soon as its registered you can make use of it in China. </li></ul><ul><li>Repatriation of Profits </li></ul><ul><li>Myth – Your profit is stuck in China, difficult to get out. </li></ul><ul><li>Reality – Quite standardized procedures for application to the State Administration of Foreign Exchange to repatriate profits in in the form of a dividend or service payments to parent company. </li></ul>China Myth Busting © ICS TRUST (ASIA) LIMITED. All rights reserved.
    20. 20. <ul><li>China has no IP protection </li></ul><ul><li>Myth – You have no recourse if your IP is infringed. </li></ul><ul><li>Reality – To have a chance, you must follow the proper procedures early on, before you have a problem. Example: For trademarks, China is a first-to-register jurisdiction. </li></ul><ul><li>Myth – There is no need to go through Hong Kong anymore, you can go direct into Shanghai, Beijing etc. </li></ul><ul><li>Reality – Technically true, but going through Hong Kong is much more advantageous. </li></ul>China Myth Busting © ICS TRUST (ASIA) LIMITED. All rights reserved.
    21. 21. <ul><li>Stats: </li></ul><ul><li>In 2009, Chinese authorities received 977,000 patent applications, up 18% from the previous year. </li></ul><ul><li>33,000 cases brought to the Chinese Intellectual Property Courts in 2009, 4000 or so involved foreign companies. </li></ul><ul><li>Meaning: The Chinese are starting to get serious about IP protection because there is something to protect. But its still a massive issue. </li></ul><ul><li>Timing: We know trademarks, patents, copywrite and domain names can be registered…eventually. Trademark registration time has come down to 18-24 months from up to 3 years. Complex patents are taking longer to register as the number of applications goes up. </li></ul> IP Update © ICS TRUST (ASIA) LIMITED. All rights reserved.
    22. 22. Contact Barrett Bingley Business Development Manager [email_address] +852 3413 3838 © ICS TRUST (ASIA) LIMITED. All rights reserved.