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
Doing Business in China Through Hong Kong By : Barrett Bingley Venue: NorthWest China Council Date: 19 th , January 2011