This document discusses considerations for UK companies setting up investments or operations in China. It notes that Hong Kong and Singapore have traditionally been used as intermediate holding companies due to tax and commercial reasons. However, direct investment from the UK is now more viable due to changes in China and a new UK-China tax treaty. The document outlines key changes like new Chinese substance requirements and the UK-China tax treaty reducing withholding taxes. It recommends UK companies review existing structures and consider direct investment or restructuring to hold Chinese investments directly from the UK to take advantage of these changes and opportunities.

1. Setting up/investing into China from the UK
Should investment be routed through a Hong Kong or
Singapore intermediate holding company?
When investing into China from the UK, many companies have historically used Hong Kong (HK), or
to a lesser extent jurisdictions such as Singapore, through which to invest. Whilst there remain good
commercial and tax reasons to invest via other jurisdictions, direct investment from the UK can offer
advantages in some instances due to recent changes in China as well as the introduction of a new
Double Taxation Agreement (DTA) between China and the UK. There may also be opportunities to
improve on existing structures when setting up in China for the first time.
What key changes/updates have been made?
There have been a number of recent developments which impact • Consider the use of a HK incorporated but UK managed
on the choice of holding company: and controlled company so the company is UK tax resident.
This could potentially satisfy substance requirements. The
• Substance requirements in HK company could be migrated to HK at a later date
The Chinese tax authorities have issued various circulars setting • Consider direct investment from the UK
out that they will challenge the availability of treaty benefits for
an intermediate holding company without economic substance. Financing structures
Cross-border financing with China is in the spotlight as companies
• New UK/China DTA seek to identify efficient ways to finance expansion and to return
The new DTA will reduce withholding tax (WHT) from 10% to funds to the UK. A financing company partial exemption (FCPE) is
5% on dividends to the UK in many circumstances. expected to be introduced when the new UK Controlled Foreign
Company (CFC) rules come into effect, probably from summer
2012.
• Dividend exemption rules introduced in the UK
From 2009 overseas dividends received from China should not The FCPE should result in only 25% of the profits of an offshore
in most instances be subject to UK tax. intra-group financing company being subject to UK tax, subject to
meeting various criteria. This means an effective 5.75% rate from
What action should be taken? 2014 when the UK corporation tax rate is reduced to 23%.
For groups with existing HK/intermediate company
structures: This could create opportunities to review financing structures in
• Consider whether there is sufficient substance in HK to China and Asia generally. For example, businesses may consider HK
satisfy the substance requirements and, if not, whether it is as a good location from which to fund the region, driven by a low
possible to increase substance potential effective rate on finance income. A new DTA between HK
and the UK, as well a series of other treaties HK has entered into
• If substance is insufficient, consider making the company UK with other countries, means that it is now more favourable as a
financing hub.
tax resident under the new UK/HK DTA by ensuring that the
company is managed and controlled from the UK. Operating
from the UK should make meeting the economic substance Who should I contact?
requirements easier For further information about how the above could affect your
business, please contact:
• Consider restructuring the operation so that Chinese
investments are held directly from the UK. This would be
subject to meeting Chinese restructuring provisions Nick Farr
Partner and Head of China Britain Services Group
For groups looking to move into China: Grant Thornton UK LLP
• Consider whether operations in HK could satisfy the T +44 (0)207 728 2691
substance requirements and whether setting up a HK operation
E nick.farr@uk.gt.com
could be beneficial. HK can still be advantageous, for example, in
respect of WHT on interest and royalties. There are also
frequently commercial and/or practical advantages
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