Five benefits of using Hong Kong as a gateway to the Chinese market
Hong Kong has long been regarded as the gateway to Asia because of its business-friendly policies, strategic location and historical ties to the West. Hong Kong has a large port and is a major trading centre in Asia; it is the world’s fifth largest export economy and the world’s seventh largest import economy. This makes it the ideal place to establish a holding company for your venture into China.
Tax
The first HKD2 million of assessable profits earned in Hong Kong are subject to Profits Tax in Hong Kong at a reduced rate of 8.25%, while any part of assessable profits above this threshold are subject to the standard rate of 16.5%. This is considerably lower than the 25% Corporate Income Tax (CIT) rate in China and neither capital gains or income earned overseas are subject to tax in Hong Kong.
Hong Kong Profits Tax is applicable only to profits sourced in Hong Kong. In practice this means that if a Hong Kong company is not actually doing business in Hong Kong it should generally be possible, with careful structuring, to arrange the affairs of the company such that no tax is payable in Hong Kong.Hong Kong has an extensive network of double tax agreements (DTAs) and does not impose withholding taxes (WHT) on payments of dividends or interest. As of 31 December 2020, Hong Kong had entered into 45 tax treaties with different jurisdiction, which have helped to lower the barriers to the cross-border flow of trade, investment, technical know-how and expertise between it and the rest of the world.
In China, Non-Tax Resident Enterprises without establishments or places of business in China are subject to WHT at 10% on gross income from dividends, interest, lease of property, royalties, and any other China-source passive income unless reduced under a tax treaty. Hong Kong has concluded a DTA with China that provides, subject to meeting certain conditions, for a preferential rate of WHT on dividends of 5%. If the necessary conditions are satisfied, this can be of great benefit because profits can be repatriated back to Hong Kong efficiently, minimising any WHT leakage.
Connectivity with China
Hong Kong serves as a gateway to most Chinese cities, generally operating hundreds of flights to China every day. Hong Kong also has strategic road and rail links to the ‘Greater Bay Area’ and beyond, including the newly-built High Speed Rail connecting Hong Kong to Mainland China’s national high-speed rail network. This gives direct access to 58 Mainland stations without interchange.
Hong Kong’s emphasis on new technologies has seen it provide widescale fibre-based broadband infrastructure, while 5G services have been available since April 2020. It has created a sophisticated digital economy to encourage social inclusion and economic development. Demand for broadband is driven by the consumption of bandwidth-intensive online services and the growing use of corporate broadband services including cloud services and software. International internet connectivity continues to grow, driven by Hong Kong’s status as an international financial hub. The high mobile subscriber penetration rate reflects the number of tourists visiting Hong Kong, both from overseas and from mainland China.The development of the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) has been accorded the status of key strategic planning in China’s development blueprint. Comprising the two Special Administrative Regions of Hong Kong and Macao, and the nine municipalities of Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing in Guangdong Province, the total area is around 56,000 km2 and the total population is over 72 million.
Being the most open and international city in the GBA, Hong Kong will facilitate and support the economic development of the region, with a view to enhancing the role and functions of the GBA. It will also facilitate the development of industries in which Hong Kong’s strengths lie in the Greater Bay Area, capitalising on Hong Kong’s strengths to serve the country’s needs.
HK Corporate Structures
A Hong Kong holding company can be used as parent to a Chinese Foreign Investment Enterprise (FIE), as well as to structure other investments into the region. Using a holding company offers much higher security and flexibility to foreign investors.
The private limited company is the most common type of entity to be registered in Hong Kong. It is governed by the Hong Kong Companies Ordinance, has its own independent legal personality and liability is limited to a shareholder’s subscribed share capital, so the offshore parent company is protected. It is also much easier to change ownership of a Hong Kong company than a Chinese company and much less bureaucratic to sell.A substantial advantage of using a Hong Kong company is that Chinese officials are familiar with Hong Kong companies and corporate documents, not to mention the fact that Hong Kong companies can be established with both Chinese and English articles of association. If a FIE’s parent company is a Hong Kong company, the local Chinese authorities will recognise the documents and this will make the incorporation process and ongoing operation of the FIE more efficient.
A FIE established in China, will, of course, be subject to Chinese law. If a Hong Kong holding company is used, agreements with third parties can be signed by the Hong Kong holding company which will be governed by Hong Kong law. In Hong Kong, both English and Chinese are official languages, so all laws are also in English and all legal proceedings can at the party’s request be held in English. This is not the case in China. Chinese is the only official language in the Chinese courts and English translations of laws are for reference only.
Robust Legal System
As a Special Administrative Region of the People’s Republic of China, Hong Kong has a separate established legal system that is based on English common law. This coupled with advanced anti-money laundering legislation and a clear regulatory framework makes doing business in Hong Kong far simpler than it would be through a direct investment in China.
As one of the leading commercial hubs for international business transactions, Hong Kong also prides itself as a prime location for dispute resolution. With an established and trustworthy Anglo-Chinese bilingual legal system, Hong Kong is an ideal hub to resolve international disputes for foreign parties conducting business, or with parties based, in Hong Kong. Hong Kong is also ideal for disputes involving Chinese entities given its geographic and economic proximity to Mainland China, as well as exclusive benefits offered to Hong Kong-based litigations and arbitrations.Hong Kong is in the unique position of being the only jurisdiction to have a number of mutual arrangements with China for judicial assistance covering various aspects of civil and commercial disputes. These include reciprocal recognition and enforcement of some types of court judgments and arbitral awards, as well as mutual assistance for court-ordered interim measures in aid of arbitral proceedings in the respective jurisdictions. This solidifies the distinctive position of Hong Kong as the ideal place to resolve Chinese-related commercial disputes.
Hong Kong and China entered into a supplemental arrangement concerning mutual enforcement of arbitral awards in November 2020 and this arrangement not only allows the Mainland courts to order post-award interim measures for the arbitral awards made in Hong Kong, but also permits an award winner in Hong Kong to apply for parallel enforcement in Mainland China when enforcement proceedings in Hong Kong are not particularly successful.
Offshore Cash Holdings
If a foreign investor in China wishes to direct the profits of a FIE abroad, a Hong Kong holding company offers one of the best routes to achieve this. If a portion of the profits can be realised in Hong Kong through transfer pricing, they will then be taxed in Hong Kong, which has the lowest corporate income tax rate in in the PRC.
The repatriation of profits from China to a foreign jurisdiction is generally the same whether the profits flow directly from a Chinese entity or through a Hong Kong holding company. This means that the foreign parent company with a Hong Kong holding company has the option of keeping the profits in Hong Kong, where they can be reinvested for other offshore purposes.Hong Kong is also one of the largest offshore RMB clearing centres. This implies that Hong Kong is one of the best places to manage RMB-denominated finances, which includes managing receipts of dividends and other commission of FIEs based within China. This allows the holding company to acquire cash pooling functions.
With its strengths as an international financial centre and its unique advantage of having close links with Mainland China, Hong Kong has been the dominant gateway to Mainland China and the global hub for offshore renminbi business. New channels have been opened to enhance connectivity between Hong Kong and Mainland China. Cases in point are Qualified Foreign Institutional Investor (QFII), Renminbi Qualified Foreign Institutional Investor (RQFII), Mutual Recognition of Funds, Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect and Bond Connect.
Thanks to its deep pool of liquidity, efficient financial infrastructure and multitude of cross-border portfolio flow channels, Hong Kong is the largest and most important global offshore renminbi (RMB) business hub, offering a wide range of RMB financial services, including clearing and settlement, financing, asset management and risk management. The highly efficient and robust market infrastructure in Hong Kong allows market participants from all over the world to handle RMB transactions with Mainland China and among offshore markets.
Sovereign group has a physical presence in both Hong Kong and China and offers a full spectrum of market entry services, including setting up suitable holding structures, as well as the operational structures in China. We also provide a full range of related corporate services – including accounting, payroll and company secretarial – in both jurisdictions.
