1. The Hong Kong and China business and tax landscape
International Tax Day
New Orleans, October 24, 2012
The Hong Kong and China business and tax landscape

2. Fiducia Management Consultants
We have a 30-year track record of serving international clients in China
Established in 1982 in Hong Kong
Professional service provider focused on China and Hong Kong
90 Chinese and foreign specialists
3 China offices located in Hong Kong, Shanghai and Shenzhen
High level of local expertise and multicultural experience
Proven ability to apply international standards with local understanding
Close co-ordination with the client leading to long-term relationships
Strong support from a large network of partners, AGN member since ‘03
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3. Comparison of locations: Hong Kong vs. China
One country – Two Systems – Differences prevail! ? =
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4. Comparison of locations: Hong Kong vs. China
Hong Kong´s regulatory requirements are moderate when compared to China
Hong Kong
China
Incorporating a Ltd.
Ca. 5 days
Ca. 180 days
Minimum capital requirements
1 HKD (0,08 USD)
Ca. 140,000 USD (Trading-WFOE)
Social insurance contributions
(employer part, as percentage of gross salary) 5%
Up to 50%
Time need for tax payments
80 hours per year
504 hours per year
Time / cost ratio to comply with regulatory requirements
100
500
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5. Comparison of key locations for sourcing offices
The Ease of Doing Business 2012
FACTORS
HONG KONG
SHANGHAI
BANGKOK
HO CHI MINH CITY
No. of days to incorporate company 3 35 29 44
Minimum capital requirements
No minimum
($1)
US$140,000
(depending on business scope)
US$6,500
(foreign owned Thai limited company)
(except for e.g. insurance, banking, real estate)
Total tax rate as a % of profit
23%
63.5%
37.5%
40.1%
Amount of yearly tax payments 4 7 23 32
Preparation and filing (hours required) 80
398
264
941
Proximity: airport to city centre (km) 36 40 30 8
Corruption Perception Index 12 75
112
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6. Comparison of key locations for sourcing offices
Corruption remains a major challenge in China No
Country
Index 1
New Zealand
9.5 2
Denmark
9.4 5
Singapore
9.2 12
Hong Kong
8.4 14
Germany 8
Japan 32
Taiwan
6.1 75
China
3.6 95
India
3.1
Scale from , 0 country is perceived as highly corrupt; 10 country is perceived as very clean
TRANSPARENCY INTERNATIONAL – CORRUPTION PERCEPTIONS INDEX 2011
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7. Comparison of set up options within China
Rep Office vs. WFOE – Corporate Structure
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8. Comparison of set up options within China
Rep Office vs. WFOE – Tax & HR
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9. Comparison of set up options within China
Incorporation Requirements of both Rep Office and Wholly Foreign Owned Enterprise
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10. Comparison of set up options within China
Set-up times in weeks for different entities (estimated from past experience)
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11. Comparison of set up options within China
Accounting Requirements of Rep Office and Wholly Foreign Owned Enterprise
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12. Taxation – Corporate Income Tax (CIT)
Finance Issues
Taxation – Corporate Income Tax (CIT) RO
WFOE
The CIT is based on the deemed income, which is calculated from the Rep Office’s expenses.
Deemed income = operating expenses / (1-deemed profit rate-business tax rate)
Deemed profit rate is at least 15% and business tax rate is usually 5%.
The actual profit rate shall be reviewed and approved by the local tax bureau.
The taxable income is the amount remaining from its gross income in a tax year after deducting the corresponding costs, expenses and losses.
The Tax Bureau can make adjustments due to non-deductible expenses or transfer prices that are deemed inappropriate
According to the Chinese Enterprise Income Tax Law implemented on January 1, 2008, the rate of corporate income tax is 25% for most industries. Some particular tax holidays and preferential treatments may be granted for approved new high-tech enterprises, which are subject to a reduced rate of 15%.
It is settled on an annual basis but is paid quarterly with adjustments either refunded or carried forward to the next year.
The final calculation will be based on the year-end audit.
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13. Finance Issues Shareholder loans
Every shareholder loan needs to be approved by the State Administration of Foreign Exchange (SAFE)
Steps
Organizations
Remarks
Signing loan contract
Applying for foreign loan registration and specific bank account for foreign loan
Getting foreign loan registration certificate and approval for specific bank account
Opening specific bank account
Feedback to SAFE about bank information
Registration for withdrawal of loan
Registration for settlement to RMB if necessary
Applying for approval for payment of principal and interest
Payment of principal and interest
Feedback to SAFE about payment
De-registration of foreign loan
SAFE
Bank
Within 15 days after the contract is signed
Usually 20 working days
Usually 1 week and with approval from SAFE
Within 5 days after the receipt of loan and with the bank-in slip
With approval from SAFE
Within 5 days after payment
Within 10 days after loan is paid off
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14. WFOE Profit Repatriation
Finance Issues
WFOE Profit Repatriation
Foreign companies in China generally can repatriate the profits they earned to their mother companies overseas. The procedure can be done every year after the annual audit has been conducted and the corporate income tax has been filed.
Restrictions:
At least 10% of the profit should be retained in the company as its statutory surplus reserve. When the total amount of the reserve reaches 50% of the company’s registered capital, the company can stop the provision of the reserve.
Annual profits must also first "make up" losses from previous years and the registered capital has to be fully paid in before any distribution can be made to shareholders.
China levies a withholding tax on any dividends remitted out of the country. Profits earned before 2008 are tax free.
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15. Finance Issues Withholding Tax Rates
The general rate for withholding tax for payments of dividends, interest, and royalties from China to abroad is 10%. For recipients from certain countries the rate is reduced under the respective DTA (e.g. Hong Kong, Singapore, Dubai, Belgium).
Hong Kong
General
(e.g. USA, Germany)
Dividend
5%* / 10%
10%
Interest 7%
Royalty
*To enjoy the reduced 5% withholding tax rate on dividend, the “beneficial owner” of China WFOE must satisfy the conditions listed on the following page.
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16. Finance Issues Withholding Tax Rates
The reduced rate of 5% for dividends under the China-Hong Kong DBA is only granted to holding companies of a Chinese entity that fulfil the following requirements
Be a Hong Kong company;
Directly holding at least 25% of the entity that pays dividend;
The shareholding percentage complies with the above limit during the past 12 months prior to dividend payment;
The company must have been incorporated for over 12 months;
The company should have its own business operation.
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17. Restructuring & Closure
Change of shareholder / sale of a WFOE
Reasons for selling (parts of) a WFOE
Additional, leaving or changing shareholders
Group internal restructuring
Ceasing the business
Tax treatment
Capital gains subject to tax
Tax liability also exists for indirect sale of Chinese entity
Tax rate 10%
Exemption for group internal restructuring possible, but difficult to obtain
Clear agreement between parties should me made, who will be in charge of paying the tax
Remark:
Due to the necessary due diligence and the limitations of the operations of a WFOE by its business scope a sale is normally only possibly if the acquiring party plans to continue the existing business.
The sale of shell companies is of no practical relevance in China.
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18. Comparison of company structures
In practice, the direct investment is often the structure of choice
Traditional structures
Holding company in USA
Holding company in USA
Holding company in USA
100%
70%
50%
China WFOE
China WFOE
China JV
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19. Comparison of company structures
Inserting a Holding in Hong Kong has benefits for the China business
Option for JV with foreign partner
Option for JV with Chinese partner
Option for WFOE
Holding company in USA
China WFOE
HK Holding
100%
Partner
(USA or CN)
Holding company in USA
China WFOE
HK Holding
70%
100%
30%
Holding company in USA
China JV
HK Holding
100%
50%
Chinese Partner
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20. Comparison of company structures
Benefits of using a Hong Kong holding company
Hong Kong company can be used for billings to other SEA countries
Hong Kong coporate tax rate only 16.5%
Company set-up in China less complicated with Hong Kong parent company
Easy and quick realization also of more complicated ownership structures possible in Hong Kong
In the case of changes in the shareholding structure, shares of Hong Kong entity can be transferred
Dividends are tax free in Hong Kong
Withholding tax for dividends paid from China to Hong Kong favorable compared to many other countries (conditions apply)
Hong Kong´s legal system is based on British law, favorable in case of disputes
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21. Why Hong Kong? – Why not Shanghai?
Comparison of locations– Sales in China
Why Hong Kong? – Why not Shanghai?
Advantages and benefits
Low start-up cost
Asia wide market coverage
High level of knowledge in sales and marketing, strong experience in China market & international trade
Maintaining stock and/or spare parts stock in duty free Hong Kong
Invoicing in Euro or USD, no currency risks and no foreign exchange complications
Invoicing to end customer in Asia i.e. Indent business (direct shipment to customer)
Profits are “locked” in Hong Kong and not in China
Reliable legislation, low taxation, easy tax system, no profit tax on “offshore” businesses
Availability of Services – Banking, Logistics, Project Finance etc.
Sales in RMB possible through the new RMB Trade Settlement Scheme
Disadvantages
Cost – staff and office space are more expensive in Hong Kong compared to mainland China
Hong Kong is a good starting point for SMEs to test the market, to achieve Asia wide market coverage
For service providers Hong Kong offers much lower operating cost
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22. Comparison of locations – Sales in China
Warehouse in Asia for Asia-Pacific
Mother company has (global) centralized warehouse in USA
Increasing Asia business
Problem: Time and geographical distances
USA Production / Central warehouse
Regional warehouse for time sensitive goods (e.g. spare parts)
Excellent logistics environment
Not duties or sales taxes
Hong Kong Regional warehouse
(Alternative: FTZ in China)
Customers in Asia-Pacific
Order by
Own subsidiary
Service partners
Final customer
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23. Comparison of locations
Example: Knorr-Bremse AG´s integrated Asia-Pacific organization
Germany Global Headquarters
Hongkong Asia Pacific Headquarters
Regional management center
Lead sales for Hongkong, Taiwan and South East Asia
Shared Service Center für HR, IT and Finance & Controlling for all Asia-Pacific offices
Other locations in Asia-Pacific
12 locations in China for production, sales, services and R&D
Other locations in India, Singaporr, Australia, Korea, Taiwan, Japan
Reasons: International know-how of HK staff, highly qualified talent pool, professional service providers available, no travel restrictions
Local presence: In the end all business is local!
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24. Comparison of locations
Example: Knorr-Bremse AG´s integrated Asia-Pacific organization
China Mainland Organization
12 local entities, thereof
7 Joint Ventures
4 WFOEs
1 WFOE Branch Office
HQs for Commercial Vehicle System in Shanghai
JVs for production, mostly to serve domestic market
WFOE for high-tech production for domestic market and export
Shanghai preferred location for HQs
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25. Why Hong Kong? – Why not Shanghai?
Comparison of locations– Purchasing from China
Why Hong Kong? – Why not Shanghai?
Advantages and benefits
High level of knowledge in Hong Kong, Strong experience in international trade
Less corruption danger
No VAT refund complications
Third party business - Direct shipment to overseas customers with cost advantages
Transport and shipment cost, Finance cost, Credit risk = Customer benefits from lower price
Reliable legislation, low taxation, easy tax system
No profit tax for “offshore “ businesses i.e. buying in China and selling to European customers
Profits are “locked” in Hong Kong and not in China
Availability of Services – Banking, Logistics, Merchandising etc.
Purchase in RMB possible through the new RMB Trade Settlement Scheme – forward rates are more attractive in Hong Kong
Disadvantages
Cost – staff and office space are more expensive in Hong Kong compared to mainland China
Proximity to the customer or the supplier – this can be overcome with the establishment of a
Rep. Office which manages product sourcing and quality control
Many of the world’s largest retailers have their sourcing activities headquartered in Hong Kong
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26. China Rep. Office or WFOE
Case study – Combination of China and Hong Kong for purchasing from China
Manufacturer Subsidiary or third party
- Make or Buy -
Advantage:
► Cost savings by outsourcing production to China
Manufacturer A
Manufacturer B
Manufacturer C
China:
► Supports supplier search
► Quality assurance
► Quality control
China Rep. Office or WFOE
Head Office in Germany
► Product development
► Supplier selection
► Determines inter-group
pricing
Hong Kong
Limited company
Hong Kong Company:
► Deals with manufacturers
and customers regarding commercial aspects
► Order processing
► Invoicing
Advantages:
► Divide and conquer
► Minimise Risks
► Utilise the Hong Kong advantage (e.g. finance, tax)
► Cost efficient
Ultimate
Customer A
Subsidiary
Italy
Subsidiary
Brazil B C D
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27. Collaboration of trade partners
Getting all relevant parties on the Order To Cash Platform
Supply Chain Management Platform
Accessibility from anywhere, anytime
Managing operations over distances using the right tool
Shift to handling information more efficiently through technology
Whole transparency and visibility of the supply chain
Cut costs through better planning and decisions based on accurate reporting data from the system
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28. Hong Kong’s strategic advantages
Tax, legal and corporate background of Hong Kong
Hong Kong’s strategic advantages
Low Tax Regime
Profits tax is 16.5%
Offshore transaction tax free
Salaries tax is 15%
No sales tax or VAT
No taxes on dividends
No Capital Gains Tax
Legal Environment
Advantages and benefits
Sourcing from China: direct invoicing to end customer, less corruption danger
FOB shipment to the customer, No direct contact between customer and manufacturer
Profits are “locked” in Hong Kong and not in China
Goods do not touch the intermediary’s warehouse
No VAT refund complications
Reduced cost and risks:
Transport and shipment cost
Finance cost
Credit risk
Customer benefits from lower price
Reliable legislation, low taxation, easy tax system, no profit tax applicable for profits out of offshore businesses
Availability of Services – Banking, Logistics, Merchandising etc.
Purchase in RMB possible through the new RMB Trade Settlement Scheme
Disadvantages
Cost – staff and office space are more expensive in Hong Kong compared to mainland China
Proximity to the customer or the supplier – this can be overcome with the establishment of a
Rep. Office which manages product sourcing and quality control
Banking and Financial Services
Trade Friendly
Outsourcing possibilities
Export Credit Insurance
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29. Tax comparison of favorite corporate structures in Asia
Comparison of tax rates in Hong Kong, Singapur and China
Source: InvestHK
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30. Countries with a DTA with Hong Kong
Confirmed and ratified Double Taxation Agreements with 24 Countries (as at: 30.April 2012):
Belgium
Brunei
China
France UK
Indonesia
Ireland
Japan
Liechtenstein
Luxembourg
Holland
New Zealand
Austria
Spain
Thailand
Czech Republik
Hungary
Vietnam
Not yet ratified:
Jersey
Kuwait
Malaysia
Malta
Portugal
Schwitzerland
Under discussion:
Bangladesh
Finland
Guernsey
India
Italy
Canada
South Korea
Macau
Malaysia
Mexico
Saudi-Arabia
UAE
Source: InvestHK
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31. Summary of the Hong Kong and China Business Landscape
Important key learnings
Consider the unique differences between Hong Kong and mainland China when making plans for business in the region
Hong Kong set up is fast, China takes longer but an entity in China is required for local trading activities
Tax landscape in Hong Kong in China is substantially different and requires good planning to profit from both places advantages
Hong Kong is very suitable as a holding company or when sourcing from China
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32. www.fiducia-china.com Our offices What is your next move? Hong Kong
Tel: (+852)
Fax: (+852)
Shanghai
Tel: (+86)
Fax: (+86)
Shenzhen
Tel: (+86)
Fax: (+86)
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