Hong Kong holding company formation
Criteria for choosing a suitable jurisdiction for holding companies low cost and risk
Considering cost and risk, a favorable jurisdiction for setting up holding companies should have the following characteristics:
(1) There is no minimum capital requirements;
(2) Except in case of public companies, there is no requirement to file accounts with the company house, thus avoiding financial information being available to the public;
(3) Ease of setting up, relocation and dissolution when the company is no longer needed;
(4) Possess some forms of investor protection agreements with major trading nations.
Favorable tax rates
(1) No tax on the income earned by its foreign subsidiaries, or the income of the holding company is exempted from any form of taxes;
(2) No withholding tax on distribution (dividends) and non-resident shareholders can receive dividends without tax;
(3) No or low Capital Gains tax on disposal of interest in the subsidiaries;
(4) Possess a wide network of Double Taxation Treaties to reduce the tax on dividends, interest and royalty received from treaty countries.
Other factors include:
(1) Stable government and definite government policies;
(2) Free flow of capital and a stable currency;
(3) Image of an international financial centre;
(4) Ease of listing and raising of capital.
Not all jurisdictions provide all of the above features. Those which come close to the list are, in Europe: United Kingdom, Portugal, Netherlands, Demarks, Luxembourg, Belgium, Cyprus; in Asia: Singapore and Tokyo and most notably, Hong Kong.
Advantages of using Hong Kong holding company in corporate development
Hong Kong is a unique and sensible choice for those international groups wishing to establish a regional base in Asia, taking advantage of its financial infrastructure and strategic location being in the heart of Asia and doorstep of China. The advantages of using Hong Kong as a jurisdiction for holding companies are as follows.
Hong Kong is one of the few countries in the world that tax on a territorial basis. Many countries levy tax on a different basis and they tax the world-wide profits of a business, including profits derived from an offshore source. Hong Kong profits tax is ONLY charged on profits derived from a trade, profession or business carried on in Hong Kong. Consequently, this means that a company which carries on a business in Hong Kong, but derives profits from another place, is not required to pay tax in Hong Kong on those profits. Hong Kong sourced income is currently subject to a rate of taxation of 16.5%. There is no tax in Hong Kong on capital gains, dividends and interest earned.
The principle of Hong Kong profits tax is that it is a tax on profits that has its source in Hong Kong rather than a tax based on residence. Income sourced elsewhere, even remitted to Hong Kong, is not subject to Hong Kong profits tax at all. Consequently, if a Hong Kong company’s trading or business activities are based outside Hong Kong no taxation will be levied.
A factor that determines the locality of profits from trading in goods and commodities is generally the place where the contracts for purchase and sale are effected. ‘Effected’ does not only mean that the contracts are legally executed. It also covers the negotiation, conclusion and execution of the terms of the contracts.
If a business earns commission by securing buyers for products or by securing suppliers of products required by customers, the activity which gives rise to the commission income is the arrangement of the business to be transacted between the principals. The source of the income is the place where the activities of the commission agent are performed. If such activities are performed through an office in Hong Kong, the income has a source in Hong Kong.
Certain sums, like royalties, paid or payable to non-resident persons for use of or right to use certain intellectual property are subject to withholding tax. The payer who claims deduction for the use of the intellectual property against its assessable income is required to withhold a prescribed percentage from the payment while that recipient is not subject to Hong Kong profits tax. The prescribed percentage is 4.95% on the gross payment if the payer and the recipient are not related, but 16.5% if the payer and recipient are related. The recipients of the royalties may enjoy different treaty rates under double taxation agreements.
Double taxation agreements
Hong Kong has comprehensive double tax agreements with Austria, Belgium, Brunei, Czech Republic, France, Hungary, Indonesia, Ireland, Japan, Liechtenstein, Luxembourg, Malaysia, Malta, Netherlands, New Zealand, Portugal, Switzerland, Spain, Thailand, United Kingdom, Vietnam and the Mainland China respectively to relieve taxation on income, for instance, dividends, interest income and royalties. The Hong Kong Inland Revenue Department allows a deduction for foreign tax paid on a turnover basis in respect of income which is also subject to tax in Hong Kong. Therefore, businesses operating in Hong Kong do not generally have problems with double taxation of income.
The respective comprehensive double tax agreements with Canada, Jersey, Kuwait, Mexico and Quatar will become effective from 1st April 2014 to relieve the applicable double taxable on various incomes.
Cross border tax optimization planning dividends received by Hong Kong holding business with China
Dividends received by your Hong Kong holding company from your China entity are tax free as there is no dividend tax in Hong Kong. These dividends can remain in Hong Kong and can be used for further investment in the region or worldwide. If your China company is a manufacturing operation and the goods are invoiced and sold through the Hong Kong Holding company, only 50% of the profits are assessed as sourced in Hong Kong and therefore taxable. Profits from the sale of goods build up in the Hong Kong company and can be used for re-investment.
China withholding tax on dividends
If the Chinese subsidiary’s parent company is a Hong Kong entity, a foreign investor would benefit from the double taxation agreement existing between Hong Kong and China where the withholding tax on dividends payable by a Chinese subsidiary to its Hong Kong parent company is reduced from 20% to 5%.
Tax free dividends and registered capital
The registered capital amount which must be paid into your China entity must be booked in its immediate holding company as registered capital. If your China entity makes a profit and your existing foreign company requires these profits to be transferred back home to be used as working capital, then the benefit of your existing foreign company establishing a Hong Kong or Singapore subsidiary which in turn establishes a China subsidiary is as follows:
The registered Capital amount which ultimately needs to end up in your China entity is transferred from your existing foreign company to the Hong Kong / Singapore subsidiary and booked as a loan. The amount is then transferred to your China entity and booked as registered capital. When profit is earned in China and transferred to your Hong Kong or Singapore Company, it is booked as dividend and is received tax free. These dividends can then be transferred back to your existing foreign company tax free as it can simply be booked as repayment of the loan.
Disposal of Subsidiary
There is no capital gains tax on disposal of overseas subsidiaries. Disposal of a Hong Kong subsidiary is subject to 0.01% stamp duty on the value of the shares transferred.
Hong Kong Company is frequently used in trading structures as trading company or Agency Company to minimize cross-border tax, in particular investments into China. Taxes will be reduced by 50% or totally tax-free, if properly structured.
Taking the advantage of the first class banking industry and infra-structure of Hong Kong, Hong Kong Company is frequently used as regional financial company facilitating transactions in trade financing, fund raising, leasing and intra-group loans.
Enhancement of corporate image
Hong Kong is a well-developed commercial and financial centre. Using Hong Kong Company as regional holding company can create a better corporate image, improving the confidence of your customers and investors towards your group.
Other advantages of using Hong Kong company as holding company
Although Hong Kong is still one of the most expensive-to-live cities in the world, rental and salary have been greatly reduced since 1997. From a cost-benefit point of view, the total cost of operations in Hong Kong has been reduced to a reasonable level.
Other than the reduction of tax burden, there are other additional advantages:
Ease of setting up and maintenance: Only 14 days are required to set up a Hong Kong Company. Shelf companies are available. Capital can be denominated in any currency. The costs of setting up and maintenance of a Hong Kong Company are relatively lower than most of the frequently used vehicles in other offshore jurisdictions.
Hong Kong’s currency has been pegged with USD at HKD7.8 to USD1 for around 20 years. It also allows the free flow of capital. Hong Kong’s legal system is based on the English Common Law system. Foreigners appointed as judges before 1997 of common law origin are still sitting in the courts of Hong Kong. Hong Kong Government is pro-commence and relatively efficient. Company procedures are based on the U.K. system and are very simple. Hong Kong has a stable government and definite government policies.
Professional services and image: Hong Kong is a renowned international financial centre. Professional supporting services, legal services, banking services and other shipping related services can be arranged efficiently and economically. Besides, Hong Kong is not listed as a tax haven or un-cooperative financial centre by the OECD and FATF. In fact, Hong Kong was the Chairman of FATF for the year 2002.
China Connection: Hong Kong is used by international groups as a hub for trading with China or as a stepping stone into China.
Advantages of using Hong Kong holding company in capital raising
(1) The political risk factor of Hong Kong is low;
(2) Hong Kong has a high market transparency;
(3) The structuring of shares and investors relationship in a Hong Kong is highly flexible.
The liquidity of shares of listed company is high. Traditional and strategic investors can acquire, dispose and adjust their portfolio in a swift way. Therefore, they are prepared to accept a lower rate of return, thus reducing the cost of capital for the company.
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