June 2008

Many foreign companies are feeling the pressure to establish an entity in China. Often the establishment requires a high capital investment and more importantly a risk factor. Due to these aspects, more and more investors are establishing offshore companies to act as a holding entity for their China investment and thereby creating a buffer layer to take over the full liability for the Chinese operation. The establishment of many of these offshore companies is an easy process and due to an uncomplicated tax system and accounting requirements, simple to operate. Double taxation agreements have been drafted and implemented between China and many of these offshore jurisdictions, which adds an additional benefit.

Offshore Jurisdiction - British Virgin Islands (BVI)

British Virgin Islands (BVI) is one of the oldest and most respected offshore financial centres in the world. The BVI is widely considered as a benchmark, which the other offshore tax havens strive to emulate. The most common entity is an International Business Company (IBC), which can be established within three working days and provides investors with anonymity as the company registry is not public.

Structural Requirements

In order to establish a BVI IBC at least one director and one shareholder are required which can be either a person or a company and BVI residency is not required. However, the BVI Company must have a registered office address. The standard authorized share capital is USD 50,000 (divided into 50,000 shares), but the minimum issued capital can be as little as one share.

Accounting and Tax Filing Requirements

An IBC Offshore Company in the BVI is restricted from doing business with BVI residents or companies. An IBC is exempt from BVI taxes by statue. There is no requirement for any financial statements or records to be kept and therefore it is not required to file an audit or submit a tax return.

However, should the shareholders and directors decide to maintain such documents, they can be held anywhere in the world.

Double Taxation Agreement (DTA)

The main objective of a double taxation agreement is to remove or reduce the level of taxation. The BVI is a typical non-treaty offshore jurisdiction with zero income tax, therefore there is no agreement between China and the BVI.

Offshore Jurisdiction - Seychelles

The Independent Republic of the Seychelles is another well known offshore center with competitive legislation which makes incorporation relatively simple whilst ensuring investor confidence and privacy. As in the BVI, the most common type of entity in the Seychelles is an International Business Company (IBC). An IBC can be incorporated within 5 working days.

Structural Requirements

A minimum of one shareholder and one director are required which can be either a person or a company. The names of the directors and shareholders will appear on the public records; therefore it is possible to use nominee shareholders, which means that a third party will hold the company on behalf of the investor so that the name of the investor does not appear in any documents filed with the company registry. The company is required to have a registered office address in the Seychelles, however an IBC is not allowed to do any business with residents of the Seychelles or own any property in the Seychelles. The IBC is not required to have any minimum paid-up capital in order to start its business operations. Any amount of authorized capital can be stated in the IBC formation documents, as required by the owners.

Accounting and Tax Filing Requirements

An IBC is exempt from all taxes on income derived outside of the Seychelles and there are no requirements to prepare or file any accounts or financial statements. It is also not necessary to conduct an audit.

China and Seychelles Double Taxation Agreement (DTA)

The double taxation agreement between China and the Seychelles does not affect IBCs as they are exempted from tax payments.

Offshore Jurisdiction - Singapore

Singapore is becoming a business city with excellent business infrastructure, political stability, and close economic ties with many of the world's leading economies.

The incorporation of a limited company is the most common form of establishment and takes only one day as the registration, structuring process and payment can be done directly with the Accounting & Corporate Regulatory Authority (ACRA) via internet.

Structuring Requirements

A limited company in Singapore must have at least one shareholder and one director. The director must be a resident of Singapore. Should none of the directors have residency, the company must appoint a local manager with Singaporean citizenship, a permanent resident status or an employment pass. A registered office address is required, as well as a Company Secretary and the company must appoint an auditor within three months from the date of incorporation. The minimum issued share capital is SD 1 (USD 0.73)

Accounting and Tax Filing Requirements

A limited company in Singapore is taxed at a flat rate on its chargeable income. The company will be taxed on its income accruing in or derived from Singapore or income received in Singapore from outside Singapore. Income is assessed on a preceding year basis, which is the basis period for any Year of Assessment (YA). This refers to the financial year ending in the year preceding the YA and for the YA 2008 the tax rate is 18%. The company has to file an annual return and annual audit.

China and Singapore Double Taxation Agreement (DTA)

Under the new DTA interests which arise either in China or Singapore will be taxed by 7% of the gross amount of the interest if it is received by any bank or financial institution and in all other cases by 10%. For royalties, the rate on lease payment for industrial, commercial or scientific equipment has been reduced from 10% to 6%.

On all interest and royalty payments there is an additional 5% business tax to be paid in China.

If the holding company in Singapore holds more than 25% of a Chinese subsidiary the withholding tax rate on dividends is 5% to be paid in China. Should the parent company hold less than 25% of the Chinese entity dividends will be taxed by 10%.

Should the Singapore parent company want to sell shares of its Chinese entity it will be taxed on the gains of the disposal of the shares in China but only if the Singapore parent company has held at least 25% of the share capital at any time during the last 12 months before the alienation.

Offshore Jurisdiction - Hong Kong

Hong Kong is the natural gateway to China due to its geographic location and its beneficial business, finance and legal systems. It is therefore no surprise that a Hong Kong Company is the most common entity incorporated as a holding company for businesses entering the China market. The most common type of entity is a limited company by shares. The registration of a limited company takes approximately three to four weeks. Alternatively, it is possible to buy a ready made shelf company, which has not yet performed any business. Registration and structuring can then be done within two working days

Structuring Requirements

A Hong Kong company needs a minimum of one director and one shareholder which can either be a person, a company or nominees. The company registry in Hong Kong is public to everyone therefore if investors do not want their name to appear on any documents they can choose to use nominees who will hold the company on their behalf. A Hong Kong company needs to have a registered office address and a company secretary. A standard limited company has an authorized capital of HKD10,000 (USD 1,300) and an issued share capital of HKD 1.00 (USD 0.13).

Accounting and Tax Filing Requirements

A Hong Kong company is required to file an audit and a tax return each year so regular bookkeeping is advisable. Normally a Hong Kong company will only be affected by profit tax. The standard profit tax rate in Hong Kong is 16.5%. However if the company has only conducted offshore business and is able to prove this to the Inland Revenue Department (IRD) in Hong Kong, it can apply for 0% tax rate. In order to be able to justify !!Loffshore business!!L the company should:

• have no employees in Hong Kong
• do not issue or receive any invoices to and from other Hong Kong companies
• shipments should not go through Hong Kong

The duration until the tax exemption is approved differs on the profit the company made in the specific tax year and very often a long negotiation process is involved.

Hong Kong and China Double Taxation Agreement

The rate of withholding tax for interest and royalties received by a Hong Kong business from the PRC is 7%. However there is a business tax in China on interest and royalties of 5%. Dividends received by a Hong Kong holding company from a China entity are tax free as there is no dividends tax in Hong Kong. These dividends can remain in Hong Kong and can be used for further investment in the region or worldwide. However, a withholding tax on dividends is payable and the tax rate varies between 10% if the Hong Kong parent holds less than 25% of the China entity and only 5% if the Hong Kong Company holds more than 25% of its Chinese subsidiary.

Capital gains derived from the transfer of shares in mainland companies will be tax free, provided the shares transferred are less than 25% of the entire shareholding of the mainland company and the assets of the mainland company are not comprised mainly of immovable property situated in mainland China.

Conclusion

Not only taxation reasons attract investors to set up offshore entities as holding companies but also liability and privacy issues. Investors enjoy a high degree of privacy in regards to the particulars of the shareholders, their shareholding and their financial status. Another advantage is that most large-scale international banks accept the application for opening the bank accounts of these offshore companies in order to facilitate their financial operations.

There are further offshore jurisdictions where a holding company for the China investment may be established. With each offshore company having different requirements, advantages and disadvantages it will be the investor!|s decision which type of entity fits their company profile and China entry strategy. However, it is advisable to meet with service providers that can explain the similarities and differences of each type of offshore entity and can assist in offering the best structuring method.

If you require assistance with the above subject, please contact us at This e-mail address is being protected from spambots. You need JavaScript enabled to view it with your detailed questions.

All information in this report is verified to the best of our ability and is assumed to be correct at time of release; however, Klako Group does not accept responsibility for any losses arising from reliance on the information provided within.