When a company grows to be international, the negative side of running suboptimal profit allocation strategies, among its entities, can be significant. If the company intends to reap the full benefit of an international presence, it should accurately, and in a timely manner, plan where to turn a profit. For some international businesses, structuring investments into China via Hong Kong can make a lot of sense. Concerns over direct exposure to China liabilities, ease of a future sale of a China investment, and certain tax planning and profit distribution capabilities can make the insertion of a holding company as part of your China strategy an interesting option.

Benefits of a Hong Kong Holding company if you plan a China Limited Company in the form of a:

• Wholly Foreign Owned Enterprise (WFOE)
• Foreign Invested Commercial Enterprise (FICE) or
• Joint Venture (JV)

Benefits of the structure:

• Arms distance engagement with China and liability
  The Hong Kong holding company is fully liable for the China investment and protects your existing foreign company from all liability.

• Flexibility
  In Hong Kong, adjustments can be made of the political and financial rights within the company in its memorandum and articles of associations or a shareholders agreement.

• Profits Repatriation Structure for Royalties and License Fees
  Fees received by your Hong Kong Holding Company from the China entity are tax free, although there is a withholding tax of 7% (compared to 10% should the shareholder of the China entity be another jurisdiction. Savings of between 4% and 13% of your total net profit in China can be achieved. That said, these require profit repatriation structures to be built into the Articles of Association of your China entity.

• Restructuring China Investment
  Any restructuring, reallocation or sale of part or all of the equity of a Hong Kong company is considerably more convenient than conducting these steps in a China entity and having to confront Chinese regulations which at times, have proven to be unsupportive or not responsive.

• Ability to sell China investment without triggering Chinese regulations
  It is very time consuming to sell companies in China as the foreign investor, going through the rules and regulations the government imposes on foreign invested enterprises (FIE). To sell a Hong Kong holding company involves much less bureaucracy without triggering any approvals to be received by the Chinese authorities.

• Tax free dividends in Hong Kong and registered capital
  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.
  
  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 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 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 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 payment of the loan.

• 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%.

• Transfer pricing and manufacturing profits
  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.Professional advise on corporate structure can save approximately USD 0.07 for every one dollar worth of goods sold. A considerable benefit.

• Consolidation and international accounting standards
  Accounting standards in Hong Kong follow international standards and therefore consolidation with foreign parent companies is easier than consolidating the accounts of a Chinese entity directly into the accounts of foreign parent companies.

• Access to a variety of financing instruments
  Financing in Hong Kong is more accessible than in China, and there are a better varieties of options at hand.
  Additionally, banking in Hong Kong has a very high standard in technology and security, and all major international banks are located in Hong Kong. In the contrary to China, there are no restrictions or approvals necessary in Hong Kong to receive or transfer funds or foreign currencies.

• Shareholding and incentive scheme for employees
  Often when making an investment in China, giving incentives to management has to be considered. Offering an incentive or shareholding scheme (stock options) is commonly used to maximize benefits for the success. These schemes are facilitated via a Hong Kong entity and much greater flexibility is given, without having to establish them in China.