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 Representative Office in China:

• China Sourcing Operation

The set up:
In China: Representative Office employs sourcing and quality control staff (close to suppliers)

In Hong Kong: Trading Company
(outsourced to Klako Group)

Corporate Structure:

The business model:

• China Sales Operation

The set up:
In China: Representative Office employs sales and after sales servicing staff (close to customers)

In Hong Kong: Trading Company
(outsourced to Klako Group)

Corporate Structure:

The business model:

Advantages:

A trading company in Hong Kong has numerous advantages over a trading company in China. Apart from a low risk, a well developed trading infrastructure in Hong Kong, as well as a free currency in and outflow, we have listed the main reasons foreign investor choose this structure:

Liability

There are still many foreign companies, where the daily business of the local employees in the RO in China is not monitored closely. Therefore some employees will use this opportunity to engage into activities not allowed for the RO. The consequences are often that the parent company gets blacklisted in China. The Hong Kong company takes this liability away from the parent company.

Capital requirements

In order to establish a trading company (Wholly Foreign Owned Enterprise = WFOE or Foreign Invested Commercial Enterprise = FICE) in China a minimum capital of USD 62,000 is required, if you wish to issue invoices in RMB USD 140,000.

The minimum issued share capital for a Hong Kong company is only HKD 1 and the Representative Office has no capital requirements.

Taxes

In Hong Kong, you have 3 taxes: profit tax, individual income tax and property tax. Your Hong Kong company will only be affected by profit tax. The standard profit tax rate in Hong Kong is 16.5%. Every year once your company has been audited, you file your tax return to the Hong Kong Inland Revenue. If your company has only done offshore business, you can apply for 0% tax rate. In order to be able to justify ‘offshore business” your 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

Compared to the 16.5 % or 0 % profit tax rate in Hong Kong, your entity in China would have to pay up to 33 % taxes on profit.

Requirements, set up, time frame

Establishing an entity in Hong Kong is very straight forward and depending on the structure does not require a lot of documents from your side. In addition, the registration of a new Hong Kong company will take around 3-4 weeks. Alternatively you can purchase a shelf company and we can prepare all documents within a few working days. After the company is set up and the documents have been signed and filed, the main shareholder of the company and any bank signatory will have to be in Hong Kong to be present at the bank account opening. After the interview, the bank needs another 2 weeks to process the papers.

Establishing an entity in China involves much more paperwork and is more time consuming. The set up will take between 3 and 6 months.