Tax Efficiency and Minimization Planning

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 be beneficial. 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.

Here are some examples:

China Withholding Tax on Dividends:

Starting from 1st January 2008, together with the new unified profits tax of 25%, China may reinstate its 20% withholding tax on dividends payable by a Chinese subsidiary to its foreign investor. 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: 

      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 repayment of the loan.

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.