Investment in China and HK offshore structure: What you need to know

A closer look at the Chinese foreign investment reveals that Hong Kong is the largest foreign investor. Many people might ask why Hong Kong?

Apart from holding an offshore structure (SPV), easier equity transfer, sound financial access, and supportive regimes, Hong Kong is preferred because of its income tax treatment of Hong Kong companies in Mainland China. Here are other things that you need to know about investment in China and HK offshore structure. 

Good tax regime

China signed an agreement with Hong Kong to help avoid double taxation for people and companies. Under the arrangements, people and companies located in Hong Kong enjoy various favourable tax treatments especially concerning their dividends.

Part 10 of the arrangements indicate s that dividends by one party could be taxed by another party. Besides, the dividends can also be taxed if the party making the payment is a resident. However, if the company/person making the payment is a resident of the other party, the charges will not exceed 5% of total amount of the dividend (if the owner has more than 25% of the shares of the company paying the dividends). The charges shall not go beyond 10% in all other instances.

This means that individuals from Hong Kong are subject to preferential treatment on dividend taxes. They are charged as low as 5% while others are charged at 10% income tax rate. In addition to the favourable tax regime, income derived from operations in China (royalties and interests) are charged only 7% while those based elsewhere are charged 10%.

Beneficial owner

This term is used to help establish the substance of a company in order to enjoy preferential tax treatment. According to China State Administration of Taxes, Beneficial owner will only be determined upon assessment to establish that the business has substance.

Besides, the beneficial owner is not applicable to conduit companies. The Chinese administration considers conduit companies to be established for the sole purpose of evading paying taxes. They are not involved in manufacturing, service delivery, distribution, or even management.

Separate operational note

Though Singapore entered into a tax arrangement with China, the terms are not as favourable as those between China and Hong Kong. A good example is tax on Dividends for individuals with companies in Hong Kong. The tax rate for dividends can go down to 5% as far as the recipient owns more than 25% of the company making the payment.

When this is compared to the agreement with Singapore, Hong Kong is more favoured and, therefore, a better place to invest.

Just like the tax on dividends, the income tax on any interest an individual Singapore resident pays can be as low as 7% as far as the recipient is a financial institution. In this case, it is financial institutions that are treated preferentially (in the case of Singapore). However, individual residents in Hong Kong enjoy the same preferential treatment and not necessarily banks.

Conclusion

Opening and running a company in Hong Kong has proven to hold massive benefits to investors. The administration is supportive while the banking system is very stable and ready to leverage business growth at all levels. More importantly, companies have direct access to the Chinese market and enjoy preferential tax treatments.

Whether it is the dividends or loyalties, Hong Kong companies get better preferential treatment from Mainland China in comparison to other countries such as Singapore and New Zealand. Note that companies operating directly from Hong Kong to the Mainland China are required to demonstrate substance in order to enjoy the favourable tax treatments.