Are you planning to expand and do business in China or neighboring jurisdictions? Selecting the company type for assurance of results carefully is important. One of the best types of businesses is a holding company in a top jurisdiction like Hong Kong.
A holding company is a separate company incorporated in a target jurisdiction and owns the controlling stock in the mother company. Most companies operating in China are operated by holding entities in Hong Kong. In this post, we look at the key facts about holding incorporation in Hong-Kong.
Holding companies in Hong Kong enjoy unique ease of formation
While Hong Kong returned to the Mainland in 1997, the system still operates as a 1 country but with 2 systems. This means that companies based in Hong Kong (including the foreign-owned) get preferential treatment compared to those that venture directly into China. For example, a US company trying to register directly in China will take longer and have to meet more requirements compared to those registered as holding companies in Hong Kong.
There is extra ownership flexibility on holding incorporation in Hong-Kong
If you set up a company in China directly from your home country, the process of changing directors or altering operational structure is very lengthy. However, if the enterprise operates as a holding incorporation in Hong-Kong, the process is more flexible. For example, consider a situation where you want to introduce a new investor to the holding company and sell about 40% of shares. Selling the 40% shares has the same impact as owning 40% of the mother company.
It is important to note is that Hong Kong’s rule of law and accounting standards are outstanding. In China, companies operate multiple sets of books compared to Hong Kong where the accounts are rolled up into one set of consolidated books. This means that the books of your company carry a lot of weight which is crucial when seeking finances for the parent company.
If the holding company is structured well, it can operate tax-free
When your company buys products in China and sells them away in a different country, it can qualify for 0% tax. However, this will depend on the home country tax codes as well as the IRD views on pricing transfer.
If you have a Hong Kong holding company, it can serve as a great legal tax shelter for the mother company. This means that the HK Company will assist you to defer global tax without going against laws in China, home or Hong Kong.
There is limited liability and exposure for your company
There are so many risks that can befall your company. If you have a factory and one of the employees fails to follow the policies on environmental management, the mother company can easily be dragged into the scenario.
Besides, lawsuits from contractors and competitors can easily force your company to pay a lot of money and even run bankrupt. However, a holding company will help to shield the company from these risks. Any lawsuit will only be targeted at the holding company and not the mother company.
While the urge to open and expand internationally is the dream of every investor, it is important to craft good methods that protect an enterprise from challenges that may arise on the way. A holding incorporation in Hong-Kong will help you do all the transactions on behalf of the mother company without risking it from direct lawsuits and even bankruptcy.