When you decide to venture offshore, some of the key factors that drive the move include seeking stronger banking systems and stable political systems. Beside, many systems abroad provide lower tax rates and straight forward tax systems that allow investors to keep bulk of the interests, profits, and royalties.
A good economy that has such huge benefits to investors is Hong Kong. Its independence from the Mainland China has been used to create a pro–business type of economy that keeps attracting a lot of investors. One way of venturing into Hong Kong is using an SPV (special purpose vehicle).
What is an SPV?
This is a subsidiary of a major company that is designed with a specific objective; mainly to help protect main assets should the parent company be faced with financial pressure like bankruptcy. They are designed for various tax benefits and helping to preserve assets, funding, and key operations from being impacted on by either operations taken separately (free from the mother company) or by the parent company.
Following the agreement between Hong Kong and mainland China on DTA (double tax arrangement), all people and companies in Hong Kong can now enjoy special treatment. In the arrangement, section ten outlines huge SPV Tax benefits that keep making Hong Kong even more attractive. The dividends that a company of one party (China or Hong Kong) pays to the other may be taxed by the recipient country.
- (ii) The Dividends outlined in section one can also be subjected to taxation according to the recipient party laws. In the event that the beneficiary owner of the said dividend is a resident in the other party, the taxes shall be as follows;
- Five percent of the entire dividend if the respective beneficially owns more than 25% of the share capital of the incorporation paying the dividends.
- 10% of the entire dividends in other settings.
This means that direct investors using SPVS into China from other countries are hit with a higher tax rate compared to those operating from Hong Kong. For example, a tax of 10% income tax rate is levied on dividends being sent from entities established inside China. However, those established in Hong Kong are only charged 5% of the entire dividends.
Tax substance and benefits under DTA
To enjoy the outlined preferential tax benefits, an SPV must demonstrate tax substance for its operations in Hong Kong. Here, the Hong Kong Administration wants to emphasize that only those SPVs that are beneficial to the economy benefit from Double Tax Arrangement.
First, you must acquire a Tax Residency Certificate that demonstrates all the directors’ meetings are held in Hong Kong and they have working phone & fax lines. You must also demonstrate that the SPV has an operational office that has daily running costs such as staff related expenses.
The surest way of getting tax substance for your SPV in Hong Kong is seeking assistance of a professional agency. The agency will help you to get the Tax Residency Certificate and maintaining high substance to keep enjoying all SPV tax benefits under DTA between Hong Kong and China as well as other countries.