Choosing the location of holding company or regional holding
company can be a daunting decision for many international
structures. The minimization of tax, cost and risk are the main
concerns. With the robust economy of China, coupled with the
accession of China and Taiwan into WTO, much interest has been seen
in investing in the Greater China or even the Asia Markets. Some
investors may prefer to set up an appropriate holding structure
Criteria for Choosing a Suitable Jurisdiction for Holding
Low Cost and Risk
Considering cost and risk, a favorable jurisdiction for setting up
holding companies should have the following characteristics:
(1)There is no minimum capital requirements; (2) Except in case of
public companies, there is no requirement to file accounts with the
company house, thus avoiding financial information being available
to the public; (3) Ease of setting up, relocation and dissolution
when the company is no longer needed; (4) Possess some forms of
investor protection agreements with major trading nations.
Favorable Tax Rates
Considering tax, there should be: (1) No tax on the income earned by
its foreign subsidiaries, or the income of the holding company is
exempted from any form of taxes; (2) No withholding tax on
distribution (dividends) and non-resident shareholders can receive
dividends without tax; (3) No or low Capital Gains tax on disposal
of interest in the subsidiaries; (4) Possess a wide network of
Double Taxation Treaties to reduce the tax on dividends, interest
and royalty received from treaty countries.
Other factors include: (1) Stable government and definite government
policies; (2) Free flow of capital and a stable currency; (3) Image
of an international financial centre; (4) Ease of listing and
raising of capital.
Not all jurisdictions provide all of the above features. Those
which come close to the list are, in Europe: United Kingdom,
Portugal, Netherlands, Demarks, Luxembourg, Belgium, Cyprus; in
Asia: Singapore and Tokyo and most notably, Hong Kong.
The Advantages of Using Hong Kong Holding
Company in Corporate Development
Hong Kong is a unique and sensible choice for those international
groups wishing to establish a regional base in Asia, taking
advantage of its financial infrastructure and strategic
locationbeing in the heart of Asia and doorstep of China. The
advantages of using Hong Kong as a jurisdiction for holding
companies are as follows:
Hong Kong adopts one of the most pro-commerce tax systems in the
world. Corporations are required to pay only 17.5% profits tax on
their profits. There is no restriction on the loss being carried
forward. There is no value added tax, capital gains tax or sales
tax. In addition, there is no withholding tax on dividend and
interest. Hong Kong adopts a taxation system based on the
territorial principle. Only profits which arise in or derived from
Hong Kong are subject to tax in Hong Kong. Income from outside Hong
Kong is not subject to any form of taxation. There is no restriction
from capital inflow into or outflow from Hong Kong. Except for the
double taxation ¨arrangement〃 signed with China, there is no other
double taxation agreement signed. Hence the concepts of ¨resident〃
and ¨domicile〃, although not alien, are only applicable and
considered in very limited circumstances.
Dividends from overseas subsidiaries are not taxed in Hong Kong
since they are not sourced in Hong Kong. Dividends from Hong Kong
subsidiaries are exempted from taxation in Hong Kong under the
Inland Revenue Ordinance. Since Hong Kong does not have any Double
Taxation Agreement with any country, dividends from other countries
may be subject to withholding tax at full rate at the country where
the subsidiaries are situated.
By using Hong Kong as the regional holding company, the major
income of this Hong Kong Company, dividend and interest are tax-free
if arranged properly. Distributions to shareholders are tax-free,
which is a favorable factor in raising capital.
A properly structured group can avoid the withholding tax by using
an intermediary holding company between Hong Kong and the
subsidiaries. The Intermediary holding company should be located in
a low tax jurisdiction with extensive network of tax treaties with
other countries; one of the best choices is Mauritius (Global
Business Company Category I). In Asia, we may also use Singapore or
Malaysia Companies. In Europe or America, we may use United Kingdom
Disposal of Subsidiary
There is no capital gains tax on disposal of overseas subsidiaries.
Disposal of a Hong Kong subsidiary is subject to 0.01% stamp duty on
the value of the shares transferred.
Hong Kong Company is frequently used in trading structures as
trading company or agency company to minimize cross-border tax, in
particular investments into China. Taxes will be reduced by 50% or
totally tax-free, if properly structured.
Taking the advantage of the first class banking industry and
infra-structure of Hong Kong, Hong Kong Company is frequently used
as regional financial company facilitating transactions in trade
financing, fund raising, leasing and intra-group loans.
Enhancement of Corporate Image
Hong Kong is a well-developed commercial and financial centre. Using
Hong Kong Company as regional holding company can create a better
corporate image, improving the confidence of your customers and
investors towards your group.
Other Advantages of Using Hong Kong Company as Holding Company
Although Hong Kong is still on of the most expensive-to-live
cities in the world, rental and salary have been greatly reduced
since 1997. From a cost-benefit point of view, the total cost of
operations in Hong Kong has been reduced to a reasonable level.
Other than the reduction of tax burden, there are other additional
1. Ease of setting up and maintenance : Only 14 days are required to
set up a Hong Kong Company. Shelf companies are available. Capital
can be denominated in any currency. The costs of setting up and
maintenance of a Hong Kong Company are relatively lower than most of
the frequently used vehicles in other offshore jurisdictions. The
cost of setting up a simple agency structure, including the drafting
of agency agreement and the first year annual fee and government
charges is around USD2,500. The annual maintenance cost is about
USD2,500, including audit fee and government charges
2. Ease of disposal: From November 1998, a ¨deregistration
procedure〃 has been introduced into the Companies Ordinance
which is a relatively economical procedure to dispose of dormant
companies. Cost can be as low as USD500.
3. Hong Kong's currency has been pegged with USD at HKD7.8 to USD1
for around 20 years. It also allows the free flow of capital.
4. Hong Kong's legal system is based on the English Common Law
system. Foreigners appointed as judges before 1997 of common law
origin are still sitting in the courts of Hong Kong. Hong Kong
Government is pro-commence and relatively efficient. Company
procedures are based on the U.K. system and are very simple. Hong
Kong has a stable government and definite government policies
5. Professional services and image: Hong Kong is a renowned
international financial center. Professional supporting services,
legal services, banking services and other shipping related services
can be arranged efficiently and economically. Besides, Hong Kong is
not listed as a tax haven or un-cooperative financial center by the
OECD and FATF. In fact, Hong Kong was the Chairman of FATF for the
6. China Connection: Hong Kong is used by international groups as a
hub for trading with China or as a stepping stone into China.
The Advantages of Using Hong Kong Holding Company in Capital
From the viewpoint of investors, the risk in investing in a Hong
Kong Company is relatively low. This is because: (1) The political
risk factor of Hong Kong is low; (2) Hong Kong has a high market
transparency; (3) The structuring of shares and investors
relationship in a Hong Kong is highly flexible. The liquidity of
shares of listed company is high. Traditional and strategic
investors can acquire, dispose and adjust their portfolio in a swift
way. Therefore, they are prepared to accept a lower rate of return,
thus reducing the cost of capital for the company.