Apr. 24 – The reasons for using an intermediary company when investing into China or Asia from say the United States, Europe or Australasia are to take advantage of various tax treaties that exist, to provide minimal corporate income tax exposure with options for future dividends repatriation, and to legally hold more risky investments at arm’s length from the parent company in the event of any major problems occurring.
The question concerning the use of Hong Kong or Singapore entities rather than the traditional offshore jurisdictions, such as the British Virgin Islands (BVI), is due to the recent and many double taxation agreements which now exist. The likes of the BVIs and many others do not qualify for tax or tariff exemptions from developing Asia, so using these does not bring the tax benefits that Hong Kong and Singapore can. Essentially, the use of offshore jurisdictions such as the BVIs has had its day and is being replaced by more efficient, and wide ranging, government-to-government agreements that supersede them.
Much is made of the differences and similarities between Hong Kong and Singapore. The basic tax structures are provided in the table below.
When it comes to China, Hong Kong companies enjoy benefits of the “Closer Economic Partnership Agreement” which permits Hong Kong companies of a certain standing to obtain preferential policies for investment that may normally be off limits for normal foreign investors. This is especially true of the services industry. The catch is that these are time dependent and that Hong Kong companies must provide a minimum of five years trading history at a certain level to qualify. Hong Kong also enjoys the sovereignty of China, and with it beneficial agreements that China has with other nations.
In terms of the global ease of doing business index, both Hong Kong and Singapore regularly rank among the top three globally, and Singapore especially has perhaps a rather better code of corporate governance than Hong Kong, where some standards are beginning to slip due to the influence of Chinese sovereignty. That being said, the use of Hong Kong entities for holding investments in China is a well-trodden and defined path, and the use of the territory as a springboard into China cannot be bettered.
Singapore’s primary benefit is that it is a member of the Association of Southeast Asian Nations (ASEAN). Companies registered in Singapore – including those that are foreign owned – qualify as domestic companies and are automatically entitled to the duty free treatments that member states of ASEAN enjoy.
As this includes the smaller Asian tigers such as Vietnam, Indonesia, Thailand, Malaysia and the newly emerging Cambodia, Laos and Myanmar, that is a key advantage to domiciling in Singapore if your longer-term strategy is to reach out into Asia.
ASEAN also has trade agreements in place with China and India – meaning that as a basic rule of thumb, international businesses looking to trade beneficially with Asia would do well to domicile in Singapore, while Hong Kong would be preferable for those that wish to concentrate on China.
Today, however, there is no shortage of companies that use both locations in their corporate structure.
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Portions of this article came from the March/April issue of Asia Briefing Magazine, titled “Expanding Your China Business to India and Vietnam.” This issue discusses why China is no longer the only solution for export driven businesses, and how the evolution of trade in Asia is determining that locations such as Vietnam and India represent competitive alternatives. With that in mind, we examine the common purposes as well as the pros and cons of the various market entry vehicles available for foreign investors interested in Vietnam and India.
