What to do with Hong Kong holding companies in a current situation
By Melody Feiyi, international legal project-manager at Baseley & Partners
As a commercial, financial and international trade centre in China, Hong Kong has always been an ideal place for setting up a holding firm. It is estimated that more than six out of ten investments in mainland China are passing through Hong Kong by setting up a holding company there(1). China Securities — a well-known Chinese investment bank and brokerage firm, for instance, has set its holding limited company in Hong Kong since 2000. Not only investors from mainland China, foreign investors such as United Express (a regional brand of United Airlines), Crown worldwide group (a giant company in Logistics industry) are also putting their eyes on the Pearl of the Orient, incorporating Hong Kong into their business structure by setting a holding regime there.


There are different reasons why businessmen prefer Hong Kong as their destination to locate their holding companies. To get a clear idea, we hereby analysis and list the main advantages the Hong Kong hold company could enjoy:

Territorial basis of taxation - profits which do not have a Hong Kong source are not subject to profits tax;
An expansive tax treaty network with over 50 jurisdictions - reduce the tax on dividends, interest and royalty received from treaty countries;
No capital gains tax on disposal of overseas subsidiaries;
No controlled foreign company provisions - which means the undistributed income from subsidiaries is not attributable to the Hong Kong parent entity;
No dividend tax in Hong Kong;
Easy and quick way to incorporate a HK company online with low cost;
No withholding taxes on payments of dividends and interest;
Issuance of shares to investors without the approval of any authorities;
Free flow of capital without foreign exchange control;
Legal system based on the English Common Law system;
Professional services with English speaking environment;


Nevertheless, there are several signals we recently notice may influence Hong Kong being a popular place for setting up an offshore holding company.
Recent Political Risk Looming Over Hong Kong


First of all, given Hong Kong's unique geographical location, Hong Kong has been widely treated as a stepping stone for investing into China. However, the markets and economy of Hong Kong have been hit especially in the second quarter due to the US-China trade war and the anti-government protests recently happens in Hong Kong. Tourism, food, retail, trade, logistics and other industries have been seriously affected.


In response to the weak economy, Hong Kong government has announced a number of relief measures in recent days, with policies targeting small and medium enterprises, students and low-income families. To be specific, the government's measures include waiving 27 groups of 12 months' government fees and charges for SMEs who engages in marine, logistics, retail, catering, tourism, construction, fishing and animal husbandry; reducing rents for most short-term tenancies of government land which are used for community and business purpose for 6 months; implementing a fee review moratorium on government fees and charges; and enhancing two government funds on branding, upgrading, domestic sales, and export marketing further. In addition, the finance secretary introduced a new loan guarantee product under the SME Financing Guarantee Scheme (SFGS) where a 90 percent guarantee for approved loans has provided for SMEs. There are also seven measures to ease people's burdens, including a further reduction in salaries tax for 2018-19 from 75 per cent to 100 percent while retaining the ceiling of HK$20,000(2).
However, some of the economists remain pessimistic about the city's economic outlook. For instance, Iris Pang, Greater China economist of ING Banking Asia comments that "the relief measures are not sufficient to prevent the economy from slipping further. He doubted that Hong Kong exporters could make good use of the measures as many dared not to take orders given US President Donald Trump's fickle trade policies". Another reason he mentions is that the measures do not meet the needs of protesters (mainly young people), who are concerning the public housing and number of public flats(3).

In addition, analysts are lowering their expectations for Hong Kong's economic growth. On Aug. 2, DBS Bank cut its estimate for 2019 full-year GDP growth to zero from its earlier forecast of 2.5%, and lowered its 2020 forecast to 0.5% from 2%(4). Tommy Wu at Oxford Economics expect quarter three to be weaker than previously forecast as the current political turmoil weighs on consumer and business sentiment(5), Some of the Lawmakers and Political commentators mentions that the economic problems could not be fundamentally solved before solving the political issues, but there is no quick solution whether for the U.S.-China trade row or local political unrest. Political commentator Ivan Choy Chi-keung from Chinese University said "it would be too late (in the mid-October) for the government to announce measures in the policy address" Party lawmaker Lam Cheuk-ting commented that "This is a political issue, not an economic issue", "You have to resolve the political crisis, so public opinion can be stabilized and the economy can recover.(6) Whereas others show a positive attitude to the measures. For example, Bank of East Asia chief economist Paul Tang Sai-on said the measures will help industries, especially tourism, and ease some of the city's economic pains(7). The Chinese General Chamber of Commerce also said it welcomed the measures, which it believes will have a positive effect on social stability and harmony(8).
Full implementation of the Common Reporting Standard (CRS)
Secondly, as one of the world's leading international financial centers, Hong Kong has been characterized as a 'tax haven' due to its limit taxation on foreign-sourced income. However, entrepreneurs recently are saying that Hong Kong tax authorities are asking whether the taxes are paid at all if they are not being paid in Hong Kong, so the issue of double non-taxation is being put on the table. In addition, foreign investors are beginning to notice the obstacles for opening bank accounts for Hong Kong newly established companies. One of the main reasons behind it is because the formal and full implementation of Common Reporting Standard (CRS) of the Automatic Exchange Of Information (AEOI) in Hong Kong(9). The CRS seeks to establish the tax residency of customers. Hong Kong tax authorities are requiring financial institutions such as banks to collect and report certain information relating to customers' tax statuses and will exchange and share the collected information with the tax authority where the customers are tax residence.


Under this circumstance, it is not surprising that banks and financial institutions in Hong Kong are raising their customer thresholds for bank accounts opening to comply with the regulatory requirements and control operating costs as well.


Stricter Requirements to get a Tax Residence Certificates
What's more, in recent years, we notice HK Inland Revenue Department (IRD) has raised a higher threshold when issuing the Tax Residence Certificates for HK companies to claim tax benefits.


A Certificate of Resident Status(10) is a document issued by the Hong Kong competent authority (IRD) to a Hong Kong resident who requires proof of resident status for the purposes of claiming tax benefits under the Double Taxation Agreements. HK Holding companies who make applications and successfully get certificates could reduce the tax on dividends, interest and royalty received from treaty countries in accordance with the applicable tax treaties.


Recently, besides being incorporated your holding companies in Hong Kong, we notice the relevant authority would also pay emphasis on the place and management of your holding companies when they received the applications. To be specific, they will take a look at:


Whether your board members have a physical place of residence in HK;
Whether the board meetings have been actually held;
Are there any resolutions on business affairs have been passed by the Boards;
Whether your companies have hired employees besides administrative officers;
Whether your companies have a fixed place of business;

Whether your company has successfully open a HK bank account.
From these aspects, we find that the tax authorities are expecting the holding companies also to prove their place of control and management in Hong Kong in order to enjoy the tax benefits under DTAs nowadays. This means that holding company would not enjoy "offshore status". In addition, the certificate is issued annually in which the applicant has recognised the relevant income and there is no judicial review process if the application has been refused. All these barriers make it difficult for holding companies to obtain tax residence certificates unless they own an actual economic substance in Hong Kong.


Our recommendations
There is no doubt for us, that the economic growth in the city would remain weak, stemming from the increased China-US trade tensions and several weeks of pro-democracy protests. The economic downturn in Hong Kong in this short period of time will more or less have a negative impact on those holding schemes, especially for those who are seeking investments abroad or engage in export industry. In addition, the full implementation of CRS in Hong Kong (which means companies' zero tax returns are at risk of being reviewed by the authority), the increasingly stricter threshold to open HK company bank accounts for foreign beneficiary as well as the higher bar to receive a tax residence status (so that tax benefits can be claimed under DTAs) worth us paying attention. It is time for us to reconsider whether Hong Kong is still a suitable place to set up a Holding Company any more.

Indeed, so far, in accordance with Peter Churchouse (managing director of Portwood Capital), increasing numbers of companies are relocating their regional headquarters from Hong Kong to other parts of Asia, "most particularly" to Singapore(11). Nissan's valued vehicle manufacturing arm, Infiniti Motor, for example, has just announced its intention of moving its global headquarters from Hong Kong.

If you decide to relocate your Holding Company - where to and how
We are willing to help if you made a decision to move out of Hong Kong. Under the current Hong Kong Companies Ordinance, there is currently no re-domicile mechanism.


The alternative methods we provide to relocate your Hong Kong holding company would be a share swap with the newly established companies located in the jurisdictions you choose or through other diversified business arrangements as you wish. When it comes to select the new jurisdictions to relocate your holding companies, please note that various traditional offshore jurisdictions for holding purposes such as British Virgin Islands, Cayman Islands, Bermuda have recently required holding companies to engage in relevant activities to maintain adequate economic substance on an ongoing basis since 2019. Please consult us before taking an action. We offer a full range of relocation services as well as help you to find out the most suitable new destination for your holding companies.

Interested?


Author of the article Melody Feiyi Guo