The best way to access the Chinese Market is by opening a Wholly Foreign Owned Entity (WFOE) in order to carry any trade activity, including counseling or freelancing services.
From a (1) feasibility to dispose of the WFOE assets, (2) tax planning, and (3) moving money offshore perspective, any foreign investor should create a Holding Company in Hong Kong 有限公司 to own the WFOE.
Disposal of the WFOE assets or Restructuring
China has laws (taxes) to avoid indirect sale of assets located in Mainland China.
Example 1.
Company “A” formed in the USA owns a Company in China (hence a subsidiary), in this case, a WFOE. If Company A sells the Shares of the Subsidiary, this taxable event (Capital Gains, let’s say), might be at a 10% tax rate.
Example 2.
Company “B”, a Holding Company formed in Hong Kong, owns the same WFOE in China. If the Hong Kong company sells the shares of the WFOE, the Capital Gain tax might be exempt or much lower, since Hong Kong and China have Tax Treaty to Avoid Double Taxation.
Example 3. Indirect Disposal of Chinese Assets
Company “A”, formed in the USA, owns a Holding Company in Hong Kong (Company “B”), and this Hong Kong Holding Company Owns company “C”, a Chinese WFOE.
In the event that Company “A” (a U.S. Company) sells its share of or in the Hong Kong Company, China will treat this as an indirect sale or disposal of Chinese Assets, and will attribute the Capital Gain to Company “A” located in the U.S. and hence it will not apply the tax treaty with Hong Kong.
For the above, it is usual that the U.S. Company owns a Hong Kong Holding Company, and the Hong Kong Holding Company will own a Company in China, and once the U.S. company wants to dispose of the China Assets, it will use the Hong Kong Holding Company to dispose of the shares or the asset in order to profit from the tax treaty.
Restructuring:
Transfer of a WFOA requires an approval from the government, so in order to reduce time and efforts, it is better to transfer the shares (all or part of it, depending on your intended purpose) of the Hong Kong Holding Company that owns the Mainland China WFOA.
Tax Planning
Transfer Pricing:
Goods produced in Mainland China (hereinafter “China”) can be transferred to the Hong Kong Holding Company at a lower price under Transfer Pricing rules, and then the HK Company can dispose and sell this products to other businesses or directly to customers. Since the final revenue will be generated in the HK Company, the investor will benefit from a lower tax rate then if the investor(s) would had sold the goods directly from the China WFOE.
Converting and Moving Money Offshore
Hong Kong is a financial hub where banks are used to moving, handling, and converting Renminbi (RMB) to USD or other currencies. This will ease capital conversion and transfers.
Closer Economic Partnership Arrangement (CEPA)
China and Hong Kong subscribed the CEPA, which is an agreement that gives, among other things, benefits to Hong Kong Companies when forming a company in Mainland China as a subsidiary. Hong Kong Company can export tariff free to Mainland China, and other areas of cooperation.
https://www.tid.gov.hk/english/cepa/press/files/CEPA_leaflet.pdf
About the Author:
Jean Franco Fernández Clark
Corporate & Tax Lawyer.
Speaks English/Spanish/French/Italian/Russian. 我学习汉语。
Disclaimer: Nothing in this article shall be considered legal, financial, or tax advice. If you wish to obtain advice you must address your tax consultant or attorney. The publication of this article is for information purposes only and the content in this article comes from personal experiences and it is not by any means a legal or tax advice. Information may not be updated nor correct. I make no implicit nor explicit representation in regards to the information contained herein.
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