How to utilize Hong Kong for Investment into China (Dated 18 February 2022)

These days, we often receive an inquiry from global business leaders: “what will happen to Greater China economy, when the China-US tension eases}. As geopolitics depend on various competing factors involving state actors, it is not possible to predict what will happen in the region in 2-to-3-year time.  Having mentioned this, in this article, while shying away from political sentiments and views, purely based on facts on the ground, we strive to analyze the prospect of the Greater China economy. Thereafter, based on the aforementioned analysis, we will introduce how to utilize Hong Kong as the best venue to conduct business for foreign enterprises in Greater China, and how to manage risks. 

The current situation in the Greater China and Hong Kong as follows: 

  • Greater China is the second largest economy in the world (although data to calculate GDP should be verified due to vastness of geography), and despite the economic deterioration, the economy is growing. 
  • Real estate bubble has burst, but the economy in the main cities have thrived and enough room for the central government to implement Common Prosperity in order to flat the disparity between the rich and poor (wealth distribution).   
  • Particularly, following US silicon valley, in Shenzhen has developed as a hub for AI and IOT technologies which attract investment activities, and it is expected to grow. However, a lot of western countries may not have access to the Shenzhen market.   
  • Fundamentally, China is based on the socialistic political system, although the measure of government depends on the elites in power. Such system is different from the Western Democratic system.  Due to the differing political ideologies, there are diplomatic tension between the Western countries and Japan.  In terms of relations with Taiwan, as of this stage, there are no specific policy which has been implemented. 

Hong Kong

  • The so-called Democratic movement has commenced in 2014, and the democratic movement has become active in 2019. Given the democratic movement was said to be influenced by foreign forces, the National Security Law was enacted which policed criminal acts involving incitement. Adding the spread of COVID and Omicron, the democratic movement has been placated.  
  • Based on the Joint Declaration entered with the United Kingdom under which “one country, two systems” is supposed to last until 2047, the political policies have been assessed. Many Hong Kong residents have moved to North America, United Kingdom, Europe, Japan or Taiwan just like the time back in 1997.  
  • Western Countries like Google may move out of Hong Kong or reduce the operation in Hong Kong, but many of the international financial institutions continue to station in Hong Kong, which supports the investment activities involving foreign investors from around the world. In addition, as contrary to Google and other IT related companies’ policies, the investment into Hong Kong based data center is increasing.  

This article does not take position on either way.  Based on the neutral view, the analytical result is as follows:

Based on purely on the trend infused by the international relations and feeling or sentiment affected by global social media, turning back on the second largest economy could be a questionable business strategies. 

Shenzhen being the hub for AI and IOT has been influenced by Silicon valley and Japanese technologies. However, to make the technologies on their own, the local custom and/or human resources have contributed the growth of such industry.  

The National Security Law is managed in the socialist national system, but the incitement or treason can be found in the criminal law in other countries.  Also, the judiciary and executive branches are categorically different.  However, the fact that there are no blessings from the Western countries, careful explanation in order to have common understanding may be needed. 

In early 1990’s, Hong Kong people and businesses have relocated to other countries ahead of 1997 HK Handover from the UK.  The current “exodus” follows the similar pattern. In the case of 1997 exodus, after the SARS crisis in 2003, around 2005, a lot of Hong Kong people returned and many businesses and talents returned to Hong Kong, which fueled the growth of Hong Kong economy.  If there are cycles for Hong Kong economy, statistically, 2019 could be the bust of the cycle, and economic growth may be expected in due course.  Once the international political tension or perception eases, people will return to Hong Kong, as the international finance city. 

There are people who believes such geopolitical risk a business chance.  The prominent US investor and found of hedge fund Bridge Water Associates, Mr. Ray Dalio has recently injected additional capital into Alibaba group.  Now may be the time to get closer to the Chinese business people who can return the investment in due course.

However, for ordinary investors and business people, geopolitical risks cannot be controlled. As such, we need to have a plan B when making business decisions in relations to China. To risk manage, Hong Kong is the ideal place as the gateway to China. In addition, utilization of offshore entity such as BVI, Cayman, Seychelles and Singapore) could be beneficial in case the situation in Hong Kong abrupt and drastic changes.  Such offshore entity can be registered as a foreign entity in Hong Kong, and bank account can be opened in Hong Kong.  But at the same time, such company should have a secondary bank account outside of Hong Kong, and funds should be periodically pooled in such third country’s bank account.   

We sincerely hope that the geopolitical tension eases soon.  For use of Hong Kong or offshore entities, please consult Visence Professional Services.

HK Corporate Tax, Audit and Tax Filing

Hong Kong’s corporate tax rates are the lowest among the international financial city.
16.5%, if annual net profits are HK $ 2,000,000 or more.
8.25% if annual net profits are below HK $ 2,000,000.

In addition to the above, given that Hong Kong adopts a territorial taxation system, if a Hong Kong company’s source of income is originated from a source outside of Hong Kong, such company may apply for an offshore tax exemption. Upon Inland Revenue Department’s approval, part or all of it will be exempt from their corporate tax.

Audit obligations

All Hong Kong Limited Companies must undergo an annual audit by a licensed CPA. For completeness, such audit is not necessary for collective partnerships, partnerships, and sole proprietors.

Newly incorporates companies have exemption where such company may complete the audit within 18 months after the establishment.

Tax Return (Profits Tax Return)

Hong Kong corporations are required to file tax returns every year. A tax return (Profits Tax) will be sent to the registered address every year. The deadline for submission is one month after issuance in principle, but the deadline for submission varies depending on the accounting period.

If there is a settlement date between April 1, 2020 and November 30, 2020, “Code N”
If there is a closing date between December 1, 2020 and December 31, 2020, “Code D”
If there is a closing date between January 1, 2021 and the end of March 31, 2021, “Code M”

The deadline for submission for each code is as follows
Code N: Until June 15, 2021
Code D: Until August 30, 2021
Code M (if profitable) until January 31, 2022

If the annual gross revenue is HK$2,000,000 or less, the audit report does not need to be attached when the corporation submits a tax return.

Tax treatment when a Hong Kong corporation invests

When a Hong Kong corporation invests, there is no tax on the return on the investment if certain requirements are met. The Inland Revenue Department Tax Department determines various factors such as the business itself is not an investment business, the investment is long-term, and the return on investment is outside Hong Kong. The auditor should first decide whether or not investment income is subject to taxation.