Enjoying largest benefit - using Hong Kong company as stepping stone

Background

  1. Mr. A is from USA with USA company "USA Ltd";
  2. Business nature is about management consulting;
  3. His business activity with China include :
    •  invest in China to setup Wholly Foreign Owned Enterprise (WFOE);
    •  sell service to China clients;

New arrangement

  1. Mr. A forms a Hong Kong company "H Ltd";
  2. using H Ltd as investor in China to setup the WFOE;
  3. and using H Ltd to sign service contract with China client;

Benefit

  1. setting up WFOE
    •  Disclosing less information to China government
      •  Originally, need to provide information of USA Ltd to China government;
      •  Now, just need to provide information of H Ltd;
    •  time to arrange document is shorter
      •  USA Ltd documents needs to be translated into Chinese and be certified by China Embassy;
      •  document from H Ltd is more ready for China use, and the certification process is more standard in Hong Kong - time and cost more under control;
  2. dividend from WFOE
    •  when China company earns profit and need to pay back to investor, withholding tax in China applies;
    •  if paying to USA Ltd, the rate is around 10%;
    •  if paying to H Ltd, the rate is around 5%;
  3. service fee from China client
    •  when China client needs to pay service fee to USA Ltd, withholding tax of 10% applies;
    •  when China client needs to pay service fee to H Ltd, withholding tax of 7% applies;

Example : break-even

  1. Cost of setting up HK company = around HKD 10,000;
  2. Cost of annual maintenance of HK company = around HKD 20,000 (including accounting and audit fee);
  3. If China income is HKD 670,000
    •  saving 3% of withholding tax (China related transaction) = HKD 20,100
    •  the cost almost break-even of maintain the Hong Kong company.