Advantage of using Hong Kong Company to apply for WFOE in China

Introduction of Hong Kong Company ("HK")The pricing for the transaction, as usual, will have to
Hong Kong, officially the Hong Kong Specialaccount for both the full industrial cost and a margin.
Administrative Region is one special administrativeThis latter must be configured in order for the Chinese
regions of China. The territory lies on the eastern sideentity to reach a sound financial and fiscal
of the Pearl River Delta.performance, but still providing wide enough space, to
Hong Kong was a dependent territory of the Unitedthe HK entity, to build its margins. In practice, the margin
Kingdom from 1842 until July 1, 1997. Under the policycan vary considerably and must be carefully chosen
of "one country, two systems", the Centralaccording to industry sector and the actual financial
Government is responsible for the territory's defenceperformance, among other factors. The HK company
and foreign affairs, while the Government of Hongwill then realize its turnover by selling to its clients,
Kong is responsible for its own legal system, policeaccording to its marketing strengths. The margin
force, monetary system, customs policy, immigrationinvolved in this latter transaction will then build the
policy etc.majority profits. The proper offshore corporate
Hong Kong remains one of the top twenty tradingstructure can save approximately USD 0.07 for every
economies, the world's third largest financial center.one dollar worth of goods. A considerable difference.
Hong Kong's corporate law is strongly based on the3. HONG KONG company as a black box
British Legal System, the setting up of a Hong Kong isSourcing operations in HK that serve European and
a str. Local businesses are regulated and Hong KongAmerican customers often need to walk a tightrope to
regards itself as a low tax centre rather than a taxmeet demands. With product life cycles getting shorter
haven. Taxes are levied on profits which is 16.5% sinceand disloyal customers merely looking at the price tag,
Financial Year 2008/2009. Under specialthese customers might try doing direct business with
circumstances, a Hong Kong company may eventhe respective Chinese suppliers. Therefore, many
declare business transactions as offshore which arebuyers have found it very useful that by channelling
subject o 0% tax in Hong Kong.business via a HK company the risk of disclosing their
As Hong Kong's role as a major trading and gatewayChinese suppliers can be avoided. When the final
to China mainland and Asia, some companies formedgoods are shipped, all related documents, labels,
in Hong Kong are for trading purposes generally, whileaddresses and other hints are rewritten in HK so that
some use it as HQ of it's operations in China mainland.customers as well as suppliers only know the HK
Doesn't like other China cities, Hong Kong has noLimited Company, but do not know each other.
restrictions on capital transfer in/out of Hong Kong (No4. Easy relax constraints on restructuring operations
Currency Control)If these weren't enough of an advantage, let's take a
Why structure with your HK company and subsidiarylook of the advantages of having a structured
WFOE in China?investment in China mainland as opposed to a direct
As many foreign companies continue to source fromone. China's regulations and company laws are being
China via Hong Kong (HK), it is worthwhile to take arefined and, although they benefit from decades of
closer look as to why this model enjoys ongoingexperience by looking at developed countries, they are
popularity and how to implement an efficient set-up.far from simple handling. Investing in China does not
There are many good reasons for companies tohave to be confused with the simple setting up of
manage their supply chain from HK: a goodmanufacturing WFOE, Trading WFOE or provision of
infrastructure, a legal framework based on British law,services to local clients: it involves a long term
a transparent and efficient banking system, faircommitment to play by the local rules in China:
taxation, a fully convertible currency and a qualifiedMergers, Acquisitions, company restructuring,
workforce.reallocation of shares among investors, or even buying
1. No storage costs and less financial riskout the investor, are all paths which lie ahead of any
The option of selling goods 'Free On Board' (FOB)investment and should not be underestimated in the
from China has become a huge success factor forinitial formulation of the strategy.
foreign companies that have set up shop in HK. TheSo how can an offshore structure relax constraints on
big retailers in US & Europe who are a majorthese operations? The idea of buffer entity comes in
customer group of many toy, textile and hard goodsmoving the hub of corporate restructuring operation
trading companies are increasingly asking for thisback into the offshore investment vehicle, as opposed
option which also helps the traders avoid many of theto a direct involvement of the Chinese company itself.
former risks associated with selling big numbers ofThe ease and freedom in reallocation of shares or
merchandise. By opening a letter of credit to the HKsale of part of, as well as all of the equity stake in an
Limited Company which is then passed on to theHong Kong company, is considerably more attractive
China supplier, the danger of non-payment by thethan having to confront Chinese regulations which, at
customer can be easily eliminated. This has particulartimes, have proven not so supportive and responsive.
significance if the order is customised specificallyIn practical, a reallocation of shares among investors in
according to the customer's needs: special brandShanghai may cost investors 2 months to accomplish
name, colour, functionality or simply the packagingall licenses. While in Hong Kong, it takes 1 week only.
make it impossible to sell goods to another customer.As a matter of fact, a full blown model for offshore
Apart from smaller financial risks, the cost of logisticsstructures would recommend an offshore investment
and expensive storing – which often make up 3-5%vehicle on the back of each investment into China
of a transaction – can be saved. Thus, direct FOBMainland. The pros and cons of such a complete
business leads to a faster time to market and to lowermodel as opposed to a single buffer holding company
prices both of which can boost competitiveness inmust be evaluated on a single client base.
times of rising sourcing costs throughout the region.CONCLUSIONS
2. Lower Tax rates through HK company operationNeedless to say, such a structure involves setup and
offshore with it's WFOE in Chinamaintenance costs and time. Hong Kong's world
Let's assume a 25% corporate income tax rate forrenowned business services infrastructure will make
China Mainland and a 16.5% for Hong Kong. Thethis process less of a burden. With TCBC's
Chinese entity will be the one running the operations,professional advice, such an offshore structure can be
while the HK entity will allow for optimization of thesetup in a matter of weeks and then enjoys all the
company's offshore corporate structure.benefits of this structure arrangement and avoiding
Once the goods are produced or traded in Chinasome of the weaknesses of China investment
mainland, they can be sold to it's HK parent company.structure.