International Business Study

It is common nowadays to find international companies and high net worth individuals to register offshore companies in low –tax jurisdictions. Hong Kong is one such jurisdiction which far outweighs the rest of the jurisdiction in terms of its clean image and competitive tax rates. Having an offshore company in Hong Kong is beneficial in more ways than the apparent tax benefit. Some of the benefits of the Hong Kong offshore business set up are discussed below.
Trading companies can benefit from re-invoicing
Hong Kong is a significant centre for reinvoicing whereby goods are imported by a Hong Kong offshore company at a particular price and reinvoiced at a higher price and sold-on to an overseas buyer. In such transaction the shipment of the goods is routed directly from the supplier to the buyer, only the documents are managed in between by the Hong Kong Company. Along with reinvoicing, the Hong Kong entity will also reissue the bill of lading to represent itself as the shipper and the port of origin as Hong Kong. The reinvoicing system is a fast and well practiced system to reduce the tax burden on trading entities. This reinvoicing system also offers another benefit in disguise whereby, the trading company can easily hide the identity of the supplier and original sourcing price. The tax free income so earned can be held in the bank account for further investments or can be repatriated; Hong Kong allows free repatriation of post-tax funds.
Investment and property Holding companies
Hong Kong does not levy tax on capital gains therefore an offshore entity’s bank account can accumulate income and funds, free of tax and also earn interest on the same. The offshore companies can hold deposits in any preferred international currency. Also such entities can be used to buy and hold property and in case of change of ownership of property, transfer of the company shares will be sufficient, thus avoiding additional expenses in the form of stamp duties and legal fees. Such an arrangement to own property also helps to avoid inheritance tax. Dividends from overseas and inland subsidiaries are also exempted from tax.

As holding company for China investment
Many investors and enterprises are particularly attracted to Hong Kong because of the potential business opportunities in the mainland China. But registering a Hong Kong company will provide a better leeway for venturing into China. A Hong Kong entity as a holding company for China investment will curtail the liabilities of the foreign parent company. Selling or restructuring a china investment can be easier when these changes are done at the holding company level otherwise going through the Chinese formalities and bureaucracy is cumbersome for foreign investors. Because of the double taxation agreement existing between Hong Kong and China the withholding tax on dividends payable by a Chinese subsidiary to a Hong Kong parent company is reduced from 20% to 5%. If the Hong Kong Company procures and sells goods manufactured by its China subsidiary then only 50% of the profits thus generated are treated as sourced in Hong Kong and subjected to tax.
In a nut sell a Hong Kong entity which is well structured can remarkably benefit a company with international operations. Limitation of exposure to taxes, liabilities, and bureaucratic hurdles along with better profit distribution, ease of restructuring also benefits the bottom line of the foreign company and facilitates its internationalisation strategy.