1 Benefits of Hong Kong Holding Companies for

1 Benefits of Hong Kong Holding Companies for making International Investments Speaker: William Kong & Company http: //www. williamkong. com. hk William Kong & Company http: \www. williamkong. com. hk

2 Context l Investments in form of capital l Return in form of Dividend l Plan to exit by selling shares in company Parent Company Tax on Foreign Dividend Withholding Tax Subsidiary William Kong & Company http: \www. williamkong. com. hk

3 Glossary l With Holding Tax – “WHT” l Tax on Foreign dividend l Double Taxation Agreement “DTA” l Dividend l Royalties William Kong & Company http: \www. williamkong. com. hk

4 Case Study: China and Japan l Japanese Company Directly invest into China l Chinese – Japanese DTA in place. l China company pay dividend to Japanese parent, 10% needs to be with held by China l Japan will not tax this under their Foreign Dividend Exclusion System “FDES” l l Requirement: parent to hold >25% subsidiary for 6 months. Overall: 10% tax in China William Kong & Company http: \www. williamkong. com. hk Japanese Parent Foreign Dividend Tax 0% Dividend 10% WHT Chinese Subsidiary

5 Hong Kong intermediate holding comapny Japan Parent Hong Kong Intermediate Chinese Subsidiary William Kong & Company http: \www. williamkong. com. hk

6 China Hong Kong DTA l Japan Parent China subsidiary can pay dividend to Hong Kong parent at 5% With holding tax. l Hong Kong charges no with holding tax when paid to a Japanese parent. l Overall: 5% tax l Saves 5% compared with a Japanese Parent going direct to China William Kong & Company http: \www. williamkong. com. hk Hong Kong Intermediate 0% Foreign Dividend Tax 0% WHT 5% WHT Chinese Subsidiary

7 Any catch? l Hong Kong intermediate needs to carry out some trade to get the lower 5% with holding tax in China l Hong Kong Audited accounts and tax return needs to be presented to China. l BUT: Trading activities in Hong Kong can all be managed abroad. William Kong & Company http: \www. williamkong. com. hk

8 China invest into Japan Direct Method: 25% Tax on dividend – Tax Chinese Parent Credit given l Japanese profits tax at 30%, Japan WHT 10% under Japan - China DTA l China normally tax foreign dividend at 25%, but will give tax credit to 37% tax already paid. No Chinese tax. [(1 -30%) x (1 -10%)] / 100 l Overall: 37% Profits Tax 30% William Kong & Company http: \www. williamkong. com. hk Japanese Subsidiary 10% WHT

9 Chinese Parent In-direct Method 25% Tax. No tax credit. In-direct Method (via Hong Kong): l Lose tax credit of 37% paid to Japan. l China charges 25% tax on net after 37% already paid. l Overall: 52. 75%!!! 1 -(75% x 63%) l Not always comparable when country pairs are reverted. WHT 10% Profits tax 30% William Kong & Company http: \www. williamkong. com. hk Hong Kong Intermediate 0% Dividend Tax 0% WHT Japanese Subsidiary

10 Case Study: Europe invest into China l The largest economies in Europe largely have DTA with China now l Dividend WHT at 10%. l Most EU countries charges tax on foreign dividend income l But give tax credit to Chinese tax/WHT paid. l Direct may be the better way. l Except for the United Kingdom William Kong & Company http: \www. williamkong. com. hk

11 Europe invest into China – continue l United Kingdom does not tax foreign dividend l So, China pays Hong Kong at 5% WHT and Hong Kong pays UK at 0% WHT l In direct method Overall 5% deduction l Direct method: China pays UK 10% WHT. UK Parent Hong Kong Intermediate Chinese Subsidiary William Kong & Company http: \www. williamkong. com. hk

12 Exit route – selling your shares l Capital Gain Tax l UK 18% - 28% l Japan 10% - set to increase to 20% l China – around 25% Japanese Parent Chinese Subsidiary William Kong & Company http: \www. williamkong. com. hk Chinese Capital Gain Tax at 25%

13 Exit route – selling your shares – cont’d l l How about selling your Hong Kong company shares instead? Japan Parent Hong Kong charges 0% Capital Gain tax Hong Kong Intermediate Chinese Subsidiary William Kong & Company http: \www. williamkong. com. hk Hong Kong 0% Capital Gain Tax

14 Intellectual Properties - Royalties l Model l Our Intellectual Property Company “IPC” owns the IP and receive royalties l The royalties are taxed at the jurisdiction of the IPC and paid out as dividend l Consideration given to both IPC receipt of royalties and the tax rate of the IPC on that royalty William Kong & Company http: \www. williamkong. com. hk

15 Receipt of Royalties l Usually from multiple countries over the world l DTAs between countries dictates the rate of WHT l Recipient country tax the royalties as profits tax. William Kong & Company http: \www. williamkong. com. hk Payer of Royalties WHT China Payer of Royalties WHT UK Royalties IPC Profits Tax Royalties Payer of Royalties WHT Japan Royalties Payer of Royalties WHT Ireland

With holding tax of paying Royalties to Hong Kong William Kong & Company http: \www. williamkong. com. hk 16

17 Profits tax on Hong Kong Royalty income l Profits tax 16. 5% rate l Closest contender is Luxembourg l Even lower tax rate on IP at 5. 75% l However, certain conditions to be meet: 1. IP not transferred from owner to the Company 2. Expenses for the IP must be recorded as asset on the company balance sheet l No particular requirements in HK l May be taxed when Luxembourg company pays a dividend William Kong & Company http: \www. williamkong. com. hk

18 Selling your Intellectual Property l Capital Gain lower at 0% in HK l Capital Gain on Luxembourg is 5. 75% William Kong & Company http: \www. williamkong. com. hk