International Tax Day New Orleans October 24 2012

International Tax Day New Orleans, October 24, 2012 The Hong Kong and China business and tax landscape Whilst every effort has been made to ensure that the information, views and data contained herein are accurate and given in good faith, we accept no responsibility for and exclude all of our liability to the maximum extent permitted by applicable law for any loss and/or damage whatsoever or howsoever caused from use of the information contained in this report. Fiducia shall only be liable in respect of anything done or omitted in a grossly negligent manner. This report has been produced by Fiducia exclusively for clients, for their internal circulation. Fiducia retains all rights, titles and interests, including copyright and other proprietary rights, in this report and all material provided or made available as part of this report. This report does not constitute legal, valuation, tax, or investment advice. Those interested in specific guidance for legal, strategic, and/or financial or accounting matters, should seek competent professional advice from their own advisors. E&OE

Fiducia Management Consultants We have a 30 -year track record of serving international clients in China ► Established in 1982 in Hong Kong ► Professional service provider focused on China and Hong Kong ► 90 Chinese and foreign specialists ► 3 China offices located in Hong Kong, Shanghai and Shenzhen ► High level of local expertise and multicultural experience ► Proven ability to apply international standards with local understanding ► Close co-ordination with the client leading to long-term relationships ► Strong support from a large network of partners, AGN member since ‘ 03 Page 2

Comparison of locations: Hong Kong vs. China One country – Two Systems – Differences prevail! ? = Page 3

Comparison of locations: Hong Kong vs. China Hong Kong´s regulatory requirements are moderate when compared to China Hong Kong China Incorporating a Ltd. Ca. 5 days Ca. 180 days Minimum capital requirements 1 HKD (0, 08 USD) Ca. 140, 000 USD (Trading-WFOE) Social insurance contributions 5% Up to 50% Time need for tax payments 80 hours per year 504 hours per year Time / cost ratio to comply with regulatory requirements 100 500 (employer part, as percentage of gross salary) Page 4

Comparison of key locations for sourcing offices The Ease of Doing Business 2012 HONG KONG SHANGHAI BANGKOK HO CHI MINH CITY 3 35 29 44 No minimum ($1) US$140, 000 (depending on business scope) US$6, 500 (foreign owned Thai limited company) No minimum (except for e. g. insurance, banking, real estate) Total tax rate as a % of profit 23% 63. 5% 37. 5% 40. 1% Amount of yearly tax payments 4 7 23 32 Preparation and filing (hours required) 80 398 264 941 Proximity: airport to city centre (km) 36 40 30 8 Corruption Perception Index 12 75 80 112 FACTORS No. of days to incorporate company Minimum capital requirements Page 5

Comparison of key locations for sourcing offices Corruption remains a major challenge in China No Country Index 1 New Zealand 9. 5 2 Denmark 9. 4 5 Singapore 9. 2 12 Hong Kong 8. 4 14 Germany 8 14 Japan 8 32 Taiwan 6. 1 75 China 3. 6 95 India 3. 1 Scale from 0 - 10, 0 country is perceived as highly corrupt; 10 country is perceived as very clean TRANSPARENCY INTERNATIONAL – CORRUPTION PERCEPTIONS INDEX 2011 www. transparency. org Page 6

Comparison of set up options within China Rep Office vs. WFOE – Corporate Structure Page 7

Comparison of set up options within China Rep Office vs. WFOE – Tax & HR Page 8

Comparison of set up options within China Incorporation Requirements of both Rep Office and Wholly Foreign Owned Enterprise Page 9

Comparison of set up options within China Set-up times in weeks for different entities (estimated from past experience) Trading WFOE Document preparation Name registration Manufacturing WFOE Environmental Evaluation Foreign investment approval Business Licence Tax and other registrations Service WFOE Bank Account opening Capital injection and verification Import / Export Licence & Customs Rep Office 0 5 10 15 20 25 30 35 Page 10

Comparison of set up options within China Accounting Requirements of Rep Office and Wholly Foreign Owned Enterprise Page 11

Finance Issues Taxation – Corporate Income Tax (CIT) RO WFOE § The CIT is based on the deemed income, which is § The taxable income is the amount remaining from calculated from the Rep Office’s expenses. § Deemed income = operating expenses / (1 deemed profit rate-business tax rate) § Deemed profit rate is at least 15% and business its gross income in a tax year after deducting the corresponding costs, expenses and losses. § The Tax Bureau can make adjustments due to non-deductible expenses or transfer prices that are deemed inappropriate tax rate is usually 5%. § The actual profit rate shall be reviewed and approved by the local tax bureau. According to the Chinese Enterprise Income Tax Law implemented on January 1, 2008, the rate of corporate income tax is 25% for most industries. Some particular tax holidays and preferential treatments may be granted for approved new high-tech enterprises, which are subject to a reduced rate of 15%. § It is settled on an annual basis but is paid quarterly with adjustments either refunded or carried forward to the next year. § The final calculation will be based on the year-end audit. Page 12

Finance Issues Shareholder loans Every shareholder loan needs to be approved by the State Administration of Foreign Exchange (SA Steps Organizations Remarks 1. Signing loan contract 2. Applying foreign loan registration and specific bank account foreign loan SAFE 3. Getting foreign loan registration certificate and approval for specific bank account SAFE 4. Opening specific bank account Bank 5. Feedback to SAFE about bank information SAFE 6. Registration for withdrawal of loan SAFE 7. Registration for settlement to RMB if necessary SAFE 8. Applying for approval for payment of principal and interest SAFE 9. Payment of principal and interest Bank With approval from SAFE 10. Feedback to SAFE about payment SAFE Within 5 days after payment 11. De-registration of foreign loan SAFE Within 10 days after loan is paid off Within 15 days after the contract is signed Usually 20 working days Usually 1 week and with approval from SAFE Within 5 days after the receipt of loan and with the bank-in slip Page 13

Finance Issues WFOE Profit Repatriation Foreign companies in China generally can repatriate the profits they earned to their mother companies overseas. The procedure can be done every year after the annual audit has been conducted and the corporate income tax has been filed. Restrictions: At least 10% of the profit should be retained in the company as its statutory surplus reserve. When the total amount of the reserve reaches 50% of the company’s registered capital, the company can stop the provision of the reserve. Annual profits must also first "make up" losses from previous years and the registered capital has to be fully paid in before any distribution can be made to shareholders. China levies a withholding tax on any dividends remitted out of the country. Profits earned before 2008 are tax free. Page 14

Finance Issues Withholding Tax Rates The general rate for withholding tax for payments of dividends, interest, and royalties from China to abroad is 10%. For recipients from certain countries the rate is reduced under the respective DTA (e. g. Hong Kong, Singapore, Dubai, Belgium). Hong Kong General (e. g. USA, Germany) Dividend 5%* / 10% Interest 7% 10% Royalty 7% 10% *To enjoy the reduced 5% withholding tax rate on dividend, the “beneficial owner” of China WFOE must satisfy the conditions listed on the following page. Page 15

Finance Issues Withholding Tax Rates The reduced rate of 5% for dividends under the China-Hong Kong DBA is only granted to holding companies of a Chinese entity that fulfil the following requirements a) Be a Hong Kong company; b) Directly holding at least 25% of the entity that pays dividend; c) The shareholding percentage complies with the above limit during the past 12 months prior to dividend payment; d) The company must have been incorporated for over 12 months; e) The company should have its own business operation. Page 16

Restructuring & Closure Change of shareholder / sale of a WFOE § Reasons for selling (parts of) a WFOE § Additional, leaving or changing shareholders § Group internal restructuring § Ceasing the business § Tax treatment § Capital gains subject to tax § Tax liability also exists for indirect sale of Chinese entity § Tax rate 10% § Exemption for group internal restructuring possible, but difficult to obtain § Clear agreement between parties should me made, who will be in charge of paying the tax Remark: Due to the necessary due diligence and the limitations of the operations of a WFOE by its business scope a sale is normally only possibly if the acquiring party plans to continue the existing business. The sale of shell companies is of no practical relevance in China. Page 17

Comparison of company structures In practice, the direct investment is often the structure of choice Traditional structures Holding company in USA 100% 70% 50% China WFOE China JV Page 18

Comparison of company structures Inserting a Holding in Hong Kong has benefits for the China business Option for WFOE Holding company in USA Option for JV with foreign partner Holding company in USA 70% 100% HK Holding 100% Option for JV with Chinese partner Holding company in USA Partner (USA or CN) 30% 100% HK Holding 50% Chinese Partner 50% China WFOE China JV Page 19

Comparison of company structures Benefits of using a Hong Kong holding company ► Hong Kong company can be used for billings to other SEA countries ► Hong Kong coporate tax rate only 16. 5% ► Company set-up in China less complicated with Hong Kong parent company ► Easy and quick realization also of more complicated ownership structures possible in Hong Kong ► In the case of changes in the shareholding structure, shares of Hong Kong entity can be transferred ► Dividends are tax free in Hong Kong ► Withholding tax for dividends paid from China to Hong Kong favorable compared to many other countries (conditions apply) ► Hong Kong´s legal system is based on British law, favorable in case of disputes Page 20

Comparison of locations– Sales in China Why Hong Kong? – Why not Shanghai? Advantages and benefits ► Low start-up cost ► Asia wide market coverage ► High level of knowledge in sales and marketing, strong experience in China market & international trade ► Maintaining stock and/or spare parts stock in duty free Hong Kong ► Invoicing in Euro or USD, no currency risks and no foreign exchange complications ► Invoicing to end customer in Asia i. e. Indent business (direct shipment to customer) ► Profits are “locked” in Hong Kong and not in China ► Reliable legislation, low taxation, easy tax system, no profit tax on “offshore” businesses ► Availability of Services – Banking, Logistics, Project Finance etc. ► Sales in RMB possible through the new RMB Trade Settlement Scheme Disadvantages ► Cost – staff and office space are more expensive in Hong Kong compared to mainland China • Hong Kong is a good starting point for SMEs to test the market, to achieve Asia wide market coverage • For service providers Hong Kong offers much lower operating cost Page 21

Comparison of locations – Sales in China Warehouse in Asia for Asia-Pacific Mother company has (global) centralized warehouse in USA Production / Central warehouse Hong Kong Regional warehouse (Alternative: FTZ in China) • Increasing Asia business • Problem: Time and geographical distances Regional warehouse for time sensitive goods (e. g. spare parts) • Excellent logistics environment • Not duties or sales taxes Customers in Asia-Pacific Order by • Own subsidiary • Service partners • Final customer Page 22

Comparison of locations Example: Knorr-Bremse AG´s integrated Asia-Pacific organization Germany Global Headquarters Hongkong Asia Pacific Headquarters • Regional management center • Lead sales for Hongkong, Taiwan and South East Asia • Shared Service Center für HR, IT and Finance & Controlling for all Asia-Pacific offices Other locations in Asia-Pacific • 12 locations in China for production, sales, services and R&D • Other locations in India, Singaporr, Australia, Korea, Taiwan, Japan • • Reasons: International know-how of HK staff, highly qualified talent pool, professional service providers available, no travel restrictions Local presence: In the end all business is local! Page 23

Comparison of locations Example: Knorr-Bremse AG´s integrated Asia-Pacific organization China Mainland Organization 12 local entities, thereof • 7 Joint Ventures • 4 WFOEs • 1 WFOE Branch Office HQs for Commercial Vehicle System in Shanghai • • • JVs for production, mostly to serve domestic market WFOE for high-tech production for domestic market and export Shanghai preferred location for HQs Page 24

Comparison of locations– Purchasing from China Why Hong Kong? – Why not Shanghai? Advantages and benefits ► High level of knowledge in Hong Kong, Strong experience in international trade ► Less corruption danger ► No VAT refund complications ► Third party business - Direct shipment to overseas customers with cost advantages ► Transport and shipment cost, Finance cost, Credit risk = Customer benefits from lower price ► Reliable legislation, low taxation, easy tax system ► No profit tax for “offshore “ businesses i. e. buying in China and selling to European customers ► Profits are “locked” in Hong Kong and not in China ► Availability of Services – Banking, Logistics, Merchandising etc. ► Purchase in RMB possible through the new RMB Trade Settlement Scheme – forward rates are more attractive in Hong Kong Disadvantages ► Cost – staff and office space are more expensive in Hong Kong compared to mainland China ► Proximity to the customer or the supplier – this can be overcome with the establishment of a Rep. Office which manages product sourcing and quality control Many of the world’s largest retailers have their sourcing activities headquartered in Hong Kong Page 25

C Case study – Combination of China and Hong Kong for purchasing from China Manufacturer A Manufacturer B Manufacturer C Manufacturer Subsidiary or third party - Make or Buy Advantage: ► Cost savings by outsourcing production to China Head Office in Germany ► Product development ► Supplier selection ► Determines inter-group pricing China: ► Supports supplier search ► Quality assurance ► Quality control China Rep. Office or WFOE Hong Kong Company: ► Deals with manufacturers and customers regarding commercial aspects ► Order processing ► Invoicing Hong Kong Limited company B Ultimate Customer A Subsidiary Italy Subsidiary Brazil Advantages: ► Divide and conquer ► Minimise Risks ► Utilise the Hong Kong advantage (e. g. finance, tax) ► Cost efficient Page 26

Collaboration of trade partners Getting all relevant parties on the Order To Cash Platform Supply Chain Management Platform ► Accessibility from anywhere, anytime ► Managing operations over distances using the right tool ► Shift to handling information more efficiently through technology ► Whole transparency and visibility of the supply chain ► Cut costs through better planning and decisions based on accurate reporting data from the system Page 27

Tax, legal and corporate background of Hong Kong’s strategic advantages Low Tax Regime ► Profits tax is 16. 5% ► Offshore transaction tax free ► Salaries tax is 15% ► No sales tax or VAT ► No taxes on dividends ► No Capital Gains Tax Legal Environment Trade Friendly Export Credit Insurance Banking and Financial Services Outsourcing possibilities Page 28

Tax comparison of favorite corporate structures in Asia Comparison of tax rates in Hong Kong, Singapur and China 11% Singapur 25% 14% 7% 17% Hong Kong 20% 28% 5% 5% 15% 20% 17% 15% 31% Corporate Income Tax Personal Income Tax Social Security (Employee) Social Security (Employer) VAT Source: Invest. HK Page 29

Countries with a DTA with Hong Kong Confirmed and ratified Double Taxation Agreements with 24 Countries (as at: 30. April 2012): Belgium Brunei China France UK Indonesia Ireland Japan Liechtenstein Luxembourg Holland New Zealand Austria Spain Thailand Czech Republik Hungary Vietnam Not yet ratified: Under discussion: Jersey Kuwait Malaysia Malta Portugal Schwitzerland Bangladesh Finland Guernsey India Italy Canada South Korea Macau Malaysia Mexico Saudi-Arabia UAE Source: Invest. HK Page 30

Summary of the Hong Kong and China Business Landscape Important key learnings ► Consider the unique differences between Hong Kong and mainland China when making plans for business in the region ► Hong Kong set up is fast, China takes longer but an entity in China is required for local trading activities ► Tax landscape in Hong Kong in China is substantially different and requires good planning to profit from both places advantages ► Hong Kong is very suitable as a holding company or when sourcing from China Page 31

Our offices What is your next move? Hong Kong Tel: (+852) 2523 2171 Fax: (+852) 2810 4494 Email: info@fiducia-china. com Shanghai Tel: (+86) 21 6327 9118 Fax: (+86) 21 6327 9228 Email: info@fiducia-china. com Shenzhen Tel: (+86) 755 8329 2303 Fax: (+86) 755 8329 0821 Email: info@fiducia-china. com www. fiducia-china. com Page 32