Expanding your business into a foreign country is a difficult challenge to face, especially if you are aiming to enter into China’s markets. Fortunately though, establishing a WFOE in Hong Kong will not only let you do business inside China, but it will also help you reap many of the benefits that Hong Kong has to offer.

A Wholly Foreign-Owned Enterprise (WFOE) is the most common legal entity type in China and is suitable for most business ventures. 

A WFOE is a business entity formed in Mainland China entirely with foreign capital. It is completely under foreign control, and it does not have any formal Chinese ownership participation. For a foreign company to be able to issue receipts, export goods, or hire staff in China, it must legally register as a local company such as a WFOE.

However, in China’s market there are complex legal and regulatory requirements, and ever-changing business environments present many challenges for foreign companies doing business in the country or seeking to expand there.

Although it is easy to establish a WFOE directly in Mainland China, Hong Kong China provides international clients the opportunity to use a Hong Kong Limited Company as the “holding company” for the China WFOE, thus benefiting from Hong Kong’s rule of law and extensive banking network, along with providing a safety-net for the parent company.

There are various reasons for choosing to setup a WFOE in Hong Kong China—its proximity to Mainland China makes it a key business hub in Asia. In addition, Hong Kong remains one of the most advantageous company locations because of its highly developed and transparent legal financial system.

Benefiting from Hong Kong’s Corporate Structure

A holding company in Hong Kong acts as a solid foundation for any investors looking to enter China’s markets, and it provides a corporate structure, giving investors much more flexibility when it comes to managing their finances in China.

For example, a US company that owns an entity in Hong Kong can then benefit from any China-based assets or entities that the Hong Kong company owns as a Wholly Foreign-Owned Enterprise.

Under the same example, the US company can use its Hong Kong China entity that manages these China-based assets to sell any China-based entities through a variety of methods, such as disposing of its shares through the Hong Kong company. Although in recent years, the People’s Republic of China has enacted strict laws to clamp down on indirect sales of taxable entities within the country. Thus, it is important to remain aware of any applicable policies.

Favorable Taxing Structures

Hong Kong has a much more favorable taxing structure compared to Mainland China as it adopts a territorial taxation base.

Everyone (including companies, partnerships, and sole proprietorships) who engages in commercial or professional business within Hong Kong is subject to pay a profit tax. These profit taxes cover any profits derived from economic activity that takes place within Hong Kong. Thus, any profits made from economic activity outside of Hong Kong would not be considered taxable.

The tax rates within Hong Kong are also comparatively very low rates, with embedded entities inside Hong Kong being subject to pay profit taxes on a two-tier system.

The first 2,000,000 HKD of profits earned is subject to an 8.25% profit tax, while any profits earned after this margin will be subject to a 16.5% profit tax. This is considerably lower when you compare it to the whopping 25% for companies with annual profit above RMB 3 million and a lower tax rate ranging from 2.5% to 20% for companies with annual profit below RMB 3 million that corporate Income Tax (CIT) rate that China imposes. Furthermore, both capital gains and income are not subject to a tax.

Hong Kong also has a very extensive tax treaty network that does not impose withholding taxes for either dividend or interest payments.

In recent years, Mainland China has concluded a double taxation agreement (DTA) with Hong Kong. This treaty provides a preferential withholding tax rate on dividends of up to 5%, provided that certain conditions are met. If these necessary conditions are met, then this can greatly benefit HQ or Hong Kong efficiently, as profits can be repatriated, preventing withholding losses.

Doing business in a foreign country is never simple, and the same goes for Mainland China. Many foreign companies will need assistance if they hope to be successful. CanCan can assist you in quickly formatting a business in Mainland China through a WFOE structure holding by using a Hong Kong Limited Company. 

Stay tuned as we’ll be sharing additional insights for setting up cross-border companies overseas as CanCan expands its services and scope into the US, Canada, and Singapore. Reach out to us today for a free consultation or reach out to Katherine directly: k at cancangroup dot com