ICS TRUST Webinar: Hong Kong as an International Hub for Trading in China

ICS TRUST Webinar Series
Hong Kong as an International Hub
for Trading in China

June 20 2012
By: Barrett Bingley

Table of Contents
• Why Hong Kong?

• Hong Kong as a market

• Hong Kong’s China Access

• Trading structures utilizing Hong Kong

• Future Trends

• Resources

• Key Takeaways

• Contacts

Copyright © 2012 ICS TRUST (ASIA) LIMITED. All rights reserved 2

ABOUT ICS TRUST

About ICS TRUST
• Established since 1980, ICS TRUST is a award-winning, private Hong Kong-based
company that provides integrated business solutions for corporations doing business
in China using Hong Kong as the gateway.

ICS TRUST’s Approved Business Service Provider
Corporate Services U.S.C.S.
United States Commercial Service

• Doing Business in Hong Kong ICS TRUST was the Executive Partner for Hong
Kong / Macau for APBO April 2011 (Los Angeles)
• Doing Business in China (DBC)
• Virtual CFO
DFAIT T.C.S.
• China Remedy Services Department of Foreign Affairs and
International Trade
Trade Commissioner Service
• Trade Services

Hong Kong as a Gateway to
Doing Business in Asia


WHY HONG KONG?

Why Hong Kong?
Economy

Banking & Finance

Location

Legal System

Tax System

Business Environment


WHY HONG KONG?

Economy
• Hong Kong is a free market, rule of law based economy
• Hong Kong ranked 5th in Global Cities Index 2012
• World’s largest IPO hub in 2010 and Asia’s largest venture
capital centre
• Largest external investor in China, accounting for US$223
billion or 45% of total

Source: Survey condecuted by the American Journal Foreign Policy, in conjuction with A.T. Kearnery and the Chicago Council on Global
Affairs, Hong Kong Trade and Development Council


WHY HONG KONG?

Economy
• Hong Kong Annual GDP Growth Rate
– Average GDP growth rate at 5.65% from 1974 to 2012

Source: The General Statistics Branch, The Census and Statistics Department of Hong Kong, Trading Economics


WHY HONG KONG?

Economy
• The 4 Pillar Industries in Hong Kong

FINANCIAL SERVICES

REAL ESTATE

TOURISM
TRADING


WHY HONG KONG?

Banking & Finance
• Hong Kong’s External Orientation:
– 3rd most important financial centre (after New
York and London)
– 10th largest for external transactions, 2nd
largest after Japan in Asia
– 6th largest Foreign Exchange Market in the
world (based on turnover)
• Infrastructure:
– Multi-Currencies Bank accounts:
• 1st and largest offshore RMB platform-handles
86% of China’s global RMB trade
– Strong, well-regulated banking system:
• Home to 70 of the world’s 100 largest banks
• 131 Licensed Banks, 36 Restricted License,
35 Deposit taking companies,
85 Representative Offices, 30 countries


WHY HONG KONG?

Location

Source:InvestHK


WHY HONG KONG?

Connectivity
• World’s busiest international Air Cargo Hub
• One of the world’s busiest Container Port
(+22mTEUs)
• Connections to about 160 destinations
worldwide
• 900 daily flights by over 95 airlines
• Handles about 32% of China’s imports and
28% of exports
• Handles 80% of Pearl River Delta’s trade
– Eg.) Shenzhen, Guangzhou, Dongguan,
Zhuhai
• Constant upgrading of infrastructure links
including road, rail and recently, barge


WHY HONG KONG?

Legal System
• British Common Law
• English as medium of communication in courts
• Independent Judiciary - no home team
advantage
• Vibrant legal profession (solicitors / barristers)
• Many international law firms have offices in HK
• Accountable local administration
• Internationally recognized arbitration and
mediation centre


WHY HONG KONG?

Tax System
• Low and stable taxes
• According to Forbes Tax Misery
Index 2009, Hong Kong has the
lowest tax misery in Asia
Pacific and 3rd lowest in the
world

Source: Forbes Magazine

Copyright © 2012 ICS TRUST (ASIA) LIMITED. All rights reserved

WHY HONG KONG?

Tax System
• 1. Territorial Tax System
• Profits Tax = Onshore profits = 16.5 % Offshore profits = Zero %
• No capital gains tax
• Inbound dividends not taxed
• No withholding tax on outbound dividends
• No VAT or sales tax
• No estate duty
• AND Government consistently runs a surplus

• 2. Preferential Tax Agreement with China
• Dividends from China to US – 10%
• Dividends from China to Hong Kong – 5%


WHY HONG KONG?

Tax System
• Hong Kong has signed, operational tax treaties with:
Austria France Japan New Zealand
Belgium Hungary Liechtenstein Spain
Brunei Indonesia Luxembourg United Kingdom
Czech Republic Ireland Netherlands Vietnams
China

• Treaties with the following countries are awaiting notification:
Jersey Malaysia Portugal
Kuwait Malta Switzerland

• Discussions are ongoing with:
Bangladesh Guernsey Korea Saudi Arabia
Canada India Macau United Arab Emirates
Finland Italy Mexico
Source: Hong Kong International Law Division, Department of Justice, Treaties and International Agreements


HONG KONG AS A MARKET

Hong Kong as a market
• Key characteristics:
– Openness, tourism, trade and investment
– Population: 7.11 million (mid-year 2011), Visitor: 41.92 million (2011)
– GDP per Capita: US $34,106 (2011), GDP Growth: 5% (2011)

• Excellent prospects for suppliers on:
– Aviation, Computer/Information Technology Equipment, cosmetics and
toiletries, education/training, environmental technologies, film, franchising,
medial equipment, safety and security equipment, travel and tourism

Source: US Commercial Services


HONG KONG AS A MARKET

Hong Kong as a market
• Planning and execution of public infrastructure works valued at
over US$16 billion
– Eg.) Hong Kong International Airport Expansion,
West Kowloon Cultural District
– Over 11% of all Hong Kong Government procurement
contracts were awarded to US firms in 2011

• Hong Kong-based Private Procurement
– Home to a large number of procurement agents and purchasing offices
– Where many purchasing decisions for major projects and conglomerates are made

Source: US Commercial Services


HONG KONG’S CHINA ACCESS

Accessing China through Hong Kong

Opportunity in the Greater Pearl River Delta Region

Closer Economic Partnership Agreement (CEPA)

The Pacific Bridge Initiative (PBI)



• Immediate market - the Pearl River Delta:
– 48 Million people
– 27% of China’s imports/exports
– 9.4% real GDP growth in 2009



• Closer Economic Partnership Arrangement (CEPA)

Source: Invest Hong Kong



• US-Hong Kong Partnership: The Pacific
Bridge Initiative (PBI)
– Agreement between the USFCS and
HKTDC to collaborate on achieving
National Export Initiative (NEI) objectives

– Encourages U.S. companies to leverage
the Hong Kong platform to tap the China
and broader Asian markets


TRADING THROUGH HONG KONG

Trading Structures Utilizing Hong Kong
Setting up a Hong Kong Entity

Common issues when doing business in Hong Kong

Hong Kong as a trading hub

Tax and Profit Repatriation

Exit Strategy



Setting up a Hong Kong entity
• Types of Business Vehicles:
– Private Company Limited by Shares
– Private Company Limited by Guarantee
– Branch Operations
– Representative Office
– Sole Proprietorship/General Proprietorship/Limited Partnership

• Corporate structuring in Hong Kong
– Incorporation 7 working days
– No residency requirements for directors and shareholders
– No requirement for multitude of licenses
– Flexibility in terms of changing nature of business, shareholder mix,
capital structure etc



Setting up a Hong Kong entity:
Corporate Law
• Hong Kong – The Companies Ordinance (Cap 32)
– Limited Company with Memorandum + Articles (M&A)* for residents or non residents
– Shares – no minimum capital requirement (1 Shareholder)
– Directors (not Vice Presidents, President or Officers) (1 Director)
– Registered Office in Hong Kong
– Company Secretary
– Individuals or Corporations acting as a Director (nominees)



Hong Kong as a trading Hub-Import from China

1 cc Purchase Order
Your Company

1 Purchase Order 1 Purchase Order
Your Customer Your New Vendor/Factory
• Buys direct from Asia 3 Invoice Hong Kong Subsidiary 3 Invoice
•Coordinates In Asia
shipments through its
own Asian buying
office to optimize
savings re: freight and 2 Letter of Credit 2 Letter of Credit
insurance costs
Banks
•Gets lower prices
Benefits: 5 Payment $ 5 Payment $
• Can Sell FOB “Any Asian Port” Freight Forwarders
• Goods are shipped directly to your customers: from vendor/factory to customer
4 Direct shipment of goods • Coordinates shipment and
-eliminating your need for a warehouse shipping document status
-reducing the costs of storage and transit
• An Asian presence without the cost of renting a physical office
or having your own staff
• Profits booked “offshore” can be structured to be taxed at 0%
or 16.5% tax in Hong Kong Copyright © 2012 ICS TRUST (ASIA) LIMITED. All rights reserved 24


Case Study-Importing from China
• CLIENT:
• A family trading business - on pet toys and accessories
• Sources from China
• Sells to specialty pet stores (USA / Canada)
• Expanding larger buyers

• PROBLEM:
• No knowledge of L/C terms and conditions
• Concerned about penalties re discrepancies in L/Cs
• Difficulties in liaising with factories and coordinating with freight
forwarders due to time difference and cultural issues



Case Study-Solution
• ICS TRUST establishes Hong Kong • Advised on structure
a Hong Kong Structuring • Incorporated the Hong Kong Company
subsidiary

• Our client is now able to •Selected HSBC as our client’s bank in Hong Kong
focus on business •Set up bank accounts
development and Banking •KYC process
marketing in Asia •Acted as a signatory

• Our client gained •ICS TRUST is client’s trading back office and acts
confidence working on for them day to day
large L/C orders with Trade •We receive orders from customers, place orders
big-box retailers due Solutions on vendors, book trading revenues in Hong Kong
to ICS TRUST’s •We advise on all Letters of Credit (L/C)
expertise transactions

ICS TRUST acts as our client’s Asian headquarters
to coordinate with factories in China
to handle trade documentation


Hong Kong as a trading Hub
Exporting to China as a Trading Company

1 cc Purchase Order
Your Company

1 Purchase Order 1 Purchase Order
Your Customer Your New
3 Invoice Vendor/Factory
In Asia 3 Invoice Hong Kong Subsidiary Canada, USA & Worldwide

2 Letter of Credit 2 Letter of Credit
Banks
5 Payment $ 5 Payment $
Freight
4 Direct shipment of goods from vendor/factory to customer
Forwarders


Hong Kong as a trading Hub
Exporting to China as a Manufacturer
Your Customer Your Company
In Asia
1 Purchase Order
Your Customer 1 Purchase 3 Invoice
In Asia Order
3 Invoice
Your Customer
In Asia Your New
Your Warehouse Freight
Hong Kong
In Asia Forwarders
Your Customer Subsidiary
In Asia 4 Shipment
4 Distribute goods to
various customers in Asia
Your Customer
In Asia
2 Letter of Credit 2 Transfer of L/C
Your Customer Banks
In Asia
5 Payment $ 5 Payment $
Your Customer Benefits:
In Asia 1. Invoicing Centre
2. Sales Office to Asian buyers
Your Customer
In Asia
3. Warehousing
4. Distribution Centre
5. Transportation Centre
- Your Hong Kong Company is an “Asset Light”
structure2012 ICS TRUST (ASIA) LIMITED.WFOEreserved 28
Copyright © as compared to a All rights


Case Study-Exporting to China
• CLIENT:
– International high-tech product developer focusing in
the architecture/construction industry
– Entering Asian Market – China, HK, Macau,
Singapore, Philippines, India, Malaysia, etc.

• PROBLEM:
– Need a sales and logistics coordination point in Asia
to distribute goods to various customers in Asia
– Want to keep overhead costs low
– No banking facilitates to handle payments in various
Asian currencies
– No experience in Asia; No Asian language skills



Case Study-Solution

Hong Kong Banking Order Taking Invoicing Warehousing Distribution
Structuring
• Advised on • Set up • Receives orders • Issues invoice • Set up • Arrange logistics
structure multicurrency from various to customer warehouse service provide
accounts customers in Asia across Asia space to store to pick and pack
• Incorporated the inventory then the large
Hong Kong • Act as signatory • Review and • Can bill clients en route to shipment into
Company prepare shipping in various buyers smaller ones to
documents currencies send to multiple
buyers in Asia
• Tracking of
payments

ICS TRUST acts as our client’s Asian headquarters representing them in
handling: sales, warehousing, distribution, and logistics arrangement



Considerations for using Hong Kong
• Intellectual Property (IP) Protection
– -territorial

• Types of IP that are register able:
– Trademark
– Domain Names
– Patents
– Copyrights



Considerations for using Hong Kong
• Human Resources Issues
– Recruitment
– Employment Visas
– Mandatory Provident Fund (MPF)
• Hong Kong Vs. Singapore
– Staff turnover
• Hong Kong and Singapore are
close to 10% while China at 20%

Source: HRM Asia



Hong Kong Vs. China Tax System
HONG KONG CHINA

VAT 0 3% -17%
Hong Kong offers an
Consumption Tax 0 3% - 45%
On Shore / Off Shore
Capital Gains Tax 0 10% - 20%
territorial tax system
Withholding Tax 0 5% - 20%
(depending on jurisdiction)
Estate Duty (Tax) 0 0

Profit (Enterprise Income) Tax 0 – 16.5% 25%
Repatriating dividends from Business Tax 0 5% - 20%
China to an actively trading
Income (Individual Income) Tax 2 - 17% 5% - 45 %
Hong Kong company incurs
Stamp Duty Up to 4.25% 0.0005 - 0.01% (of
ONLY a 5% dividend contract amount)
withholding tax Education Surcharge (of 0 3%
Business Tax or VAT)
Urban Construction (of Business 0 1% - 7%
Tax or VAT)



Profit Flow
Parent Company / Hong Kong / China
Parent Company

$ No dividend withholding tax

Hong Kong Company
No HK tax on
dividends
received
Dividends subject to W/H
tax of 5% for HK.
10% + for other jurisdictions
$
$
Chinese VAT on
Profits Tax at 25% Chinese WFOE domestic sales
10% R/E Goods Customers



Exit Strategy
• Sales of China/Hong Kong Assets
– No capital gain tax
– Ease of completing a sale as
compared to China
– Maybe able to avoid capital gain tax in
China

• Best jurisdiction to go public with
your Asian assets


FUTURE TRENDS

Future Trends

• Internationalization of Renminbi

• China Entity - The death of Representative Office (RO)

• Loosen Regulations on setting up a WFOE

• More Hong Kong Double Taxation Avoidance (DTAs) Treaties


KEY TAKEWAYS

Key Takeaways

• Hong Kong has a strong and resilient economy with key ‘hub’
characteristics such as openness, high connectivity and rule of
law.
• Its levels of international trade and investment, tourism and
concentrated sophisticated clients make it an appealing market
in itself
• Hong Kong’s geography and special status make it an ideal
platform for trading in Asia, especially for Mainland China
• Utilizing a Hong Kong entity is an important part of your trading
structure to leverage its benefits on tax, logistics, banking and
legal advantages


RESOURCES

Resources

Hong Kong as a gateway
to doing business in
China and internationally


Q&A


CONTACT

Contact
Barrett Bingley THANK YOU
Business Development Manager
bbingley@icstrust.com
+852 3413 3838

6th Floor St. John’s Building,
33 Garden Rd.
Central, Hong Kong


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