Investment opportunities in Asia Pacific via the Hong Kong platform

Siegfried Verstappen,Invest Hong Kong

Brussels office

21 March 2013

Practical advantages of a Hong Kong office

TDC Budapest seminarSofia, Bulgaria

RIGHT PLACE,RIGHT TIME

Hong Kong’s Enduring Advantages

Heart of Asia• The world's 4th busiest

international passenger airport

• Around 90 scheduled airlines operating some 750 flights per day to about150 destinations

• One of the world’s busiest container ports

• 23 minutes from central business districts to Airport by high-speed train

Shanghai

Hong Kong

Singapore

Seoul

Tokyo

Jakarta

KualaLumpur

Manila

Hanoi

Beijing

Taipei

Wuhan

Guangzhou

Mumbai

Ho-Chi-Minh-City

Qingdao

Chongqing

Fuzhou

Shenyang

Flights from Hong Kong to Shanghai

ca. 100 daily connectionsfirst 8:00 amlast 9:20 pmFlight time ca. 2 ½ h

Hong Kong and its reach within Asia

The circle represents approx. 3 h of flight or 1800 km

Conclusions?

Sell to China? Choose HK or SHA

Sell to Asia-Pacific? Choose HK

Sell to SEA? Choose Singapore

Return daytrip from HK to SHA is possible but not from Singapore

Low and simple tax rates

Hong Kong Singapore Mainland China

Corporate tax 16.5% maximum rate 18% maximum rate Standard rate = 25%High/New Tech Enterprises (HNTE) = 15%HNTE some regions 0%

Income tax 15% maximum rate(salaries)

20% maximum rate 5 - 45%

VAT/GST Nil 7%Certain exemptions apply

17%Certain exemptions apply

Income not subject to tax

Offshore income; dividends; capital gains; tax exemption for interest income from deposits placed with authorised financial institutions

Certain remitted income; certain shipping income; certain Singapore dividends; prescribed income of foreign investors arising from certain funds; capital gains

All income subject to tax (certain preferential tax treatments for foreign-invested enterprises)

Withholding tax Nil for dividends, management fees/, interest, rent5.25% for royalties

Nil for dividends10% for royalties15% for interest & rent 20% for mgt/ tech svc fees & directors’ remuneration

10% for dividends 10% for royalties10% for interest 10% for capital gains

HK is in more favourable position than Singapore in double-taxation avoidance with the Mainland

WithholdingTax Rate

Note WithholdingTax Rate

Note

Dividends 0% Hong Kong doesnot imposewithholding taxon dividendspaid to anonresident.

0% Singapore does notlevy withholding taxon dividends.

Interest 0% Hong Kong doesnot levywithholding taxon interest paidto nonresidents.

7% / 10% The 7% rate appliesto interest receivedby a bank orfinancial institution;the rate is 10% inall other cases.

Royalties Domestic rate,i.e. 4.95%

10%

Source: Deloitte International Tax Source

Hong Kong-Mainland China Singapore-Mainland China

Forbes Tax Misery Index 2009

Hong Kong - 3rd lowest tax misery score = 41.5

Singapore - eight positions higher, score = 78.5

Bulgaria – five positions higher, score = 73.5

China – nr 2, score = 159

France – nr 1, score = 167

Low and simple tax system

Source: Forbes Tax Misery Index 2009, Inland Revenue

Low and Simple Tax System

• NO VAT/GST or sales tax

• NO Capital gains tax

• NO Withholding tax on dividends and interest

•NO Estate duty

•NO Global taxation (offshore income allowed/only HK-sourced income is taxable)

•NO Wine duty

Only 3 direct taxes in HK: profits, salaries, property

Why Hong Kong instead of mainland China?

Source: Fiducia Management -Doing Business 2011, World Bank Report

WHY HONG KONG?

The ideal combination: The Hong Kong Limited Company executes the trade transactions and the Representative Office / WFOE in China manages quality control and/or manufacturing.

• Direct sales and direct invoicing from Hong Kong to overseas‘ subsidiaries and to customers

• FOB shipment to the customer, No direct contact between customer and manufacturer

• Profits are “locked“ in Hong Kong and not in China:taxed in Hong Kong and not in China!

• Goods do not touch the intermediary’s warehouse• No VAT refund complications• Reduced cost and risks:

• Transport and shipment cost• Finance cost• Credit risk Customer benefits from lower price

• Reliable legislation, easy taxation, low corruption

311

238

119

95

77

59

50

46

53

26

32

19

173

612

494

234

128

133

111

51

98

63

158

52

61

389

0 100 200 300 400 500 600 700 800 900

U.S.

Japan

U.K

China

Germany

France

Netherlands

Singapore

Switzerland

Taiwan

Italy

Australia

Others

Regional Headquarters Regional Offices

Asia’s Leading City for International Business

No. 1 in Asia for international companies3,882 regional offices and headquarters

Source: 2008 Annual Survey of Companies in Hong Kong Representing Parent Companies Located outside Hong Kong, Census & Statistics Dept, HKSARG

“””No other city in the world can help overseas investors manage the risks inherent in entering

Mainland markets as well as Hong Kong. This is an important part of the reason why overseas firms

prefer Hong Kong for the highest-value activities that they perform in the Asia-Pacific region.”

Michael Enright, Sun Hung Kai Properties Professor, School of Business, University of Hong Kong

Hong Kong is China’s Risk Manager

Foreign entrepreneur’s perspective

What is the most crucial element in the

decision making process regarding an

investment abroad for an entrepreneur?

Foreign entrepreneur’s perspective

CONFIDENCE!

The foreign entrepreneur’s perspective

CONFIDENCE that he will achieve the greatest added value by choosing a

particular route

Hong Kong’s Elements of Strategic Confidence

• Intellectual property rights• Legal recourse• Access to the Chinese market (CEPA)• Credit risk insurance• Chinese wall between suppliers/customers• Lower financing cost• Market research• Support for SME loans and marketing• RMB currency developments• Taxes

Legal recourse: problem

• Mainland China has no tradition of Western style law and jurisprudence

• Many lower courts are not yet fully conversant with new laws regulating commercial, investment or IPR issues

• Non-Chinese firms (and most Chinese firms) find it very difficult and time-consuming to obtain their rights through the Chinese courts

Solution A: HK International Arbitration Centre

• Insert clause in contract with the mainland Chinese partner that any disputes regarding the execution of the contract will be submitted to the Hong Kong International Arbitration Centre.

• Both Hong Kong and mainland China have signed the Convention of New York : any arbitration award from HK is immediately executable in China*

• HK based law cabinets confirm that the system is working speedily, smoothly and satisfactorily

• Website: www.hkiac.org

*(enforceable between HK and mainland China since February 2000)

Sol. B: Sue in HK, enforce in China

• A new agreement on July 16, 2006, between HK and mainland China : if parties provide for this in their contract, verdicts from the Hong Kong courts are immediately executable in mainland China*

• It covers money judgments and commercial cases

• The contract has to stipulate expressly in writing that the HK court has exclusive jurisdiction

• Applicable whenever the judgment debtor keeps his assets in mainland China

*(enforceable between HK and mainland China since August 2008)

Hong Kong’s credit risk insurance advantage

• Hong Kong based firms exporting goods to other markets can obtain both country risk and buyer risk insurance from a HKSAR agency called:

• Hong Kong Export Credit Insurance Corporation (ECIC)

• Website: http://www.hkecic.com/eclink/infoCenter.jsp

• Insurance premium can be as low as 0.39%

Hong Kong’s lower financing cost advantage

• Hong Kong based firms trading goods with other markets can obtain a lower financing cost as the base rate HIBOR is consistently lower than EURIBOR, since Hong Kong in effect follows U.S. monetary policy

Support for SME’s

Background to the RMB Trade Settlement Scheme

Pilot Cities (initially)– 5 pilot cities (Shanghai, Guangzhou,

Dongguan, Zhuhai and Shenzhen)Now expanded to all of China (vice premier

Li Keqiang August 2011)

Eligible transactions:– Cross border trade – Service trade

Eligible Enterprises in Mainland China: – 365 Mainland Designated Enterprises

(initially)– Transactions with non-MDEs now

allowed after PBOC registration

Coverage:– Hong Kong / Macau / ASEAN

member countries– Countries beyond ASEAN allowed

(highly dependent on access)

RMB Trade Settlement Scheme: implications for sourcing from China

● Old system of paying in hard currency has following consequences for the Chinese supplier:

● A) he has a currency risk exposure of about 6 weeks before SAFE informs him at what rate the conversion will take place

● B) he has to finance his foreign customer for 2 months before he receives the payment in his Chinese account

● C) therefore his export prices are up to 10% more expensive than his domestic prices to compensate these risks

● New system allowing renminbi payment has following consequences for the Chinese supplier:

● A) no longer currency risk exposure● B) no intervention by SAFE = payment occurs 4 weeks faster

● CONCLUSION: You can negotiate lower prices from your supplier: his 10% cushion is no longer required SINCE HE IS ALLOWED TO TRADE IN RENMINBI !!!

Chinese taxes: problem

• China is nr 2 worldwide on the Forbes Tax Misery Index

Chinese taxes: solutions

• Objective: reduce your taxable income in mainland China

• The Double-taxation avoidance treaty between HK and mainland China allows, to a certain degree, the imputation of expenses by HK parent companies to mainland affiliates

• Examples that could qualify under certain conditions: market research, personnel support or recruitment, quality control inspectors, logistics coordination, etc….

• Hong Kong corporate tax rate is 16.5% and even 0% for offshore incomes

• Hong Kong companies can deduct 50% of their income from joint ventures with mainland Chinese firms from taxable revenue

Chinese taxes: solutions

• The Double-taxation avoidance treaty (DTAT) between HK and mainland China brings in new and highly favourable rates for transfer of dividends, interest, and royalty payments from mainland China firms to their HK parent companies

• In practice, withholding taxes are now greatly reduced on these forms of transactions:

• 5% for dividend payments

• 7% for interest payments

• 7% for royalty payments

Confirmed Double Taxation Relief Agreements with 23 trading partners:

Double Taxation Agreements

In negotiations: • Bangladesh

• Canada

• Finland

• India

• Italy

• Korea

• Macau

• Malaysia

• Mexico

• Saudi Arabia

• the United Arab Emirates

• Austria

• Belgium

• Brunei

• Czech Republic

• France

• Hungary

• Indonesia

• Ireland

• New Zealand

• Portugal

• Spain (to be entered into force on 16-04-2012)

• Switzerland

• Thailand

• UK

• Vietnam

• Japan

• Jersey

• Kuwait

• Liechtenstein

• Luxembourg

• Mainland of China

• Malta

• Netherlands

As of 24 February 2012

* - Pending entry into force

Invest Hong Kong: how we can help

Enjoy our free of charge services

• Latest information on business environment and opportunities

• Contacts for all aspects of business establishment

• Arranging tailored visit programmes

• Support and assistance with visa applications, trade regulations etc.

• Public relations services during your launch/expansion

• Advice on settling in Hong Kong – housing, schooling, healthcare

• Rue d’Arlon/Aarlenstraat 118, B-1040 Brussels, Belgium• Telephone +32/2/775 00 76• E-mail: siegfried_verstappen@hongkong-eu.org • Websites: www.investhk.gov.hk and: www.hongkong-eu.org• Hong Kong background information:• http://www.brandhk.gov.hk/en/#/en/facts/factsheets/index.html

Invest Hong Kong Brussels office