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 2012By: Barrett Bingley

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

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

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About ICS TRUST

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Approved Business Service Provider

• Doing Business in Hong Kong

• Doing Business in China (DBC)

• Virtual CFO

• China Remedy Services

• Trade Services

ICS TRUST’s Corporate Services

Hong Kong as a Gateway to Doing Business in Asia

U.S.C.S.United States Commercial Service

ICS TRUST was the Executive Partner for Hong Kong / Macau for APBO April 2011 (Los Angeles)

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.

DFAIT T.C.S.Department of Foreign Affairs and International TradeTrade Commissioner Service


Why Hong Kong?Economy

Banking & Finance

Location

Legal System

Tax System

Business Environment

4

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

5

WHY HONG KONG?

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


Economy

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WHY HONG KONG?

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

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


Economy• The 4 Pillar Industries in Hong Kong

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WHY HONG KONG?

FINA

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L ESTATE

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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

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WHY HONG KONG?

Copyright © 2012 ICS TRUST (ASIA) LIMITED. All rights reserved 9

WHY HONG KONG?

Location

Source:InvestHK


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 linksincluding road, rail and recently, barge

10

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

11

WHY HONG KONG?


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


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%

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WHY HONG KONG?


Tax System

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• Hong Kong has signed, operational tax treaties with:Austria France Japan New ZealandBelgium Hungary Liechtenstein SpainBrunei Indonesia Luxembourg United KingdomCzech Republic Ireland Netherlands VietnamsChina

• Treaties with the following countries are awaiting notification: Jersey MalaysiaPortugalKuwait Malta Switzerland

• Discussions are ongoing with:Bangladesh Guernsey Korea Saudi ArabiaCanada India Macau United Arab EmiratesFinland Italy Mexico

WHY HONG KONG?

Source: Hong Kong International Law Division, Department of Justice, Treaties and International Agreements


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 AS A MARKET


Accessing China through Hong Kong

Opportunity in the Greater Pearl River Delta Region

Closer Economic Partnership Agreement (CEPA)

The Pacific Bridge Initiative (PBI)

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HONG KONG’S CHINA ACCESS



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



Accessing China through Hong Kong• Closer Economic Partnership Arrangement (CEPA)

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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

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Trading Structures Utilizing Hong KongSetting 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

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TRADING THROUGH HONG KONG


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

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• 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)


Setting up a Hong Kong entity:Corporate Law


Hong Kong as a trading Hub-Import from ChinaTRADING THROUGH HONG KONG

Your Company

Your New Hong Kong Subsidiary

Vendor/FactoryIn Asia

Letter of Credit

cc Purchase Order

Direct shipment of goods from vendor/factory to customer

1

2

4

Banks

Your Customer• Buys direct from Asia•Coordinates shipments through its own Asian buying office to optimize savings re: freight and insurance costs

•Gets lower prices

Purchase Order1 Purchase Order1

Invoice3Invoice3

Letter of Credit2

Freight Forwarders• Coordinates shipment and shipping document status

Payment $5 Payment $5Benefits:• Can Sell FOB “Any Asian Port”• Goods are shipped directly to your customers:-eliminating your need for a warehouse-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


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

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•Advised on structure•Incorporated the Hong Kong CompanyHong Kong

Structuring

•Selected HSBC as our client’s bank in Hong Kong•Set up bank accounts•KYC process•Acted as a signatory

Banking

•ICS TRUST is client’s trading back office and acts for them day to day•We receive orders from customers, place orders on vendors, book trading revenues in Hong Kong•We advise on all Letters of Credit (L/C) transactions

Trade Solutions

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

• ICS TRUST establishes a Hong Kong subsidiary

• Our client is now able to focus on business development and marketing in Asia

• Our client gained confidence working on large L/C orders with big-box retailers due to ICS TRUST’s expertise

Case Study-Solution

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TRADING THROUGH HONG KONGHong Kong as a trading HubExporting to China as a Trading Company

Your Company

Your New Hong Kong Subsidiary Vendor/Factory

Canada, USA & Worldwide

Letter of Credit

cc Purchase Order

Direct shipment of goods from vendor/factory to customer

1

2

4

Banks

Your CustomerIn Asia

Purchase Order1 Purchase Order1

Invoice3Invoice3

Letter of Credit2

Freight Forwarders

Payment $5 Payment $5


TRADING THROUGH HONG KONGHong Kong as a trading HubExporting to China as a Manufacturer

Your Company

Your New Hong Kong Subsidiary

Letter of Credit

Distribute goods to various customers in Asia

2

4

Banks


Purchase Order1Purchase Order

1

Invoice3

2

Freight Forwarders

Payment $5 Payment $5








Your WarehouseIn Asia

Transfer of L/C

Shipment4

Invoice3

Benefits:1. Invoicing Centre2. Sales Office to Asian buyers3. Warehousing4. Distribution Centre5. Transportation Centre- Your Hong Kong Company is an “Asset Light”

structure as compared to a WFOE


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

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Case Study-Solution

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Hong Kong Structuring•Advised on

structure

•Incorporated the Hong Kong Company

Banking

•Set up multicurrency accounts

•Act as signatory

Order Taking

•Receives orders from various customers in Asia

•Review and prepare shipping documents

Invoicing

•Issues invoice to customer across Asia

•Can bill clients in various currencies

•Tracking of payments

Warehousing

•Set up warehouse space to store inventory then en route to buyers

Distribution

•Arrange logistics service provide to pick and pack the large shipment into smaller ones to send to multiple buyers in Asia

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

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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%

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Source: HRM Asia


HONG KONG CHINA

VAT 0 3% -17%

Consumption Tax 0 3% - 45%

Capital Gains Tax 0 10% - 20%

Withholding Tax 0 5% - 20% (depending on jurisdiction)

Estate Duty (Tax) 0 0

Profit (Enterprise Income) Tax 0 – 16.5% 25%

Business Tax 0 5% - 20%

Income (Individual Income) Tax 2 - 17% 5% - 45 %

Stamp Duty Up to 4.25% 0.0005 - 0.01% (of contract amount)

Education Surcharge (of Business Tax or VAT)

0 3%

Urban Construction (of Business Tax or VAT)

0 1% - 7%

Hong Kong Vs. China Tax System

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Hong Kong offers an

On Shore / Off Shore

territorial tax system

Repatriating dividends from

China to an actively trading

Hong Kong company incurs

ONLY a 5% dividend

withholding tax



Dividends subject to W/H tax of 5% for HK.

10% + for other jurisdictions

No HK tax on dividends received

Profit Flow Parent Company / Hong Kong / China

$

GoodsProfits Tax at 25%

10% R/E

No dividend withholding tax

VAT on domestic sales

$

$

Hong Kong Company

Parent Company

Chinese WFOEChinese

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

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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

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FUTURE TRENDS


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

KEY TAKEWAYS


Resources

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RESOURCES

Hong Kong as a gateway to doing

business in China and internationally


Q & A


Contact

Barrett BingleyBusiness Development Manager [email protected]+852 3413 3838

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

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THANK YOU

CONTACT