Hong Kong is known as one of the world’s leading financial hubs. Despite the recent turmoil, it can still be a great place to incorporate an investment holding company, depending on the nature of your business, business transactions and plans for going public.
This guide will explain why you might want to choose Hong Kong as a base for your investment holding company.
1. Attractive tax system
Hong Kong has a territorial basis of taxation where tax is only levied on profits which arise in or are derived from Hong Kong. Profits that do not have a Hong Kong source are not subject to profits tax.
Dividend income and capital gains are also not subject to profits tax, and no withholding tax is imposed on payments of dividends and interest.
Hong Kong’s profit tax rates are also relatively low and incorporated entities are subject to a two-tier tax system. The first HKD 2 million of profits generated locally is subject to a profit tax rate of 8.25%, and any profits that exceed this margin will be taxed at a rate of 16.5%.
However, if your profits are derived from outside of Hong Kong, your business might be eligible for 0% taxes.
2. Expansive double taxation agreements
Hong Kong has an expansive tax treaty network with over 40 jurisdictions around the world. The tax agreements reduce taxes levied on dividends, interest and royalty that are received from countries that have entered a DTA with Hong Kong. Double tax treaties also eliminate tax from being imposed on the same income.
Only Hong Kong resident individuals and companies that are managed and controlled in Hong Kong can benefit from income tax relief under the DTA. Hong Kong resident individuals are those who ordinarily reside in Hong Kong or have stayed in Hong Kong for more than 180 days during the year of assessment.
A Hong Kong resident company refers to a company that is incorporated in Hong Kong or incorporated outside of Hong Kong but is controlled and managed in Hong Kong.
3. Investors and funding resources
Perhaps one of the most important reasons for foreign investors to choose Hong Kong as their base for investment holding companies is that Hong Kong provides access to a diverse pool of investors and funding resources, which include private equity, venture capital, angel investors and other government grants.
Hong Kong is the second-largest private equity market in Asia and one of the three popular regions for private equity in addition to London and New York.
Private equity refers to professional investors who provide investments or funds given to private companies to support the company’s growth in return for a majority stake of equity, often 50% or more. Private equity firms usually invest in companies that are going through financial difficulties, mismanagement or debt.
Private equity funds in Hong Kong obtain their funding from family offices, limited partners, sovereign wealth funds, asset managers and high-net-worth individuals and firms.
Venture capital (VC) funding has become popular among small businesses or start-ups that need funding or mentorship. As a small company, they may lack access to bank loans or other debt instruments, which is why they may seek funding from VC firms.
VC firms provide funds to start-ups or small businesses that are believed to have potential long-term growth of at least 10 times the investment in return for a minority stake (less than 50%). They also offer mentorship opportunities and accelerator programs. If the business fails, the company does not need to repay the VC firm.
Angel investors are wealthy individuals who invest their personal money in early-stage start-ups or during the seed phase in exchange for ownership equity. As angel investors have business experience, they also provide mentorship and guidance for new start-ups.
Angel investors can also invest as groups or networks by pooling their funds together to invest more money than an individual angel investor would.
4. Gateway to China
Hong Kong, strategically located in central East Asia, is a natural gateway to mainland China and is an advantageous geographical location for setting up an investment holding company if you plan to expand into China.
Built historically on a free market economy, Hong Kong has developed into a contemporary international business platform.
As one of the premier international financial centres, Hong Kong acts as a favoured conduit for foreign direct investments in China. With good development in the past decades, Hong Kong financial specialists are managing risks well in respect of investments in China.
Further, the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA), the first free trade agreement ever concluded by the governments of China and Hong Kong, provides vast opportunities for Hong Kong goods and services and enhances the close economic cooperation and integration between the two places.
CEPA brings new business opportunities to China, Hong Kong and foreign investors. By establishing a business in Hong Kong, foreign investors would enjoy the CEPA benefits and tap into the opportunities of the China market.
Hong Kong is one of the top destinations as a base for your investment holding company because of its relatively low tax rate compared to other locations and has over 40 tax treaties that can be used to reduce taxes on dividends, interests and royalties.
The Special Administration Region also offers a wide range of investors and funding resources to early-stage businesses to support business growth in exchange for equity. Lastly, since Hong Kong is located in central East Asia, it is a perfect location for entrepreneurs who want to expand to China and can also benefit from trade agreements between the mainland and Hong Kong.
If you have any other questions regarding setting up an investment holding company or a normal company in Hong Kong, feel free to contact Acclime.
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