Investors looking for an investment vehicle that can hold assets or investments and generate profit may consider an investment holding company.
This article will provide more details on the benefits and why you should set up an investment holding company in Hong Kong.
What is an investment holding company?
An investment holding company is a particular entity that owns assets and shares of other companies that it controls. As such, it does not engage in any business activities, such as sales, manufacturing or providing services but can oversee the company’s management decisions.
It can also be called an umbrella or parent company and holding companies that fully own other companies are referred to as wholly-owned subsidiaries.
Reasons for setting up a holding company in Hong Kong
The following are reasons why you should set up a holding company in Hong Kong:
Hong Kong is considered a tax haven because of its low tax rates.
Corporate income tax is based on a two-tier tax profit regime in which corporations are taxed at 8.25% on the first HKD 2 million and 16.5% on any profits that exceed 2 million.
Unincorporated businesses are taxed at 7.5% on the first HKD 2 million and 15% on profits greater than 2 million.
Taxation in Hong Kong is based on a territorial basis, meaning that profits tax is only imposed on profits derived in Hong Kong. Even if you are a Hong Kong resident but generate earnings from outside Hong Kong, the tax will not be levied on that profit.
Hong Kong does not impose a tax on capital gains, dividends, withholding tax on dividends or interest, VAT and sales tax.
Hong Kong is located on the southeast coast of mainland China and individuals can easily travel to and from Shanghai, Beijing and other significant Chinese cities in a single day. Because of its closeness to China, it is considered an entry point to China.
Additionally, Hong Kong’s culture and languages are similar to those in China, so you and your company will be able to adapt to the China market quickly.
Hong Kong and China have also entered a Closer Economic Partnership Agreement (CEPA), a free trade agreement enhancing mutual market access and containing facilitation measures for bilateral trade and investment between China and Hong Kong.
Double tax treaties
Hong Kong currently has 40 double tax agreements (DTA), and the purpose of the DTAs is to eliminate double taxation on income. Double taxation occurs when a taxpayer is taxed on the same income twice by two jurisdictions.
Benefits of a holding company
Setting up a Hong Kong investment holding company is relatively simple and can be incorporated in approximately two weeks.
The investment holding company is a separate legal entity, and the shareholders’ liability is limited to the amount contributed. If the company becomes bankrupt, the shareholders’ assets would not be at risk.
Even though the holding company cannot engage in any business activities, it can own and purchase tangible and intangible assets, such as buildings, intellectual property and stocks.
Investment holding companies also have control over subsidiary companies that it owns shares in and can participate in the subsidiary’s management.
Incorporating an investment holding company in Hong Kong requires a minimum share capital of only HKD 1.00.
Holding company incorporation process
1. Meeting statutory requirements
To set up a holding company, you will need the following:
- Company officers – a minimum of one director, shareholder and company secretary (cannot be the same person). If the company secretary is:
- An individual – must be a Hong Kong resident.
- A company – the registered address or principal office must be in Hong Kong.
- Registered share capital of at least HKD 1.00
The process of setting up a holding company is similar to opening a normal company and includes the following steps:
2. Choosing a business structure and company name
The most common business entity used for a holding company is the private limited company, a structure with the fewest incorporation requirements. The company name can be in either English, Chinese or both.
3. Preparing incorporation documents
Incorporation documents include:
- Articles of association
- Incorporation form that consists of the following information:
- Company name
- Registered address
- Brief description of business activities
- Particulars of shareholders, directors and company secretary
- Liability of members
- Share capital registered on incorporation
- Number of shares taken up by subscribers
- Copy of Hong Kong identity card and residential address proof for resident directors and shareholders
- Copy of passport, overseas residential address proof for non-resident directors and shareholders
4. Registering with the Hong Kong Companies Registry
Submit the required documents, incorporation form and proof of fee payment to the Hong Kong Companies Registry.
5. Post-registration requirements
An investment holding company will need to apply for a tax residence certificate with the Inland Revenue Department in order to claim tax benefits, such as tax reduction by the double taxation agreements between Hong Kong and other locations.
The following information may be required:
- Place of operation
- Business activities
- Local bank account (if applicable)
- Number of employees
- Whether board meetings were held in Hong Kong
You should also be aware of the Organisation for Economic Cooperation and Development’s (OCED) base erosion and profit shifting (BEPS) program. According to the OCED website, BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity to erode tax bases through deductible payments such as interest or royalties.
Considering that your company is not taking advantage of the tax benefits and engages in business activities, you will not be suspected by the OCED’s BEPS program.
Setting up an investment holding company in Hong Kong is straightforward, and the procedure is quite similar to incorporating a regular company. Having an investment holding company in Hong Kong has many benefits, and it can be an entry point to doing business with or in China.
If you want to set up an investment holding company, contact Acclime to assist you throughout the process. Besides taking care of the incorporation process, we can also advise on multi-entity company structuring for your expansion across Asia.
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