I was cc’ed on the following email the other day from one of our China investment lawyers, responding to a client who wanted to know the “benefits” of forming a Hong Kong company to own its China WFOE, as opposed to its just forming its China WFOE directly in China. I am publishing the email below because it provides a blissfully succinct explanation of the pros and cons of forming a Hong Kong company to own a China WFOE. The key takeaway should be that whether it makes sense to have a Hong Kong entity be the parent of a planned China WFOE truly depends on the individual situation.
There are two basic reasons for establishing a subsidiary in Hong Kong to be the direct parent of a WFOE in China: (1) tax benefits and (2) ease of incorporation.
(1) The tax benefits depend on a number of factors, such as the country where the parent company is incorporated, the tax treaties between that country and Hong Kong (if any), the tax treaties between that country and China (if any), the type of work done by the WFOE, the amount of profit the WFOE is projected to make, the amount of money the WFOE plans to repatriate to the home country, and so forth. Sometimes there are no tax benefits.
(2) Ease of incorporation has to do with Chinese company formation authorities’ substantial (and often nonsensical) documentary requirements. For a variety of reasons, it is almost always easier and faster to submit documentation from a Hong Kong parent company than from anywhere else.
Forming a Hong Kong company also has disadvantages. You will have to pay for incorporating a separate entity, and to maintain that entity you will need to file annual reports, pay taxes, and do all the other things required of Hong Kong corporations. This is all relatively easy and cheap, but it’s an additional layer of complexity. Also, while incorporating a Hong Kong company opening a Hong Kong bank account takes time, a lot of documentary evidence, and an in-person appearance at the bank by at least one representative of the Hong Kong company.
The above discussion presumes the Hong Kong company is a mere shell company with no employees and no operations beyond its ownership of the Chinese WFOE.
Happy to discuss further if you’d like.