Decmber 2010
Adding Substance to a Hong Kong SPV holding PRC investments to Enjoy Tax Treaty Benefits
Hong Kong is the most commonly adopted special-purpose vehicle (SPV) for holding PRC investments. Based on the statistics for foreign direct investment into China, more than 90% of Chinese-inbound investment adopts a Hong Kong company as an SPV.
One reason for Hong Kong’s popularity in this respect is the favourable tax treatment offered under the Hong Kong-PRC Comprehensive Double Tax Arrangement (DTA).
The Hong Kong-PRC DTA offers favorable tax rates on passive income such as dividends, interest and royalties.
The following is a summary of the applicable withholding tax rates for dividends, interest and royalties under the Hong Kong-PRC DTA:
The diagram below illustrates the aforementioned treaty benefits using a Hong Kong SPV for holding PRC investments:
The reduced withholding tax rates on dividends, interest and royalties are the lowest amongst all prevailing treaties signed by the PRC government.
Hong Kong imposes no tax on capital gain and does not impose withholding tax on dividends and interest payable by a Hong Kong company to overseas.
With its competitive advantages, Hong Kong is a preferred location for investors wishing to structure tax efficient investment into and out of China.
How to Add Substance to Your Hong Kong SPV
With the promulgation of tax circular 601 by PRC tax authorities, it is vital for a Hong Kong SPV to have substance before it can enjoy the treaty benefits available under the HK-PRC DTA.
The Hong Kong SPV must obtain a Hong Kong tax residency certificate. Also, it is advisable that the Hong Kong SPV has directors resident in Hong Kong, holds director’s meetings in Hong Kong, has direct telephone and fax lines, and reflects reasonable office costs and employee costs, etc.
Currently, the Hong Kong Inland Revenue Department (IRD) has issued two forms specifically for the Hong Kong-PRC DTA. The two forms are used by companies and individuals to apply for certification of Hong Kong residency status.
Upon receipt of an application, the IRD will examine the information supplied by the companies or the individuals. If the information is sufficient, the IRD will issue a Certificate of Hong Kong Resident Status for DTA purposes. The processing time required is normally 21 working days. Where the evidence available is insufficient, the IRD will request the applicant to supply the additional information required.
In general, for a company that is incorporated in Hong Kong, a Certified Extract of Information on the Business Register or a copy of the certificate of incorporation of the company is sufficient evidence.
How Amicorp can Help to Add Substance
Amicorp can develop a tailor-made structuring solution for your Chinese inbound and outbound investments.
In addition, we can assist in adding substance to SPVs, such as a Hong Kong SPV. Our services include:
(a) Minimum substance, achieving local management & control
  • Incorporation
  • Company secretary (maintaining corporate documents, seals, minutes and resolutions)
  • 1 bank account
  • Local corporate director
  • (Local individual director)
  • Arranging shareholders meeting
  • Signature on contracts, minutes and resolutions
  • Accounting, tax filing service
  • Applying for the tax residency certificate
(b) Showing bricks and mortar in the balance sheet
  • Virtual but reflected-by-financial-reports office other than only a registered office
  • Telephone line
  • Fax line
  • Local staff (manager, non-manager)
  • Outsourcing costs for office operation
  • Outsourcing costs for management services (marketing, legal, financial and technical)
  • Assistance with providing management services (marketing, legal, financial and technical), lending, licensing and trading to the subsidiary
  • Assistance with registration of patents, trademarks
(c) Using substance of a third party
  • Holding through a third party (under a service agreement)
  • Licensing through a third party (under a service agreement)
  • Lending through a third party (under a service agreement)
  Derk Scheltema
Amicorp Shanghai
  Kit-wah Poon
Amicorp Hong Kong
  Deqi Chen
Amicorp Shanghai
  Xiaoliang Li
Amicorp Shenzhen
© Amicorp Group