“The first thing we recommend for starting a business in China is starting a business in Hong Kong,” remarked Jacob Blacklock at the recent Lean Startup Beijing meetup.
The American attorney from Lehman, Lee, and Xu law firm came to speak to a packed crowd of aspiring entrepreneurs about the basics of registering their business in Hong Kong, and why they should do so. Here’s a summary of what he had to say:
1. Tax benefits
Blacklock suggests foreign companies entering China should register a Hong Kong Special Purpose Vehicles (HKSPV), then set up a wholly-owned foreign enterprise (WOFE) in China. The WOFE makes money in China, then sends it back to the Hong Kong company. While transfers cost about five percent, it’s much cheaper than paying China’s 25 percent income tax. The tax rate on money not earned in Hong Kong is zero percent. Profits earned in Hong Kong are taxed 16.5 percent. Startups are also eligible for VAT refunds. All funds can be managed easily and moved back and forth between the WOFE and HKSPV with no currency controls.
2. Intellectual property
Many foreign startups simply work in China under the radar, without legally registering their company anywhere. This is a risky move for many reasons, and a major one is the lack of protection for intellectual property. Trademarks, copyrights, patents, design patents, and domain names all should be filed and held by the Hong Kong company. China uses a first-to-file system, and prior use is not considered. With a HKSPV/WOFE registered, startups can transfer funds out of China using licensing agreements.
3. New streamlined rules for WOFEs
As of March this year, China made it easier for startups to get off the ground by streamlining and reducing many of the requirements necessary for company registration. The requirement for a minimum amount of registered capital has been eliminated, as have capital verification reports. Annual audits have been replaced by a system that lets the company send in its own financial reports. Blacklock noted this likely means more holding companies and hi-tech companies coming into China. While the easing of the law is beneficial to startups, he says this also means there’s a need for more due diligence on their part. “If the authorities aren’t watching, you have to watch,” he says.
4. Cheap and easy
Registering a HKSPV (Edit: originally said WOFE, our mistake) costs between US$200 and US$300. Remittance of funds is easier than if a foreigner were to start a joint venture in China. Exits are also much simpler, as a company can be sold or closed in just one day in Hong Kong, but it takes six months to a year in China.
5. Limited liability
Because the HKSPV is a limited liability company, the liability of each shareholder is limited to the capital they have invested. The Hong Kong company is also liable for the subscribed registered capital for the mainland company. This is important if lawsuits ever arise. The alternative is to run a joint-venture in China, which requires at least half the company be owned by a local partner. WOFEs offer more control and less potential for disputes.
The best option?
Both Blacklock and another attorney attending the event vouched for the Hong Kong company registration route. Besides a joint venture, other options include the Cayman Islands, Singapore, and other tax havens, but all have larger barriers to entry.
Note that registering a company in Hong Kong requires having an office address in Hong Kong, which means you’ll be paying rent for office space even if you aren’t using it.
For more info, check out Blacklock’s full slideshow below:
Editing by Steven Millward; image credit: Flickr user Jo Schmaltz