An effective tool for making international investments in China is to manage those investments through holding companies or similar special purpose vehicles located outside of China.

For instance, one common approach for investment into China has involved using a combination of offshore and Hong Kong companies. The attraction of such a structure is that the Hong Kong company would hold the shares in a China-based wholly foreign-owned enterprise (WFOE), which means it can take advantage of lower withholding taxes on dividends. The related offshore vehicle, often established in the British Virgin Islands (BVI), the Cayman Islands (Cayman) or Anguilla is the ultimate parent.

It is estimated billions have been invested in China using such structures, and establishing such vehicles using an offshore jurisdiction is one of the services delivered by ICS TRUST. In fact, ICS TRUST has helped clients incorporate in more than 30 jurisdictions.

It has been common in the past for larger companies to take this approach for investment in China, however a growing number of smaller businesses are following the same route. For these smaller organizations, it is imperative that they stay on top of Chinese tax and regulatory policy adjustments, which is challenging due to many changes.

For example, for Chinese nationals, central approval is required for the transfer of Chinese assets to non-Chinese vehicles where the Chinese national holds a majority stake. Such approvals have been hard to come by.

More recently, a new tax change details how a foreign company, including ones based in Hong Kong, might be taxed when indirectly disposing of Chinese assets. The new regulations require anyone selling Chinese assets, including a non-Chinese holding company, to file with Chinese tax authorities. Depending on the circumstances, tax authorities could impose capital gains tax of 10 per cent on any profit.

While such changes leave some observers cautious about the future use of the Cayman Islands and BVI structures, there are a number of strong arguments for continuing to pursue such structures for foreign investment into China.

For example, companies in the Cayman Islands, Anguilla and BVI are easy to manage, which translates into cost and administrative savings. Furthermore, annual general meetings and annual audits are not required.

Another advantage is that corporate law in the Cayman Islands and BVI generally adheres to the English/Hong Kong model, which means international investors are comfortable working in the two jurisdictions.

In addition, neither jurisdiction requires companies domiciled there to have local directors and both locations are respected as reliable offshore financial centres.

Furthermore, Cayman Islands, the BVI and Anguilla all have same-day incorporations, Chinese names are allowed, incorporation is simple and inexpensive, and there is no requirement that funds or accounts be held in either jurisdiction.

Strategic planning by ICS TRUST takes advantage of offshore jurisdictions to ensure investments are secure and growing.

By Herb Shoveller