I was cc’ed on the following email the other day from one of our China 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 it below because it provides such a good and 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.
The question you ask is a complicated one. Generally speaking, 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; it is something to discuss with your international accountant beforehand. If you need any assistance in finding the right accountant to work with you on this, please let us know as we can certainly make some referrals for you.
(2) Ease of incorporation has to do with the substantial (and often nonsensical) documentary requirements of the Chinese authorities. For a variety of mundane reasons, it is almost always easier and faster to submit documentation from a Hong Kong parent company than from a U.S. company.
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 have to file annual reports, pay taxes, and do all the other things required of Hong Kong corporations. All of this is relatively easy and cheap, but it’s an additional layer of complexity. Also, while incorporating a Hong Kong company is easy, opening a Hong Kong bank account is not. It 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 that the Hong Kong company is a mere shell company that has no employees and no operations outside of its ownership of the Chinese WFOE.
Happy to discuss further if you’d like.