Savvy Canadian companies use Hong Kong to access China
Hong Kong has been viewed for many years as the ideal launch pad to do business with mainland China. Today, that is truer than ever. The City’s unique geographic location (it’s less than an hour’s drive to the hub city of Shenzhen), its business-friendly outlook and world class infrastructure make it the perfect regional headquarters to do business with China.
Canadian corporations and individuals can also benefit from Hong Kong’s much vaunted 2014 Canada-Hong Kong Tax Treaty, which provides significant tax relief and savings. Savvy Canadian companies have realized that having a Hong Kong affiliate company allows them – because of the tax treaty – to distribute revenue as a dividend, free from Canadian tax. For companies doing business in mainland China, this is a business gift from the heavens.
Furthermore, the withholding tax rate for cross-border payments which would be payable if they were made client to convert, (such as dividends, certain interest income and royalties) made between China and is reduced by half ( from 10% to 15%) under the CEPA Agreement between Hong Kong and the PRC, thereby stimulating cross-border capital flow and foreign direct investment.
“Low taxes mean Canadian and Hong Kong affiliate companies can save money by investing in other areas, thus creating employment opportunities and, overall, healthy organic growth,” said Ken Deayton, Founder and CEO of The Hong Kong Corporate Services Group.
In 2018, Chinese investment into Canada fell by a whopping 47%, due to Beijing‘s restrictions on capital outflows as part of its plan to stabilize the Yuan. That coupled with the broader global economic and political uncertainties (Trump trade war and the unfortunate Huawei case) has hampered Chinese outward investment into Canada.
But the business-friendly tax treaty between Canada and Hong Kong offers a way for Chinese investment, via Hong Kong-domiciled businesses. Chinese investors can funnel Canada-bound investment funds through Hong Kong subsidiaries, without impinging on the existing restrictions, often at a rate of tax that makes the investment even more attractive.
“We’re entering an extremely exciting time for business in Southern China,” said Ken Deayton, Founder and CEO of The Hong Kong Corporate Services Group. “The region is already growing rapidly, but the recently-announced Greater Bay Area blueprint marks a statement of intent by China to ensure that there is even greater cooperation and synergy among the 11 named powerhouse cities in Southern China. The plan will have huge ramifications for business.”
The Greater Bay Area instantly becomes one of the world’s most dynamic economic regions. It pools together a population of 67.6 million people (nearly double the entire Canadian population) spread over an area of 56,000 sq. km – about the size of Nova Scotia. The combined Gross Domestic Product (GDP) of the Greater Bay Area is about US$1.36 trillion –about that of Australia.
The blueprint encourages closer cooperation in the areas of infrastructure development and current connectivity, innovation and technology, environmental protection, new energies, livability and young entrepreneurship.
Advantage Hong Kong
Hong Kong is earmarked as one of the core engines for Greater Bay Area economic development, as the City provides financial and services expertise that is practically unmatched anywhere in the world. Hong Kong is also in a unique position – vis-à-vis China – in that its government and legal systems are at arm’s-length from the Mainland, due to its “One country Two Systems” status. This allows companies operating in the City to enjoy a certain degree of stability and transparency not found on the mainland.
With the tax treaty now in place between Canada and Hong Kong, coupled with the City’s business-friendly outlook and world class infrastructure, it makes even more sense for Canadian companies looking to do business in Southern China to set up a local affiliate to take advantage. A Hong Kong based affiliate of a Canadian corporation not only enjoys favourable tax relief and reduced withholding tax rates on interest payments and royalties, but also has the protection of Hong Kong’s more stringent rule of law while being in the ideal location to access the Greater Bay Area.