Background
- Mr. A is from USA with USA company "USA Ltd";
- Business nature is about management consulting;
- His business activity with China include :
- invest in China to setup Wholly Foreign Owned Enterprise (WFOE);
- sell service to China clients;
- Mr. A forms a Hong Kong company "H Ltd";
- using H Ltd as investor in China to setup the WFOE;
- and using H Ltd to sign service contract with China client;
- setting up WFOE
- Disclosing less information to China government
- Originally, need to provide information of USA Ltd to China government;
- Now, just need to provide information of H Ltd;
- time to arrange document is shorter
- USA Ltd documents needs to be translated into Chinese and be certified by China Embassy;
- document from H Ltd is more ready for China use, and the certification process is more standard in Hong Kong - time and cost more under control;
- Disclosing less information to China government
- dividend from WFOE
- when China company earns profit and need to pay back to investor, withholding tax in China applies;
- if paying to USA Ltd, the rate is around 10%;
- if paying to H Ltd, the rate is around 5%;
- service fee from China client
- when China client needs to pay service fee to USA Ltd, withholding tax of 15% applies;
- when China client needs to pay service fee to H Ltd, withholding tax of 12% applies;
- Cost of setting up HK company = around HK$ 9,000;
- Cost of annual maintenance of HK company = around HK$ 20,000 (including accounting and audit fee);
- If China income is HK$ 670,000
- saving 3% of withholding tax (China related transaction) = HK$ 20,100
- the cost almost break-even of maintain the Hong Kong company.