Thinking outside the box: Using a BVI/Cayman islands incorporated Company in Hong Kong

Introduction

British Virgin Islands (“BVI”) and Cayman Islands companies (“BVI/CI Companies”) have been utilised in Hong Kong for many years in respect of cross-border transactions, as a property holding vehicle or as a listing vehicle.

This article will: (a) set out the reasons why anyone considering using a corporate vehicle for undertaking any business in Hong Kong should consider using a BVI/CI Company instead of a local one; (b) explain the process required to register a BVI/CI Company, under Part XI of the Companies Ordinance (Cap 32) as a ‘non- Hong Kong company’; and (c) how a BVI/CI Company may be able to access the double taxation treaty network of Hong Kong.

Stamp duty on transfer of shares

Neither the BVI nor the Cayman Islands imposes stamp duty on the transfer of shares, other than in relation to the transfer of shares in a company which holds real estate in the BVI/Cayman Islands, as the case may be.

Hong Kong imposes stamp duty (approximately 0.2 per cent of the total value of the shares transferred or the value of consideration, whichever is higher) on the transfer of shares when the shares are being transferred in Hong Kong, i.e. the register of members of the company is required to be situated there. The transferor and transferee are each liable to 0.1 per cent.

Corporate migration

BVI/CI Companies may, by a simple filing, migrate (without reincorporation or transfer of assets and liabilities) to another jurisdiction having a comparable migration concept. This allows great flexibility in respect of future tax planning and exit strategies.

Corporate migration is not provided for in Hong Kong.

Repurchase of shares

BVI/CI Companies have considerable flexibility in relation to the repurchase or redemption of shares which can be paid for out of profits, the proceeds of a fresh issue of shares or any other monies available to the company. The repurchase process may be subject to a post repurchase statutory solvency test but no filings or notifications to third parties need to be made.

A Hong Kong company can repurchase its shares out of: (a) distributable profits; (b) the proceeds of a fresh issue of shares; or (c) capital, in respect of private companies only.

In order to effect a repurchase under the Companies Ordinance, a company is required to pass a special resolution of members; this requires not less than three-quarters of the votes cast by members attending the meeting. In addition, if the repurchase is to be made out of capital, then the following requirements must be met:

  • a statement (in the specified form) obtained from all the directors to the effect that the company can pay its debts and will continue to operate as a going concern throughout the following year;
  • the provision of an auditor’s report; and
  • a notice published to the creditors and there are no objections from the creditors within the five-week objection period.

Financial assistance

There is no statutory prohibition on BVI/CI Companies providing financial assistance with regard to the acquisition of shares in a company. The directors just have to act in good faith and in the best interests of the company in agreeing to such financial assistance.

Financial assistance is generally prohibited in Hong Kong such as, when the assistance does not reduce net assets (or if net assets are reduced, the extent to which they are reduced is provided out of distributable profits), or, in the case of an unlisted company, when the directors make a statement that they are of the opinion that there is no ground on which the company could be found unable to pay its debts immediately after the financial assistance or within the following 12 months, and the shareholders thereafter approve the financial assistance by special resolution. Other exceptions include the payment of dividends, distribution of assets in a winding-up, allotment of bonus shares, or a reduction of capital or redemption of shares, in each case in accordance with the Companies Ordinance.

Merger

A BVI/CI Company may ‘merge’ with another corporate entity which may be another BVI/CI Company or a company from another jurisdiction having a comparable merger concept. The surviving company from the merger can either be a BVI/CI Company or a company from another jurisdiction.

A Hong Kong company is not able to merge with any entity.

Effect of registration

It should be noted that registration of a BVI/CI Company in Hong Kong will not impact on any of the above advantages that a BVI/CI Company has over a Hong Kong company.

Registration of a BVI/CI company in Hong Kong

Who has to register?

Any BVI/CI Company which has an established a place of business in Hong Kong is required to register under Part XI of the Companies Ordinance. The definition of ‘place of business’ is wide and includes a share transfer office and a share registration office. Practically, any company conducting business from premises in Hong Kong whether owned, leased or licensed, will satisfy the requirement of having a place of business in Hong Kong. Such registration in Hong Kong permits local creditors and their advisers to view the BVI/CI Company’s particulars and constitutional documents.

Initial registration obligations

The Companies Ordinance requires a BVI/CI Company to submit the specified Form N1 with the Companies Registry within one month of establishing a place of business in Hong Kong. The Form N1 will include the following particulars of the BVI/CI Company: name; place of incorporation; date of establishing the place of business and its address; address of principal place of business in Hong Kong; identity of secretary and directors, together with dates of appointment and particulars; identity of local ‘authorised representative’ appointed to accept service of process, together with particulars; and details of the registered office and principal place of business overseas.

The Form N1 should be accompanied by certified copies of the BVI/CI Company’s constitutional documents, certificate of incorporation; and the latest published financial statements. Note, however, there is an exemption from this requirement if the BVI/CI Company: (i) is not required by the law of its place of incorporation or by any other applicable jurisdiction or any stock exchange or regulator in such jurisdictions to publish financial statements; or (ii) has been incorporated for less than 18 months and has not yet published financial statements.

In addition to the Form N1 and its supporting documents, a Form IRBR 2 must be submitted to the Companies Registry under the new ‘one-stop’ service. The Form IRBR 2 is a one-page notice to which is passed to the Business Registration Office of the Inland Revenue Department (IRD) for tax purposes.

Once the Companies Registry has received all the required documents to its satisfaction, a Certificate of Registration as a ‘non-Hong Kong company’ will be issued, certifying that it is registered under the Companies Ordinance. In addition, a Business Registration Certificate will be issued in respect of the registration under the Business Registration Ordinance (Cap
310). The failure to register will subject the company to possible fines.

Post registration obligations:

After registration, continuing obligations are imposed on BVI/CI Companies and they must keep the Companies Registry and Business Registration Office updated of certain changes. For example, any changes to the information in Form N1 and the accompanying documents should be filed with Companies Registry within one month of the change. A BVI/CI Company should also annually file an annual return, supported by the most recent financial statements (where applicable).

A BVI/CI Company that creates a charge over property in Hong Kong or acquires property in Hong Kong that is subject to a charge is required to register the charge and provide a copy of the relevant instrument creating the charge to the Companies Registry.

A BVI/CI Company must keep current the appointment of an authorised representative throughout the time it maintains a place of business in Hong Kong, and also for a further year after the date on which the company ceases to have a place of business in Hong Kong. There are also requirements that a BVI/CI Company must conspicuously exhibit outside its place of business certain information including its name and place of incorporation or formation.
Certain information including its name and place of incorporation or formation must also be stated legibly on all bill-heads, letter paper, notices, prospectuses and other official publications issued by it.

Tax treatment and treaties

Domestic tax

Hong Kong has a pure territorial tax system which does not distinguish between a Hong Kong incorporated entity and one that is incorporated offshore. ‘Profits Tax’ is imposed on every person carrying on a trade, profession or business in Hong Kong in respect of profits arising in or derived from Hong Kong for that year for that trade or business. Currently Profits Tax is levied at 16.5 per cent.

No distinction is made between residents and non-residents in levying Profits Tax and the residence concept itself is of limited importance in the Hong Kong domestic tax context. Profits from the sale of capital assets and dividends are not taxable in Hong Kong, and there are no withholding taxes on dividend and interest payments made out of Hong Kong, although withholding taxes apply to certain royalty payments.

Extent of treaty network

Hong Kong has entered into 22 tax treaties, many of them in the last two years, and it is steadily expanding its network.

Residence for tax treaty purposes

Given that the definition of residence under Hong Kong’s tax treaties includes both an entity incorporated in Hong Kong, as well as (variously worded) concepts of effective management in Hong Kong, investors can choose between using a Hong Kong incorporated company or, say, a BVI or Cayman Islands incorporated company managed in Hong Kong, as a holding company to access benefits under Hong Kong’s tax treaty network.

If sufficient care is taken by the non-Hong Kong incorporated company to ensure that the relevant criteria are satisfied, which will usually require that the top-level strategic direction of the company is exercised through board meetings in Hong Kong, then, in principle, a BVI/CI Company should be able to access treaty benefits as readily as a Hong Kong incorporated company.

In practice, many countries require a residence certificate from the IRD which can be obtained on producing evidence of meeting the tax treaties criteria; further comments on the difficulties which may be encountered in obtaining this, at least in the context of the Hong Kong-PRC treaty, are outlined below.

Challenges in accessing treaty benefits re: the PRC

It continues to be more administratively difficult for non-Hong Kong incorporated companies to access treaty benefits under the Hong Kong-PRC tax treaty. In order to obtain the Circular Guo Shui Fa [2009] 124 clearance to access treaty benefits, Hong Kong incorporated companies must supply the relevant PRC tax authorities with their certificates of incorporation to evidence residence.

Non-Hong Kong incorporated companies must supply tax residence certificates issued by the IRD. Under the protocols put in place between the State Administration of Taxation and the IRD in the late 1990s, the IRD will not issue a tax residence certificate unless they receive a referral letter from the local Chinese tax authorities, who are responsible for the China company from which the income/gain is received, requesting the issuance of such a certificate. In practice, it has frequently proved difficult to obtain this letter from the local Chinese tax authorities, and this is in large part a consequence of their unfamiliarity with the treaty arrangements.

Conclusion

There are good corporate reasons why an entrepreneur or investor would utilise a BVI/CI Company rather than a Hong Kong one for domestic transactions. Although currently there are a number of practical difficulties in accessing tax benefits under the treaties, in certain circumstances, it may be possible to utilise them when access to the Hong Kong tax treaty network is required.

Overall, the flexibility that BVI/CI Companies give in comparison to local ones means that advisers should consider them first when advising their clients about incorporations.

This article was first published in Hong Kong Lawyer, January 2012 issue.
Barry Mitchell (then a partner at Maples and Calder) was one of the co-authors