The answer first
A Hong Kong holding company owns shares in subsidiaries in Mainland China, Southeast Asia or elsewhere, and sits between the ultimate owners and the operating businesses. It can simplify ownership, investment and exit, and Hong Kong's tax system is generally favourable to holding activities. The benefits depend on the holding company having genuine substance.
Treaty benefits, such as reduced withholding tax on dividends from Mainland China, depend on beneficial ownership and substance in Hong Kong. The tax rules of the owners' home country, for example controlled foreign company rules, can affect the overall result.
At a glance
- Capital gains
- Not taxed in Hong Kong
- Dividends from Hong Kong companies
- Not taxable
- Foreign dividends and gains
- Considered under the FSIE regime for MNE group members
- Withholding tax on dividends paid
- None in Hong Kong
- Essential
- Real decisions, people and costs in Hong Kong
Why groups use a Hong Kong holding company
- Single point of ownership for several regional subsidiaries.
- Flexibility: investors can enter and exit at the Hong Kong level under Hong Kong law.
- Financing: access to international banking and capital.
- Tax: no capital gains tax, no withholding tax on dividends paid, and access to Hong Kong's double taxation agreements.
- Management: a regional headquarters with staff and decision-making in Hong Kong.
How holding income is treated
| Income | General position in Hong Kong |
|---|---|
| Dividends from Hong Kong companies | Not taxable |
| Foreign dividends received in Hong Kong by an MNE group member | Taxable under FSIE unless the participation requirement (at least 5% held for at least 12 months) or the economic substance requirement is met, subject to anti-abuse rules |
| Gains on disposal of shares | Capital gains are not taxed; foreign disposal gains of MNE group members are considered under FSIE |
| Dividends paid to shareholders | No Hong Kong withholding tax |
Specialist sign-offThe tax position of a holding structure depends on the facts and on the rules of every country involved. Confirm with tax advisers in Hong Kong and in the relevant jurisdictions.
Substance: what a holding company needs
- Directors who make and record the key decisions in Hong Kong.
- Board meetings and minutes held in Hong Kong.
- Adequate staff (employed or through service arrangements) and operating expenditure for its activities.
- Its own bank account, accounts and audit.
- A Hong Kong certificate of resident status where treaty benefits are claimed.
Key takeawayA holding company with no people, no decisions and no costs in Hong Kong is a shell. Shells struggle to claim treaty benefits, meet FSIE exceptions or keep bank accounts open.
Setting up and running a holding company
| Stage | What happens |
|---|---|
| Design | Agree the structure with tax and legal advisers |
| Incorporate | Incorporate the Hong Kong company; open its bank account |
| Transfer | Transfer subsidiaries' shares to the holding company, with stamp duty and regulatory approvals as needed in each country |
| Operate | Hold board meetings, keep records and maintain substance |
| Comply | Annual Return, audit, Profits Tax Return and FSIE reporting |
How DBMS Global can help
- Incorporating and administering the holding company.
- Board meetings, minutes and records that evidence substance.
- Accounts, audit coordination and tax filings, including FSIE reporting.
- Applications for certificates of resident status for treaty claims.
- MAP Asia Pacific advises on cross-border structuring alongside your tax advisers.
In summary
- A Hong Kong holding company can simplify ownership and exit.
- Holding income is generally favourably treated, subject to FSIE.
- Substance in Hong Kong is essential.
Official references
- Inland Revenue Department: FSIE regime and double taxation agreements, www.ird.gov.hk
- Inland Revenue Department: certificate of resident status