Articles

Will Hong Kong SPV Company Still Qualify For Tax Benefits?

Seymour J. Mansfield
Founding Partner

As part of Mansfield Tanick & Cohen's continued efforts to bring awareness of the legal issues in the world's fastest growing markets, namely China, I am pleased this month to introduce you to another of my good friends and Chinese lawyer, Hao Wang, co-founding and co-managing partner of RayYin & Partners PRC Lawyers, with two main offices in Beijing and Shenzhen. She is our esteemed guest author of the following article: Do You Still need a Hong Kong Company? Ms. Wang and her Firm are members of our international legal network, Lawyers Associated Worldwide ("LAW"). With 107 firms in 57 countries and 148 key cities, comprising over 3500 lawyers worldwide, the high quality lawyers in LAW's member firms, such as RayYin & Partners, are a core component of Mansfield Tanick & Cohen's ability to serve our clients' needs globally. Our close association with these fine firms allows us to provide a seamless connection for Minnesota businesses needing local counsel in another state or country.

Through LAW, we connect with Chinese firm members with offices in Beijing, Shanghai, Tianjin, Xiamen, Qingdao, Guangzhou, Shenzhen and Hong Kong. In conjunction with these member firms and the many other experienced non-lawyer advisors who are part of US-China Business Connections (UCBC), we have established our China US LAW Connections (CULC) Program, in order to seamlessly connect clients with the right legal and non-legal talent here and in the PRC.

Ms. Wang specializes in foreign investments, trusts, mergers and acquisitions, financial markets and corporate. She has built a solid practice expertise in banking, including commercial lending, fund management, foreign exchanges management, secured transactions, financial leasing, and related areas. She has advised many prominent international clients in designing their business structure and setting up and maintaining their operations in China. She has LL.M. degrees from both King's College, London University and University of International Business & Economics, Beijing.

A founding shareholder of Mansfield Tanick & Cohen, P.A., with 40 years of diverse lawyer experience, Seymour Mansfield now focuses on business, complex and class litigation, mediation, executive employment and employee benefits, trade secrets and restrictive covenants, international business law and acts as legal counsel to emerging medical device companies. He is the firm's primary representative to Lawyers Associated Worldwide and served on LAW's Executive Committee (governing board) from 2002 through 2008. LAW empowers our firm to serve the needs of our clients in domestic and foreign markets worldwide.

Will Hong Kong SPV Company Still Qualify For Tax Benefits?

Hao Wang
Partner
RayYin & Partners PRC Lawyers

For years, Hong Kong has been the hot place for setting up special purpose vehicle (SPV) entities to channel a Chinese company and a real parent company due to the special tax arrangement between mainland China and HK. This may soon become "gone are the days" story as the China's State Administration of Taxation (SAT) recently issued its circular narrowing entities qualifying as eligible beneficiaries under the PRC-HK Tax Treaties.

SAT's new guidelines, Circular Guoshuifan (2009) 601, effective October 27, 2009, provides that any applicant who fails to substantiate that they are a beneficial owner will be denied treaty benefits.

China has signed Conventions to Avoid Double Taxation ("Tax Conventions") which stipulate that if the "beneficial owner" is the resident of Hong Kong, it can avoid double taxation regarding dividends, interest and royalties. The new SAT Circular, however, defines the characteristics and tests that are to be met by the "beneficiary" in order to avoid double taxation, emphasizing throughout that to qualify, the beneficial owner must have real economic and structural substance.

Under this circular, a "beneficial owner" can be an individual or a company, but it must be engaged in the substantial operation; own or control assets or the rights to income generated from such assets deriving from income.

The circular specifies that neither mere agent nor a channel company can be the beneficial owner. A "channel company" established for the purposes of tax avoidance or reduction, profits transfer or accumulation, existing only as a registered legal entity, without substantial operations, such as manufacturing, trading or management services, will no longer qualify as a beneficial owner entitled to the protections of such bi-lateral Tax Conventions.

Pursuant to the SAT Circular in applying for tax relief under the applicable Tax Convention, the applicant must provide supporting documentation to prove that it is the "beneficial owner" with real substance. The circular also list several factors which are determinative of whether or not the applicant is a qualified "beneficiary." Among other things, for example, the following factors would disqualify the applicant:

• It must pay or distribute all or most (over 60%) of its incomes to a third-party country.
• The applicant's assets, size and staff are too small to generate the claimed income.

In sum, the PRC is now taking serious action to challenge the tax avoidance of entities and agents which are shams existing only on paper to exploit the special arrangement between Hong Kong and Mainland China while continuing to sanction the avoidance and reduction of double taxation for real and substantial business operations.

RayYin & Partners provides professional advice in regards to offshore company tax planning, including how to structure your offshore company consistent with PRC government. In particular, in light of the new SAT Circular, investors and owners should carefully review both existing and newly established SPV companies in Hong Kong to determine if they will comply with these new policies, and if not, promptly implement the changes necessary to help them qualify for the tax benefits of HK-PRC Tax Conventions.