You’ve probably heard of a holding company when searching on how to start a business. Holding companies exist in all countries, and you should have heard of a few well-known ones such as Alphabet Inc., Berkshire Hathaway and Johnson & Johnson. These companies are usually known as the ‘parent’ company while the companies under them are called ‘subsidiaries’.
In this article, we will go through what exactly is a holding company, what you should look out for when considering to open a holding company, why you should consider this option, and how to go about opening one.
What is a Holding Company?
To put it simply, a holding company is a parent’ company with a bunch of ‘children’ that live under the roof of the parent. It is however, still a business entity. A holding company does not perform any business operations such as manufacturing, sales or perform any services. It solely owns the assets of the companies under it.
Therefore, while a holding company can oversee a company’s management decisions, it does not vigorously participate in their subsidiaries’ daily operations.
Alphabet Inc. is a holding company based in California, and it has no business operations on its own. So how does the company stay open? How does it stay on the NASDAQ stock exchange as a trade stock then, if the company does not perform any sales or services?
Alphabet Inc. is fully driven by the earnings, cash flows, revenue and assets of the subsidiaries under it. These subsidiaries include DeepMind Technologies, Google Fiber, CapitalG etc. Without its subsidiaries, Alphabet Inc. will just be an ‘empty’ company.
How to Set up a Holding Company in Hong Kong?
Now that you’ve gotten a gist of what it means to open a holding company, let’s go through the steps to open one in Hong Kong. It’s not as difficult as you would expect. Hong Kong is a country with a relatively easy and straightforward process for company formations.
Things to take note of:
- You will need a minimum of one shareholder, a director and a company secretary. They cannot be the same person. If you are the sole director, you can be a shareholder but you cannot be the company secretary. So, minimum, you’ll need 2 people.
- If the company secretary is a natural person, he or she must ordinarily reside in Hong Kong. If the company secretary is a body corporate, the address of its registered or principal office should be in Hong Kong.
- There are no requirements for the share capital when setting up your holding company.
- The steps that apply to normal companies will also apply to holding companies.
If you are a foreign investor looking to invest in Hong Kong, subsidiaries or private limited companies can also operate as holding companies in the country.
The steps are similar to opening a normal company:
- Choose your business structure.
Private limited companies are most popular because the requirements needed for incorporation is somewhat lower.
- Prepare your incorporation documents.
These documents are the company’s constitutional documents which include its Articles of Association and registration documents. We have prepared a guide to Articles of Association in Hong Kong here as well.
Some things that the Hong Kong government expects every business to have includes:
- A corporate secretary
- A registered address
- A business registration certificate
- Formally register with the Hong Kong Companies Registry.
You will need to submit the registration form, and pay the registration fee.
- Set up your accounting routine.
Here comes the difficult part. The accounting of any company is key. You need to take care of your accounting processes and take note of any tax exemptions you may be eligible for.
- You can start operating your company.
You can now start your business. For holding companies, you can now decide on your subsidiary companies.
If you’re still a rookie entrepreneur, we’ll advise against trying to incorporate a company yourself without any help. Don’t worry because our company secretary professionals in Hong Kong can assist you at any stage.
Next question. Why set up a holding company in Hong Kong?
Well, if you’re here you’ll probably be interested in opening a holding company in Hong Kong. The question is - how do you choose a justification to open a company?
You should look for a jurisdiction that allows investors such as yourself to incorporate easily within a few steps. The last thing you want is to go through numerous steps and then giving up halfway.
For starters, in Asia, notable countries include Singapore, Tokyo and of course, Hong Kong. Be aware that not all jurisdictions are advantageous to the investor, and you should choose one that is.
Some things you can look out for when choosing your jurisdiction:
- Is company incorporation an easy process?
- What are the legal laws in place in that country?
- Is there a minimum capital needed to start a company?
- What are the tax rates for both locals and foreigners?
- Will I be maximising my earn rate if I set up a company in this country?
There are many advantages that draw investors towards Hong Kong for company incorporation. We will list out a few that we think are the most attractive.
The Tax Regime
What we think is the biggest advantage that Hong Kong has against other countries such as the USA are mainly the tax advantages.
- The first 2,000,000 HKD of profits earned is subject to an 8.25% profit tax, while any profits earned after this margin will be subjected to a 16.5% profit tax.
- This rate is considerably when you compare it to the 25% Corporate Income Tax (CIT) rate that China imposes.
- Only income produced in Hong Kong will be taxed according to normal taxation rules.
- Income received by a Hong Kong company due to revenue from other states are not subjected to tax.
- Hong Kong does not impose withholding taxes on dividends and interest.
- China has concluded a double taxation agreement (DTA) with Hong Kong. This treaty provides a preferential withholding tax rate on dividends of up to 5%.
Entrance into the China market
Hong Kong is close to mainland China, and it is good news for any investors looking to enter China’s markets. Not to mention, Hong Kong remains a key financial hub in Asia, and has a transparent legal and highly developed financial system.
Corporate structure benefits
Cameron owns a US company. His US company owns an entity in Hong Kong. He will benefit from any China based assets or entities that his Hong Kong company owns as a Wholly Foreign-Owned Enterprise. In other words, even though Cameron does not have a Hong Kong company locally, he can use his existing US company to earn revenue from China that comes through his Hong Kong subsidiary.
Having a Hong Kong subsidiary under your company gives you the flexibility to earn from or sell your China based investments easily.
What to look out for when opening a holding company in Hong Kong?
A holding company or non-resident legal entity needs to apply for a Tax Residence Certificate with the Inland Revenue Department
This is so that you can claim tax benefits. You may be asked to provide information about the place of operation and what your business is involved in.
These can include:
- Whether or not the company has a local bank account
- The fixed place of business (if applicable)
- The number of employees (if any in addition to the administrative officers)
- Whether or not board meetings were held in Hong Kong
If you wish to take advantage of the benefits included with the double taxation agreements between Hong Kong and other jurisdictions, you will require the Tax Registration Certificate.
Make sure your holding company is compliant with local laws
As long as your holding company is not solely looking to get a tax advantage, and is not lacking in business operations, you will not be on the radar of the Organisation for Economic Cooperation and Development’s (OECD) base erosion and profit shifting (BEPS) program. The organisation looks to stop companies who are set up for the only reason of getting a tax benefit.
On top of that, Hong Kong is tightening their anti-money laundering regulations, as well as China having anti-circumvention laws on indirect transferring of taxable assets. Thus, it is important to remain aware of any application policies when you set up your holding company.
If you need professional assistance, we are able to help! Remember, if it’s your first time starting your own company or if you are unsure of the proper way to do so, it is always good to engage the help of the professional company secretaries in Hong Kong to ensure a smooth incorporation process.