The surge in outbound investment has been supported by current Chinese government policies. While new measures have been passed to ease the domestic approval process, challenges faced by Chinese investors overseas have not been alleviated. Nowadays, "How to structure our overseas investments?" is frequently the first question raised by clients to cross-border transaction lawyers.
Hong Kong has always been the preferred jurisdiction for structuring both outbound and inbound China investments. In 2014, 57.6% of Chinese outbound investments were through Hong Kong, which far exceeded direct investments into any other jurisdiction.
The reasons for using Hong Kong as the "first ring" of outbound investment chain differ from those using Hong Kong as the "last ring" of foreign direct investment (FDI) into China.
1) Free flow of capital. Unlike foreign investors, Chinese investors see the free flow of capital, without foreign exchange control, more attractive than the tax benefit provided by the Double Taxation Agreement between Hong Kong and the Mainland. Moreover, Hong Kong banks are some of the most liquid and well-capitalised in the world.
2) Efficiency and cost. Incorporating a Hong Kong company is quick, easy, and cost-effective. It can be completed within 24 hours, requiring a Hong Kong registered office, a local secretary, and a minimum of one individual director (who is not required to be a Hong Kong resident).
3) Common law jurisdiction. Principles underlying Hong Kong's corporate governance standards are in line with those observed in other developed economies. Chinese investors' first lesson in complying with Hong Kong law, is a valuable warm-up exercise for foreign law compliance at a later stage.
4) Closer Economic Partnership Arrangement (CEPA). CEPA offers Hong Kong's products and services preferential access to the mainland's market. This privilege is beneficial to qualified Chinese investors, who operate in Hong Kong and help secure their international partnerships.
The most commonly used structure for Chinese outbound investment is a Hong Kong subsidiary company, with various functioning offshore structures at distant levels. This type of Hong Kong subsidiary is often a holding company of offshore structures and sometimes, a joint venture partner with other investors. This arrangement facilitates the holding and transfer (stock or asset) of the acquired interests in the future, as well as supporting any projects of financing and international tax planning.
In practice, apart from using Hong Kong companies in red-chip or variable interest entities (VIE), more Chinese companies prefer to route their regional and international investment through Hong Kong. Not surprisingly, the Hong Kong trend will continue indefinitely.
Vivian Zhang
Partner
Hong Kong solicitor, PRC attorney
Guantao Law Firm
A: 18/F, Tower B, Xinsheng Plaza, 5 Finance Street, Xicheng District, Beijing 100032, PRC
T: +86 10 66578066
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E: vzhang@guantao.com
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