Since then, quite a number of offshore jurisdictions become well-known in the business community of Hong Kong. Businessmen now prefer to incorporate an offshore company i.e. a company incorporated in one of those offshore jurisdictions e.g. BVI, Cayman Islands, Bermuda, Mauritius, Barbados, Belize etc., for investment holding purpose. This choice helps minimize the administrative and compliance work involved in maintaining the company. Almost all offshore companies have very minimal corporate and tax filing requirements. Details of directors and shareholders remain anonymous to the general public. Company secretary is not mandatory in most jurisdictions. Annual compliance requirement is to pay the government and agent fees to ensure that the company is still in the register of companies. Preparation of audited accounts is, in most jurisdictions, on voluntary basis.
When compared to companies incorporated in Hong Kong, annual filing showing details of the directors, shareholders, company secretary, and registered office address and capital details have to be submitted to the Companies Registry. This information is public information. Audited accounts have to be prepared for adoption by members at general meetings held on an annual basis. Profits tax filing has to be done with the Inland Revenue Department. All these could be burdensome when the company is only a passive investment vehicle. Therefore, setting up an offshore company becomes a natural choice.
Besides being used for investment holding, it is also used as a vehicle for fund raising purpose. Lots of incubating businesses set up offshore companies for angel and strategic investors to fund their fledgling business operations. As reputable law firms from most offshore jurisdictions have set up offices here, obtaining legal opinion and arranging joint venture agreements, shareholder agreements and all other legal papers can be done without physical hindrance.
Subsequent transfers of shares amongst founder members and investors can be done without going through governmental approval. Unlike companies incorporated in Hong Kong, transfer of shares in most offshore companies can be done by the parties involved signing the necessary documents and obtaining board approval. There is no stamp duty payment for shares transfer.
Some people may have the misconception that the main purpose of using offshore company is to avoid paying stamp duty in Hong Kong. Stamp duty saving is one of the reasons but not the only reason when it comes to making the choice. In Hong Kong, when shares are transferred within a group, application for stamp duty relief can be made and if the Stamp Office is satisfied that all conditions are met, no stamp duty is payable. With proper corporate structure planning at the outset, stamp duty is not an issue in subsequent corporate changes. That is why stamp duty saving is not the only reason for having an offshore company. Administrative and compliance cost savings are more important in most cases.
As Hong Kong is one of the top IPO centers, one of the major reasons in having an offshore company is for listing purpose. In addition to the time saved in shares transfer, arranging share swap with another offshore company is also cost effective. The procedures involved are simpler. Currently, there are more than 20 jurisdictions being accepted by the Stock Exchange of Hong Kong (the ‘Exchange’) for listing. For those offshore jurisdictions, how to get the Exchange to put them on the approval list is important to promote themselves in Hong Kong.
Offshore jurisdictions have their networks of tax treaties. Investors sometimes have to choose a particular jurisdiction as a bridge for investing into their target country. Again, the more tax treaties, the more appeal to others in using them as a bridge. How to choose the right jurisdictions is a question for the professionals to answer. All the above explains why offshore companies are so commonly used in Hong Kong.
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We also invite you to review the 2nd Quarter Edition of Cititrust EDGE eMagazine for the year 2012.
Topics in this issue cover:
- The Offshore Debate.
- Bribery Acts.
- IRS continued scrutiny of foreign insurance subsidiaries.
- Also more from Russia, Austria, Japan, Estonia, India and other jurisdictions.
Download your complimentary copy of Cititrust’s EDGE eMagazine here.