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We are a US company. What's the benefit of setting up a Hong Kong holding company as opposed to direct ownership of a factory in China?

Posted: 2011-03-22

Full Question

We are a USA company that wants to set up a 100% owned factory in PRC. We also heard some good reasons to set up a Hong Kong holding company for the PRC entity, but wanted to get your opinion. Please let us know what you feel are the benefits of setting up a HK company as opposed to direct ownership from the USA of the PRC entity.

Answer

This is a frequently asked question and let me give you my thoughts. But keep in mind that you should consult with accounting/business formation specialists before you make an investment so they can review the particulars of your specific situation. www.Fiducia-China.com is one such organization that I highly recommend. But in the meantime, here is my feedback for you.

1.  Because of the special status of HK to China, setting up a factory owned by a HK holding company takes less time, money and paperwork than doing PRC entity ownership directly from your HQ in USA.
2.  If your USA HQ ever wants to sell the China assets, a potential buyer will place value on having a HK set of audited books. While you may end up running a world class set of books at your PRC factory, buyers (even Chinese buyers) tend to place more credibility with HK accounts. Plus buying and selling assets in HK are much easier than going through all the red tape in PRC. So having a HK company allows for a quick and easier sell if so desired.
3.  There may be some tax deferral benefits of using HK, but you would need to consult with experts as transfer pricing issues come into play.
4.  There is also the benefit of risk avoidance for the USA HQ. I hope it never happens, but for the sake of giving an example, let's say your China factory got into some trouble with a lawsuit or PRC government relation issue. Having a holding company in HK isolates USA HQ to some extent.

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