Authors:
Barry Mitchell and Mark Western, Maples and Calder, Hong Kong
Daniel Yong and Cai Si Xuan, Norton Rose, Singapore
Chris Abbiss, KPMG, Hong Kong
British Virgin Islands (BVI) and Cayman Islands companies (Offshore Companies) have been utilised in Hong Kong (HK) and Singapore for many years in respect of cross-border transactions, as a property holding vehicle or as a listing vehicle. This article shall (a) set out the reasons why anyone considering using a corporate vehicle for undertaking any business in HK or Singapore (Onshore) should consider using an Offshore Company instead of a local one, (b) explain the process required to register an Offshore Company (i) under part XI of the Companies Ordinance (Chapter 32 of the Laws of HK)(HK Companies Ordinance) as a "non-HK company" and (ii) under the Companies Act (Chapter 50 of Singapore) (the Singapore Companies Act) and (c) how an Offshore Company may be able to access the double taxation treaty networks of HK and Singapore.
STAMP DUTY ON TRANSFER OF SHARES
The Offshore position
Neither the BVI nor the Cayman Islands imposes stamp duty on the transfer of shares (other than in relation to the transfer of shares in a company which holds real estate in the BVI/Cayman Islands (as the case may be).
The Onshore position
Both HK and Singapore impose stamp duty (approx 0.2 percent of the total value of the shares transferred or the value of consideration, whichever is higher) on the transfer of shares when the shares are being transferred in either jurisdiction i.e. the register of members of the company is required to be situated there. In Singapore the full amount is payable by the transferer while in Hong Kong the transferor and transferee are each liable to 0.1 percent.
MIGRATION
The Offshore position
Offshore Companies may, by a simple filing, migrate (without re-incorporation or transfer of assets and liabilities) to another jurisdiction having a comparable migration concept. This allows great flexibility in respect of future tax planning and exit strategies.
The Onshore position
Migration is not provided for in either HK or Singapore.
REPURCHASE OF SHARES
The Offshore position
Offshore Companies have considerable flexibility in relation to the repurchase or redemption of shares which can be paid for out of profits, the proceeds of a fresh issue of shares or any other monies available to the company. The repurchase process may be subject to a post repurchase statutory solvency test but no filings or notifications to third parties need to be made.
The Onshore position
A HK company can repurchase its shares out of (a) distributable profits, (b) the proceeds of a fresh issue of shares, or (c) capital, in respect of private companies only.
In order to effect a repurchase under the HK Companies Ordinance, a company is required to pass a special resolution of members (this requires not less than three- fourths of the votes cast by members attending the meeting). In addition, if the repurchase is to be made out of capital then the following requirements must be met: obtain a statement (in the specified form) from all the directors to the effect that the company can pay its debts and will continue to operate as a going concern throughout the following year, provide an auditor's report, publish a notice to creditors and no objection from creditors within a five week objection period.
A Singapore company may repurchase shares provided it follows a prescribed ‘whitewash’ procedure. Fully paid shares may be redeemed or repurchased if the articles of association so provide so long as the ordinary shares repurchased do not exceed 10 percent of the total number of ordinary shares of the company issued. The repurchase may be funded out of a company's capital or profits so long as the company is solvent and will not become insolvent as a result of the repurchase.
FINANCIAL ASSISTANCE
The Offshore position
There is no statutory prohibition on Offshore Companies providing financial assistance with regard to the acquisition of shares in the company. The directors just have to act in good faith and in the best interests of the company in agreeing to such financial assistance.
The Onshore position
Financial assistance is generally prohibited in both HK and Singapore subject to certain exceptions.
MERGER
The Offshore position
An Offshore Company may "merge" with another corporate entity which may be another Offshore Company or a company from another jurisdiction having a comparable merger concept. The surviving company from the merger can either be an Offshore Company or a company from another jurisdiction.
The Onshore position
A HK company is not able to merge with any entity. In Singapore only Singapore-incorporated companies may amalgamate with each other pursuant to the Companies Act to become a single legal entity.
EFFECT OF REGISTRATION
It should be noted that registration of an Offshore Company in either HK or Singapore will not impact on any of the above advantages that an Offshore Company has over a local company.
REGISTRATION OF AN OFFSHORE COMPANY IN HK/SINGAPORE
7.1 Who has to register?
The Singapore Companies Act requires every foreign company to register with the Accounting and Corporate Regulatory Authority ("ACRA") before it establishes a place of business or commences to carry on business in Singapore as a branch of the foreign company.
A foreign company under the Singapore Companies Act refers to a company which is incorporated outside Singapore and which, through a branch in Singapore, has established a place of business or commenced the carrying on of business in Singapore.
The term “carrying on business” includes administering and managing, or otherwise dealing with property situated in Singapore, whether by employees, agents, or otherwise. However, isolated activities such as becoming a party to any action or arbitration proceeding in Singapore maintaining a bank account in Singapore, creating a charge on movable or immovable property in Singapore, or conducting an isolated transaction that is completed within a period of 31 days (but not being one of a number of similar transactions repeated from time to time), are not likely to be regarded as “carrying on business” in Singapore.
Any Offshore Company which has an established place of business in HK is required to register under Part XI of the HK Companies Ordinance.
The definition of “place of business” is wide, and includes a share transfer office and a share registration office. Practically, any company with conducting business from premises in HK whether owned, leased or licensed, will satisfy the requirement of having a place of business in Hong Kong.
Such registration in HK permits local creditors and their advisers to view the Offshore Company’s particulars and constitutional documents.
7.2 Initial registration obligations
In Singapore, the first step is to apply for the approval and reservation of the name for a registration of a branch by the submission of an electronic form to ACRA. The information required for the name reservation is the proposed name, country of incorporation of foreign company, date of incorporation, capital structure, principal activities and details of other countries it is registered in.
After the proposed name has been approved and reserved, the constitutional documents will need to be filed together with information about the directors. The Offshore Company will also need to have a registered office in Singapore and appoint two agents who are ordinarily resident in Singapore.
Upon successful registration of the branch, an electronic notice will be issued. If a certificate of confirmation of registration is required, this can be applied for.
In HK, the HK Companies Ordinance requires an Offshore Company to submit the specified Form N1 with the Companies Registry within one month of establishing a place of business in HK. The Form N1 will include the following particulars of the Offshore Company: name; place of incorporation; date of establishing the place of business and its address; address of principal place of business in HK; identities of secretary and directors, together with dates of appointment and particulars; identity of local “authorised representative” appointed to accept service of process, together with particulars; and details of registered office and principal place of business overseas.
The Form N1 should be accompanied by certified copies of the Offshore Company’s constitutional documents, certificate of incorporation; and latest published financial statements (note however, that there is an exemption from this requirement if the Offshore Company: (i) is not required by the law of its place of incorporation or by any other applicable jurisdiction, or any stock exchange or regulator in such jurisdictions, to publish financial statements; or (ii) has been incorporated for less than 18 months and has not yet published financial statements).
In addition to the Form N1 and its supporting documents, a Form IRBR 2 must be submitted to the Companies Registry under the new “one-stop” service. The Form IRBR 2 is a one-page notice which is passed to the Business Registration Office of the Inland Revenue Department of HK for tax purposes.
Once the Companies Registry has received all required documents and all are to its satisfaction, a Certificate of Registration as a "non-HK company" will be issued, certifying that it is registered under the HK Companies Ordinance. In addition, a Business Registration Certificate will be issued in respect of the registration under the Business Registration Ordinance. The failure to register will subject the company to possible fines.
7.3 Post registration obligations
The Singapore Companies Act requires a branch to comply with certain ongoing obligations. It must have two agents ordinarily resident in Singapore who will be answerable for acts, matters, and things required to be done by the branch.
The branch must also file a return with the ACRA within one month of any change in the Offshore Company’s constitutional documents, directors, agents, registered office address of the Offshore Company, or the branch office, its company name or the powers of any directors resident in Singapore who are on the board of directors of the Offshore Company.
In addition, an Offshore Company is required to lodge its balance-sheet with the ACRA within two months of its annual general meeting. In addition to the balance-sheet, it is also required to lodge with ACRA a duly audited asset and liabilities statement and profit and loss account attributable to its local operations. An exemption from this requirement may be granted on certain grounds, for example, if it would be of no real value having regard to the amount involved.
In HK, after registration, continuing obligations are imposed on Offshore Companies and they must keep the Companies Registry and Business Registration Office updated of certain changes. For example, any changes to the information in Form N1 and the accompanying documents should be filed with Companies Registry in HK within one month of the change. An Offshore Company should also file an annual return yearly, supported by the most recent financial statements (where applicable).
An Offshore Company that creates a charge over property in HK or acquires property in HK that is subject to a charge is required to register the charge, and provide a copy of the relevant instrument creating said charge to the Companies Registry.
An Offshore Company must keep current the appointment of an authorised representative throughout the time it maintains a place of business in HK, and also for a further year after the date on which the company ceases to have a place of business in HK.
In both Singapore and HK there are requirements that an Offshore Company must conspicuously exhibit outside its place of business such as certain information including its name and place of incorporation or formation. Certain information including its name and place of incorporation or formation must also be stated legibly on all bill-heads, letter paper, notices, prospectuses and other official publications issued by it.
TAX TREATMENT AND TREATIES
Domestic Tax
HK has a pure territorial tax system which does not distinguish between a HK incorporated entity and one that is incorporated offshore. “Profits Tax” is imposed on every person carrying on a trade, profession, or business in Hong Kong in respect of profits arising in, or derived from, Hong Kong for that year. Currently, Profits Tax is levied at 16.5 percent. No distinction is made between residents and non-residents in levying Profits Tax, and the residence concept itself is of limited importance in the context of HK domestic tax. Profits from the sale of capital assets and dividends are not taxable in Hong Kong, and there are no withholding taxes on dividend and interest payments made out of Hong Kong (although withholding taxes apply to certain royalty payments).
Singapore has a hybrid territorial system of taxation under which corporate tax is imposed on income accruing in, or derived from Singapore. Singapore residents, and non-residents with a Singapore permanent establishment, may also be assessable on foreign sourced income received in Singapore- although foreign sourced dividends, service income, and branch profits may be exempt if certain conditions concerning the taxation of that income overseas are satisfied. The prevailing corporate tax rate is 17 percent. Profits from the sale of capital assets are not taxable in Singapore, and domestic dividends are specifically exempt. While there are no withholding taxes on dividend payments made out of Singapore, withholdings may be required for interest, royalty, management/technical/service fees, and rental and leasing income.
Extent of treaty network
HK has entered into 21 tax treaties, many of them in the last two years, and it is steadily but rapidly expanding its network. Singapore has entered into 68 tax treaties, and continues to expand its network.
Residence for tax treaty purposes
Given that the definition of residence under Hong Kong’s tax treaties includes both an entity incorporated in Hong Kong as well as (variously worded) concepts of effective management in Hong Kong, investors can choose between using a Hong Kong incorporated company or, say, a BVI or Cayman Islands incorporated company managed in Hong Kong as a holding company to access benefits under Hong Kong’s tax treaty network. If sufficient care is taken by the non-Hong Kong incorporated company to ensure that the relevant criteria are satisfied, (which will usually require that the top-level strategic direction of the company is exercised through board meetings in Hong Kong) then in principle, an Offshore Company should be able to access treaty benefits as readily as a Hong Kong incorporated company. In practice, many countries require a residence certificate from the Inland Revenue Department which can be obtained on producing evidence of meeting the tax treaties criteria; further comments on the difficulties which may be encountered in obtaining this, at lease in the context of the HK-China treaty, are outlined below.
Singapore’s general tax treaty policy provides that corporate residence is defined as under the domestic law. Under the domestic tax rules a company is resident in Singapore if the management and control of its business is exercised in Singapore. While a range of factors will be taken into account in making this determination, such as the place where annual general meetings are held, the place of registration or incorporation, and the places of business indicated on the company stationary, management and control will typically be considered to rest in the place where the directors of a company meet and exercise de facto control.
Challenges in accessing treaty benefits
It continues to be more administratively difficult for non-HK incorporated companies to access treaty benefits under the HK-PRC tax treaty. In order to obtain the Circular 124 clearance to access treaty benefits, HK incorporated companies must supply the relevant PRC tax authorities with their certificates of incorporation to evidence residence. Non-HK incorporated companies must supply tax residence certificates issued by the IRD. Under the protocols put in place between the SAT and the IRD in the late 1990s, the IRD will not issue a tax residence certificate unless they receive a referral letter from the local Chinese tax authorities, responsible for the China company from which the income/gain is received, requesting the issuance of such a certificate. In practice, it has frequently proved difficult to obtain this letter from the local Chinese tax authorities, and this is in large a consequence of their unfamiliarity with the treaty arrangements.
In Singapore, it is not common practice for non-Singapore incorporated companies to be treated as Singapore tax residents. The Singapore tax authorities have concerns about the potential abuse of the Singapore tax treaty network and take a strict line in issuing the tax residence certificates which are needed, under many of Singapore’s treaties, to obtain treaty benefits. Typically, the Singaporean tax authorities will require evidence of significant commercial substance in Singapore in terms of staffing, leased office space and business activities as well as the proper constitution of board meetings. They may also enquire as to why a non-Singaporean incorporated company has been used – in this regard, tax motivations, such as a desire to mitigate exposure to Singaporean stamp duty, may be referred to by the Singaporean tax authorities in refusing the issuance of a tax residence certificate.
It should be noted that tax authorities around the Asia-Pacific region have been raising the bar for offshore holding companies to be regarded as the beneficial owners of income and gains in order to avail of treaty benefits. Increasingly, countries such as China, Korea and Indonesia have sought evidence of substance in addition to evidence of residence to provide treaty benefits substance requirements after looking at physical attributes such as office space, employees, and other business activities.
Summary
There are good corporate reasons why an entrepreneur or investor would utilise an Offshore Company rather than a HK or Singapore one for domestic transactions. Although currently there are a number of practical difficulties in accessing tax benefits under the treaties, in certain circumstances, it may be possible to utilise them when access to the HK or Singapore tax treaty network is required. ALB
