Hong Kong has been the world’s freest economy for most of the last 30 years, primarily because of its lack of bureaucracy and low tax rates. However, there are a myriad of other benefits; one of which is the ability to protect a company through the use of the special purpose vehicle.
The special purpose vehicle allows a parent company to keep its assets secure and operational if the unfortunate happens, and that parent company goes out of business. While the concept of a special purpose vehicle is not exclusive to Hong Kong, the ability to isolate risk within the liberal economy of Hong Kong itself is a unique combination.
This article will cover exactly what a special purpose vehicle means in Hong Kong’s interpretation, and why you should create your special purpose vehicle in Hong Kong.
What is a Hong Kong Special Purpose Vehicle?
As with other international markets, a special purpose vehicle (often called a special purpose entity in other countries), is a fenced organisation that sits under a parent company. Its purpose is to isolate risk by holding major assets away from the parent company. If the parent company goes out of business, those assets are separated from that bankruptcy, and so the special purpose vehicle can effectively continue business as usual.
A special purpose vehicle also makes the parent company more attractive to potential investors because it clarifies the company’s risk mitigation strategies are active.
In Hong Kong, a special purpose vehicle can be a fully incorporated company, a trust, or a partnership.
While the form of the special purpose vehicle can be similar to other Hong Kong business entities, there are usually extra legal requirements. This makes sense given the purpose and nature of a special purpose vehicle.
Otherwise, a special purpose vehicle should operate largely the same as a standard company, and keep a separate balance sheet from its parent company. This also extends to the special purpose vehicle’s profits and losses. After all, the idea of the special purpose vehicle is too isolated from the parent company.
What Are the Advantages of Forming a Special Purpose Vehicle in Hong Kong?
As mentioned, the combination of Hong Kong’s economy and the benefits of a special purpose vehicle can be extremely attractive for any company looking to mitigate risk.
In our mind, there are two main advantages for choosing Hong Kong as the territory for a special purpose vehicle.
1. A Hong Kong Special Purpose Vehicle Is a Gateway to Mainland China
By having a special purpose vehicle operating in Hong Kong, a foreign company will have access to the Chinese Mainland, the second-largest economy in the world. The physical and economical proximity of Hong Kong to Mainland China would be a huge advantage to any foreign company.
It also gives foreign companies the ability to own China-based assets or entities as a Wholly Foreign-Owned Enterprise. The foreign company (using their Hong Kong special purpose vehicle) can then sell any China-based assets they own by disposing of its shares, enjoying the benefits of those China-based assets.
2. Double Taxation Agreement
The Fifth Protocol of the Double Taxation Avoidance Agreement (DTA) was completed between China and Hong Kong in late 2019. Its primary purpose was to remove the double taxation of income and dividends between the two countries and optimise tax rights and obligations.
Because the Hong Kong special purpose vehicle is becoming more and more attractive for foreign companies as a means to access the Chinese market, the Hong Kong Government has started to tighten some regulations.
If China is one of your special purpose vehicle goals, you will need to acquire the relevant certificates from the Inland Revenue Department of Hong Kong. Most important of which are the Certificate of Resident Status and a Mutual Agreement Procedure. You will also need to obtain tax documents from both Hong Kong and the Chinese Mainland which will take some time and effort. This can be expedited by taking on the services of a reputable company incorporation specialist in Hong Kong.
Requirements for a Special Purpose Vehicle in Hong Kong
To create a special purpose vehicle in Hong Kong, it will need to adhere to five major conditions:
- The special purpose vehicle needs to have a fully incorporated parent company outside of Hong Kong.
- The special purpose vehicle must only be holding company.
- The special purpose vehicle cannon engage in trade or any other business activity.
- The special purpose vehicle must be owned either partially or fully by a non-resident of Hong Kong.
- The special purpose vehicle cannot be an accepted or immune private company.
Conclusion — Where to Next for Forming Your Hong Kong Special Purpose Vehicle
While Hong Kong is world-renowned for its ease of doing business (especially when it comes to company incorporation), the process of forming a special purpose vehicle is inherently complex. Add to that the nuances of the possibility of dealing with the Chinese Government, and even the most adept organisation may run into some issues.
Above all, one must hold legal considerations above all else, as it would be deeply unfortunate to accidentally be deemed dishonest by either the Hong Kong or Chinese Governments.
To get your footing in the process of creating your own special purpose vehicle, we’d encourage you to talk to us first. InCorp has an expert team of qualified lawyers, accountants, and bankers to ensure your Hong Kong special purpose vehicle’s success.
If you have any questions about how to create your Hong Kong special purpose vehicle, please do contact us — it’s both our job and pleasure to assist.