Traditionally, many multinational enterprises (MNEs), including those in Hong Kong, have established entities in “no or only nominal tax jurisdictions” (e.g. the Cayman Islands and the British Virgin Islands (BVI)) to hold their investments or undertake specific business activities for various reasons, including tax considerations, their relatively simple compliance obligations and less onerous information disclosure requirements.
However, these offshore jurisdictions have faced growing global scrutiny in recent years, prompting the enactment of new legislation to enhance corporate and tax governance. The advantages of maintaining offshore entities in these jurisdictions may no longer yield the desired benefits and there has been an increasing trend for MNEs to unwind their offshore structures in the past few years. Up until now, the most common Hong Kong entry option for foreign companies is establishing a new company in Hong Kong and winding up the old company in its original place of incorporation upon business transfer. In order to reduce the administrative complexity and compliance burden for restructuring, the Financial Services and the Treasury Bureau (FSTB) launched a public consultation in 2023 on the introduction of a company re-domiciliation regime (regime) to provide a simple and straightforward route for a foreign-incorporated company to change its domicile to Hong Kong while maintaining its legal identity and minimizing the disruption to the business operations. Taking into account the feedback received, the FSTB released the consultation conclusions and legislative proposals in early July this year.
In this article, we will discuss the challenges observed in the market for maintaining entities in no or only nominal tax jurisdictions. We will then explain why the regime can be an appealing choice for the business community and provide an overview of the key features of the regime.
Common challenges in no or only nominal offshore tax jurisdictions
Based on our observations and industry insights, we have identified several key challenges that MNEs may face when maintaining entities in no or only nominal tax jurisdictions which drive them to consider walking away from these offshore jurisdictions:
Economic substance and additional disclosure requirements
In recent years, these jurisdictions have faced heightened global scrutiny, resulting in, for example, the BVI and the Cayman Islands introducing economic substance requirements in 2019, which require offshore entities to maintain an appropriate level of economic substance in the BVI and the Cayman Islands, unless exceptions apply. BVI entities are also now required to submit simplified financial statements to their registered agents annually. Such rules have significantly increased the compliance costs for maintaining such offshore entities.
Global minimum corporate tax
Under the Organization for Economic Cooperation and Development’s Inclusive Framework on Base Erosion and Profit Shifting, more than 140 members (including Hong Kong) agreed to imminently enact a new global minimum corporate tax of 15 percent for in-scope MNEs. The historical tax efficiency of such offshore structures may no longer be achievable and some MNEs with subsidiaries in these offshore jurisdictions are mulling over restructuring or exiting these jurisdictions entirely. For instance, Bahamas announced plans to forge ahead with the enactment and implementation of legislation to introduce a global minimum corporate tax of 15 percent during 2024.
Dual compliance requirements for non-Hong Kong companies registered in Hong Kong
Companies incorporated outside Hong Kong that have established a place of business in Hong Kong are currently required to register as a “non-Hong Kong company” under Part 16 of the Hong Kong Companies Ordinance. As a result, these companies must navigate and comply with two distinct sets of legal and compliance regulations, one in Hong Kong and another in their home jurisdictions, which imposes additional compliance costs and administrative burdens on MNEs.
Corporate identity
Entities incorporated in no or only nominal tax jurisdictions are facing increasing difficulties in running their business operations. For example, business counterparties may have concerns about doing business with entities incorporated in no or only nominal tax jurisdictions, and they face increased scrutiny by financial institutions in opening bank accounts and remitting funds. These factors cause significant disruption to the daily business operations for MNEs.
The attractiveness of the regime
In view of the above challenges, the regime may potentially become one of the optimal choices in executing business restructuring.
Sustainable structure
Hong Kong stands as a premier destination for businesses and investments looking to expand their presence in the Mainland China, Asia, and beyond. With its transparent and efficient corporate governance framework, simple taxation system, and world-class professional services, Hong Kong offers compelling business opportunities to MNEs. Relocating the domicile of such offshore entities to Hong Kong would enhance brand image, alleviate the aforementioned practical challenges and smoothen business operations, especially for MNE groups with substantial business operations in Hong Kong already.
Preserving legal identity and business continuity
Unlike the existing commonly used entry option (i.e. setting up a new company in Hong Kong followed by a business transfer), re-domiciled companies can retain their legal identity. It can ensure a seamless transition to Hong Kong. By preserving their legal identity and business continuity, companies can maintain established relationships, contracts and branding, minimizing disruptions to the business operations and reducing the costs of business restructuring.
Key features of the regime
With reference to the latest legislative proposals, the key features of the regime in Hong Kong are summarized as follows:
Eligibility criteria
- A non-Hong Kong company applying for re-domiciliation to Hong Kong must originate from a jurisdiction that permits outward re-domiciliation.
- Applicable to the following four types of companies:
- Private companies limited by shares;
- Public companies limited by shares;
- Private unlimited companies with a share capital; and
- Public unlimited companies with a share capital.
- No economic substance requirement will be imposed.
- The property, rights, obligations and liabilities, as well as the relevant contractual and legal processes of the re-domiciled company will not be affected.
- The legal identity of the re-domiciled company will be retained. No new legal entity is created throughout the process.
Administrative procedures
- The Registrar of Companies (R of C) will be responsible for approving applications for re-domiciliation, and considering whether the companies have fulfilled specified requirements in relation to integrity, member and creditor protection and solvency.
- Certain documents are required to be filed with the application, including, but not limited to:
- Proof of solvency – the latest financial statements of the company as at a date no more than 12 months prior to the application date.
- Legal opinion on due incorporation and continuing existence.
- Legal opinion that proposed re-domiciliation is allowed under the law of original domicile.
- Members’ consent by a resolution passed by at least 75 percent of the eligible members (if neither the law of the original domicile nor constitutional documents of the applicant requires such consent).
- Upon successful application, the R of C will issue a certificate of re-domiciliation.
- The re-domiciled company is required to notify the R of C and provide evidence of de-registration in its original place of incorporation within 120 days. An extension may be applied for if needed.
Tax arrangements
- Transitional tax matters – The Inland Revenue Ordinance will be amended to cover fair deduction for trading stock, specified types of expenditures, depreciation allowances, etc.
- Tax benefits or credits – Unilateral tax credits will be available if the re-domiciled company is charged an exit tax by its original domicile.
- Stamp duty – No stamp duty liabilities will arise from the re-domiciliation process, as it will not entail any transfer or change in the beneficial ownership of a company’s assets.
Leveraging the regime for future restructuring
Industries should grasp this opportune moment to consider an inward re-domiciliation of their offshore companies to Hong Kong, particularly if they are already engaged in business activities in Hong Kong, although domiciled abroad. The regime aligns well with recent international business and tax developments and offers an attractive option for business restructuring in Hong Kong going forward.
Pending the legislative details, we hope the FSTB can clarify certain key items of the regime (e.g. whether a re-domiciled company will be considered as a Hong Kong tax resident for enjoying tax treaty benefits and whether the transfer of shares in a re-domiciled company will trigger Hong Kong stamp duty liabilities). Nonetheless, companies that are interested in re-domiciling to Hong Kong may wish to start mapping out their plan now. As always, seeking professional advice in the process is advisable, given the potential technical complexity involved and the unique circumstance of different companies.
This article was contributed by Ricky Chow, member of the Institute’s Taxation Faculty Budget Proposals Task Force and Tax Partner at PwC Hong Kong; and Candice Mak, Tax Senior Manager at PwC Hong Kong.