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.