Hong Kong Special Purpose Vehicle (HKSPV) is a company founded in Hong Kong that holds IP rights for a mainland China company. It provides limited liability, easy exit from China, and tax benefits. A Wholly Foreign Owned Enterprise (WFOE) allows foreign companies to do business in China with more control than a joint venture. China's new Company Law removes minimum capital requirements and allows more flexibility in capital contributions. Intellectual property like trademarks and patents should be registered in China to protect ownership and allow legal action against infringement.
1. P R E P A R E D B Y : J A C O B B L A C K L O C K
F O R E I G N L E G A L C O U N S E L
L E H M A N , L E E & X U
B E I J I N G , C H I N A
Start-Up Basics For China Business
2. Hong Kong Special Purpose Vehicle
Hong Kong Special Purpose Vehicle (HKSPV)
A company founded in Hong Kong, normally conducting no business
of its own.
Typically holds all IP rights for the mainland China company.
No restriction on value of initial capital.
Between one and fifty shareholders; individuals or corporate entities.
Liability of each shareholder is limited to the capital they have
invested.
At least one Director which may be individual or corporate entity.
3. Hong Kong Special Purpose Vehicle
Hong Kong Special Purpose Vehicle (HKSPV)
At list one Company Secretary is required and must be a Hong
Kong resident or corporation.
Must have a registered office address in Hong Kong.
Required to renew business registration annually, file annual tax
return.
Required to appoint auditors and prepare audited accounts every
year.
4. Hong Kong Special Purpose Vehicle
Hong Kong Special Purpose Vehicle (HKSPV)
Limited Liability: As the shareholder of the mainland company,
the HKSPV will be liable up to the subscribed registered capital for
the mainland company.
Exit Strategy: Provides option for quick exit from China operation.
Can be sold in one day under Hong Kong laws. Avoid lengthy
winding down proceedings in mainland China.
Remittance of Funds: Provides for easy transfer of funds out of
China in form of payments for services, royalties or licensing fees.
5. Hong Kong Special Purpose Vehicle
Hong Kong Special Purpose Vehicle (HKSPV)
Tax Benefits:
Tax rate on money not earned in Hong Kong (i.e. in mainland China)
is 0%
Avoid 25% mainland China income tax
Tax rate for profits earned in HK is just 16.5%
No dividend tax in Hong Kong, dividends received by the Hong
Kong company will not be taxed in HK
The China withholding tax applying to a Hong Kong parent
company can be as low as 5%.
Funds can be managed easily over internet, and moved easily in and
out of the HKSPV due to no currency controls.
6. Your China Company
Wholly Foreign Owned Enterprise (WFOE)
Limited Liability corporations established in China by a foreign
corporation or individual(s)
Permitted business activities include production, sourcing,
distribution, retail sale, and provision of services.
May produce products directly, or source from Original Equipment
Manufacturers.
VAT refund on products produced for export only
Foreign components may be imported duty free for addition to
products produced for export only.
More business capability than a Representative Office.
More control and less potential for disputes than a Chinese-Foreign
Joint Venture.
7. Changes to China’s Company Law
Effective March 1, 2014
The requirement for a minimum amount of
registered capital has been removed
The mandatory proportion of initial capital
contribution and the proportion of capital
contribution paid in currency have been eliminated
Capital verification report no longer necessary at
registration.
8. Changes to China’s Company Law
Registered Capital Subscription System:
Registered Capital is now indicated by the
shareholder in the Articles of Association. The
“Subscribed” amount stated in the Articles
will be legally binding on the company.
The shareholders will be allowed to determine
the form and time of capital contributions
according to business needs. This information
must be recorded in the Articles of
Association.
9. Changes to China’s Company Law
Additional Changes:
Registration Requirements: In general
interactions with authorities should gradually be
streamlined and simplified
Annual Reporting: Annual Audits will be
eliminated and replaced by an Annual Reporting
system, in which a report is generated by the
Enterprise itself, and sent to Authorities
Enterprise Credit System: Annual Reports will be
available for the public to view. Enterprises which
do not submit an Annual Report for three years
will be blacklisted.
10. Changes to China’s Company Law
Anticipated Effects:
More holding companies: Lowered costs to
establish a new company will lead to the
establishment of more holding companies
and special purpose vehicles to facilitate
multilevel financing and complex transaction
structures.
More hi-tech companies: More flexibility to
allocate assets such as technology,
Intellectual Property, and physical assets for
capital contribution. More opportunities for
development of hi-tech companies and
startups.
11. Changes to China’s Company Law
Anticipated Effects:
Need for more due diligence: Due to the removal of
the need for “paid in” capital and the absence of
any requirement for annual inspection of
companies, more prudent legal and financial due
diligence on counterparties in transactions is
recommended to prevent transaction risk.
12. Employment Systems
Type of Labor Contract:
Fixed Term
Non-Fixed Term
Contract for completion of specific task
Termination of an Employment Contract:
Every Employee is Required by Law to have an Employment Contract
Proper causes for Termination with 30
days notice
Unable to resume work after
treatment period for work related injury
Employee is incompetent and
remains so after training
Employment is impossible to
perform due to material change in
conditions
Proper causes for Immediate Termination
Employee fails to meet employment
requirements during probation
Employee materially breaches
Employers regulations
Employee’s Serious dereliction of duty
causing substantial loss (including fraud)
Employee begins another job
13. Employment Systems
Company Handbook: Responsibilities of Employees to Company.
Employment Trainee Agreement: Requiring the employee to pay back
trainee costs if the employee leaves employment within a certain time
period.
Non-Disclosure Agreement: A standalone agreement.
Non-Competition Agreement: A standalone agreement.
Intellectual Property Work for Hire Agreement: A standalone
agreement, indicating that all intellectual property created by the
employee during employment is the property of the company.
China Anti-Bribery/Foreign Corrupt Practices Act Agreement: A
standalone agreement.
China Expense Reimbursement Agreement: A standalone agreement.
14. Intellectual Property Protection
Types of Intellectual Property
Trademarks: Protection for the words or logo used to identify goods
or services.
Copyrights: Protection for an original work of art or writing (including
software)
Patents: Protection for a new invention, an incremental improvement,
or a new use of existing technology
Design Patents: Protection on the unique appearance of the design of
a product.
Domain Names: Register your name, and variations on your name,
under multiple domains (.com, .com.cn, .cn, .中国)
15. Intellectual Property Protection
Intellectual Property Registration
First-to-File System: The first to file for protection of a Intellectual
Property (IP) will be the owner, prior use is not a consideration.
Benefits of Registration
Legal ownership of the IP
Ensures rights to use the protected IP in China
Reduces potential for infringement
Grants right to initiate legal action against infringement
and unauthorized use.
After filing with customs authority, may prevent import
and export of infringing goods
Important as an aid to transfer money out of China legally
16. Intellectual Property Licensing
Transferring funds out of China using Licensing
Agreements
IP Licensing Agreements signed between the China company and
the foreign IP holder (Usually a HKSPV).
Income of the China company transferred to the HKSPV as
licensing payments.
Avoid 25% income tax on China company profits.
Licensing Fee will be subject to 6% VAT on transfer
Typically the IP and the Licensing Agreement, must both be
registered with Chinese authorities. However, registering the
Licensing Agreement is not necessary if license is held by a Hong
Kong company.
