Hong Kong's revival as a holding company location? Resilient supply chains in the spotlight

published on 3 April 2023 | reading time approx. 5 minutes

For many years, China was the first destination for outsourcing parts of production and/or sourcing for raw materials and intermediate products. For this purpose, companies generally set up their own subsidiaries in China. For tax reasons, but also for increased security and flexibility, and not least because of the very good business environment in Hong Kong, a Hong Kong-based company was often interposed as the parent company of the Chinese subsidiary. Particularly as a result of reforms to Chinese commercial law and also the entry into force of the German-Chinese double taxation agreement, the importance of a Hong Kong holding company has steadily declined in recent years.

However, a turnaround seems to be on the horizon. As a result of the supply chain problems caused by the Corona pandemic and the smoldering trade conflicts between the Western countries and China, many companies are questioning their China strategy. Likewise, greater diversification of supply chains is being included in strategic considerations so as not to be dependent on decisions made by a single state, with potentially drastic consequences for the company. The goal of many companies is to diversify outsourced production more widely geographically and also to broaden the range of suppliers for raw materials and intermediate products. In addition, increased requirements due to the Act on Corporate Due Diligence in Supply Chains as well as legal requirements in third countries (e.g. import bans in the USA under the Uyghur Forced Labor Prevention Act) may make it necessary to diversify supply chains.

Many companies therefore aim to have a larger number of potential suppliers in order to be able to quickly respond to the shortfall of a particular supplier and to make their own supply chains more resilient. This also includes diversifying suppliers geographically in order to be able to mitigate political risks in one of the supplier countries. In short, it involves increasing the number of alternative suppliers, manufacturing products at several locations, and improving warehousing in order to be able to respond to (geopolitical) crises at short notice.

Basically, an expansion of economic activities in different countries as well as the coordination of internationally located suppliers involves a significantly higher effort for the company. Not only do different legal systems have to be observed, but companies can also face challenges from a tax perspective. In addition, controlling and monitoring activities from Germany often proves difficult. The establishment of a holding company in Hong Kong can therefore be a suitable way of bundling, managing and monitoring activities in the East Asian region.

Hong Kong as a location for a holding company

Hong Kong offers an excellent location for a holding company for a number of reasons:

Location

With its location in southern China, both the People's Republic and the states of East and Southeast Asia can be reached within a short time. In addition, Hong Kong is part of the Greater Bay Area (GBA) and thus benefits from a close interlocking and connection to the megacities of Guangzhou, Shenzhen, Zhuhai, Foshan and other megacities in Guangdong Province, as well as close ties to the Macau Special Administrative Region.

Infrastructure

Hong Kong, with its international airport, ranks alongside Singapore as an excellent transportation hub in Asia. Hong Kong not only has a close and excellent network of flight connections in the region, but also good civil and cargo flight connections to Europe and the rest of the world, which are particularly important for the German airline industry.

In addition to its excellent air network, Hong Kong still has one of the largest container ports in the world, even though a considerable part of its competitors are located in mainland China. The importance of this port, despite the competition, nevertheless remains immense, especially due to its status as a free port.

To connect Hong Kong with the Mainland even more easily, a gigantic infrastructure project – the Hong Kong-Zhuhai-Macau Bridge as the world's longest sea bridge – was built, inaugurated and put into operation within just a few years. In addition, Hong Kong is connected to the Chinese high-speed rail network.

Hong Kong scores not only with its transport infrastructure, but also with an extremely wide range of premises for business and warehousing, as well as special zones for start-ups, labs, think tanks, etc. In terms of technology (mobile communications, Internet, etc.), Hong Kong is among the world leaders.

Languages

Besides Chinese (Cantonese, Mandarin), English is the official language in Hong Kong. This facilitates in particular the communication with authorities immensely. Court proceedings can also be conducted in English. Elaborate translations are not necessary.

Legal System

Hong Kong has an independent legal system based on British common law. The courts are independent. Rulings of Hong Kong courts, as well as arbitration or mediation institutions, are recognized and declared enforceable in most countries of the world (including the People's Republic of China for rulings in certain civil and commercial matters), making Hong Kong a convenient place for contracts and possible dispute resolution.

Protection of Intellectual Property

The application and registration of trademarks, copyrights, patents, etc. is carried out swiftly. Violations are prosecuted promptly.

Visa

Foreigners who shall work for the holding company in Hong Kong need a work visa. The application process for a work visa is relatively simple and quick compared to many other countries. Usually, the issuance of a work visa takes place without major problems.

Company formation

Hong Kong is known as one of the freest economies in the world. The incorporation of a company, for example in the form of a limited company, is simple and usually takes only a few days.

Taxes

Hong Kong has a very straightforward tax system. Corporate income tax for companies is 8.25 per cent up to profits of 2 million HKD and 16.5 per cent for profits above. Offshore profits, or profits earned outside the territory of Hong Kong, are exempt from taxation. No withholding tax is levied on dividend or interest payments.

Banking

Hong Kong is one of the largest financial centers in the world and accordingly has an excellent banking system. In addition, Hong Kong is one of the largest offshore RMB clearing centers, which greatly facilitates financial transactions with the People's Republic of China. The Hong Kong Stock Exchange is one of the 3 largest stock exchanges in Asia and is currently on the upswing again after a Corona-related halt to IPOs. Moreover, there are no restrictions on capital movements.

Free flow of information

In principle, information can flow freely in Hong Kong (subject to local data protection regulations). Especially in comparison to countries with strict requirements for data security, location of data storage – such as the People's Republic of China – Hong Kong can therefore also serve as a data center. This can reduce the corresponding efforts in other countries and the risk of forced disclosure of (sensitive) data to authorities in such countries. In addition, there are no restrictions on Western information and entertainment apps and websites, whether for obtaining information via official news sites or for private use (Instagram, Facebook, WhatsApp, etc.).

Cash-Pooling

A holding company in Hong Kong can relieve the parent company in Germany in matters relating to the provision of liquidity at individual subsidiaries and take over the liquidity balancing for these subsidiaries in the region.

Outlook

In recent years, Hong Kong's image has taken a huge hit, particularly as a result of the protests and especially the Corona pandemic. With the global economic recovery, Hong Kong itself also seems to be reviving and realigning itself. Our examples above represent just a few points and should be taken as general indications of the benefits a Hong Kong holding company can bring to operations in East and Southeast Asia.

In the end, the focus is always on the individual consideration and the individual needs of a company. However, according to the company's needs, a Hong Kong holding company can be a suitable vehicle to structure, implement and manage business activities and diversify supply chains in the region.