This is the issue that will be explored in this article. Rather than discussing the tax systems and policies of various regions, this article hopes to reveal the other functions of offshore companies in terms of commercial purposes.
Mr. He (a pseudonym) has been engaged in the furniture manufacturing industry for over 20 years, from an apprentice making traditional mahogany furniture to a boss owning a semimechanized furniture production factory with more than 200 employees. He has pursued perfection, cost-effectiveness, functionality and an unassailable market position. However, the growth of his business is also influenced by external factors and it is because of this influence that he was led to seek the next stage of his business development.
Production, processing and foreign trade - the OEM road from China to Hong Kong.
The decade from 1995 to 2005 was not just the golden years for Mr. He, but also a period that witnessed a soaring growth in China's exports. During this period, due to a policy of the Chinese government to attract foreign investment, many foreign enterprises, many of them from Hong Kong, Macao and Taiwan, came to China to set up factories.
The small-sized factory owned by Mr. He grew because it outsourced orders from foreign factories. However as he got to know the senior executives at foreign factories, Mr. He discovered that almost all of the registered investors in these factories were not from their original countries, but instead were from some little-known small islands, such as the British Virgin Islands, Samoa, and the Cayman Islands, or they were intermediary agents receiving orders from Hong Kong or Singapore. After discovering this, Mr. He was very curious and started to investigate the benefits of offshore companies.
At that time considering both Mr. He's corporate shareholder structure, size, development goals and flexibility in allocating operation capital, and China's laws and policies, setting up a traditional international business company limited in an offshore jurisdiction was unable to fully and effectively meet his needs. Mr. He needed a company in a modern international jurisdiction for taxation planning and finance.
In addition to the above considerations, Mr. He wanted to take the initiative to separately establish a foreign trade marketing team rather than continuing to receive orders subcontracted from foreign companies in China. Therefore, he also considered jurisdictions based on their geographical location, foreign trade professionals and the maturity of their cargo port, and their monetary stability, financial institutions and fund-raising system in capital markets and taxation. Mr. He eventually chose Hong Kong as the first step for his company.
Meanwhile, he separately set up an Anguilla International Business Company and used it as the corporate shareholder to invest in the Hong Kong company. In addition, he prepared to send a senior level executive to be the director of the company's Hong Kong office.
The reasons why He Sheng choose to set up an Anguilla international business company as the investor in the Hong Kong entity included:
To avoid a drain on talents and to build employee incentive programs.
Using corporate shares as a mechanism to reward senior staff and retain talents is a widely-used management tool. Since a change of the Hong Kong company's shareholding structure must be reported to the Hong Kong Inland Revenue Department and some tax will occur, using the Anguilla International Business Company Law, which has no stipulated fees on registered capital, no need to report the change of shareholders, and no relevant taxation rules, as a platform to reward the management team and retain talent was an ideal option.
To avoid the embarrassment of commercial competition.
Because Mr. He's main source of revenue was still based on obtaining the orders subcontracted by foreign companies in China, avoiding the conflict of competing for customers between the Hong Kong trading company and Mr. He's Chinese company, and keeping the independence of the shareholders, directors and management team was crucial at that time. Of course, the Hong Kong company law allowed corporate shareholders, but Mr. He had to meet the financial reporting requirements to beef up the independence of the Hong Kong company. Especially in terms of late-stage international taxation planning, it was absolutely important for the Hong Kong company to maintain its independence.
After this, Mr He created ashareholding and employee platform using the Anguilla company, developed the Hong Kong company into an independent trader and used the China factory as the main entity for OEM and processing. However, the SARS virus in 2003 battered booming Hong Kong into recession; once again Mr. He felt the impact of external factors on his business model.
Design, production and foreign trade - the ODM road from China to the US.
With the launch and maturity of the "Anguilla+Hong Kong+China factory" business model, the number of direct purchasing customers from the US grew rapidly. In addition to China's trade fairs, Mr. He also participated in overseas trade fairs. When communicating with local buyers, he found that "distance" and "aftersale services" became the bottleneck for growth. Thus, Mr. He decided to set up an entity in the US to shorten the distance with customers, provide swift "after-sale services" and better grasp the US market.
The office set up in the United States served as a cost center and didn't engage in profit-making commercial activities, instead, it focused on "customer relations", "market development" and "product development and design". Therefore, Mr. He used the Anguilla international business company to invest and set up a Delaware LLC.
B2C returning to the Chinese market - the road of brand and channel.
During 2008 and 2009, the US market was hit by the sub-prime debt turmoil that broke out in July 2007. Mr. He's US business was seriously challenged. At that time, China's high-end furniture consumption patterns were in a transition stage. So with the help of its experience accumulated in the United States since 2003 and the brand resources of its customers, Mr. He started to team up with a well-known US furniture brand to invest back in China.
Mr. He used the Anguilla international business company to set up a Seychelles International Business Company with its US partner as the investor in the wholly foreignowned company in China. Meanwhile, it utilized Mr. He's Chinese factory and Hong Kong company to successfully establish a complete platform of designing in the US, manufacturing in China, doing and processing trade in Hong Kong, and using the foreign-owned company in China as the brand's sales agent.
Summary.
With China's reform and opening up as well as increasing economic globalization, China's business owners are beginning to address how to use offshore companies for investment, shareholding, trading, tax planning, and estate planning, as well as management incentive planning purposes. However, it's impossible to use a single offshore company to meet all the requirements of a company during its growth. Rather, the decision should take into account situations where the "nationality" of the company is the key factor. Therefore, in today's business environment with frequently changing policies, looking for a suitable and flexible offshore jurisdiction to meet a company's requirements must be an ongoing process.
