In the coastal cities of China, enterprises have been gaining an increasingly deep understanding of offshore companies. Meanwhile, in recent years, more and more offshore institutions have been established and registered. An offshore company refers to a limited liability company established in an offshore jurisdiction according to its laws and regulations on offshore companies. Local government collects no tax but only a small amount of corporation administration charges from offshore companies. Besides, most major banks in the world recognize and accept offshore companies, agreeing to open bank accounts for them and provide them with financial operation services. Offshore companies feature strong data confidentiality, zero corporate income tax and free capital flow. Therefore, many Chinese enterprises, including state-owned enterprises, adopt offshore company structures within corporate operations and development for cost-saving and tax planning reasons, and to provide a financing platform.
The common purpose of offshore companies is for international trade. A company can register an offshore company as a trader, purchase products from Country A and sell to Country B to make a profit, and then apply for tax-free overseas gains. In such a way, the operational cost of enterprises may be reduced. In addition, offshore accounts can improve the fund utilization rate of enterprises because they are not restrained by foreign exchange controls.
With the development of Chinese policies, offshore companies can also be used for round-trip investments. For example, by filing an application with the State Administration of Foreign Exchange and the Ministry of Commerce, Company A in mainland China may establish a wholly-owned subsidiary Company B in Hong Kong (i.e. Company A is the shareholder of Company B) and then transfers its fund to Company B in the name of an investment fund. Afterwards, Company B can make investments in mainland China using a round-trip investment and apply for the corresponding preferential policies with the government, thus maximizing corporate interests.
China encourages enterprises to make investments abroad, but the foreign investments of many Chinese state-owned enterprises are restrained by Chinese policies. Furthermore, due to the lack of familiarity with the laws and tax systems of other countries, such investments are exposed to certain risks. Offshore companies can be used by large enterprises as a springboard to avoid China's governance of foreign investments and to make investments abroad while holding companies as an international holding company. Due to the confidentiality of shareholders’ data, offshore companies can also conceal the identity of the investors, spread the investment risks of the enterprises, and use them to assist with tax planning.
As the bubbles of the market economy become increasingly visible and bank policies are tightened up, most enterprises in mainland China will be confronted with a problem: the difficulties in and high costs of financing. In contrast to China, if enterprises have legitimate operations overseas and establish complete auditing accounts, they can obtain financing at a lower cost from foreign banks to expand the financing channel with a letter of guarantee issued by domestic banks to foreign banks. The most common financing mode is overseas loans under domestic guarantee, which features both low financing costs and an arbitrage space. However, problems arising from exchange rate risks – especially the sharp rise against the US dollar this August – have significant impact on the cross-border, cross-currency financing of enterprises. Offshore companies are widely used. Offshore service institutions like Zhuorui will establish different offshore structures for different enterprise objectives to exploit the advantages of offshore companies to the maximum.
By Biao Su
Biao Su, General Manager of Zhuorui Enterprise Management Consulting Ltd., Zhuorui Accounting Ltd. and Hongrui Capital Investment Management Ltd. He
joined offshore registration industry in 2004 and since then provided offshore registration and offshore structure establishment services for clients from more than 1000 enterprises in Zhejiang, Liaoning, Fujian and Shandong provinces, covering sectors from international trading, manufacturing to real estate, etc. He has rich experiences in offshore practices.
