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Recently, news has spread on Wall Street that the United Kingdom and the United States plan a joint enforcement operation to investigate overseas investment companies registered in tax havens such as the Cayman Islands and the Bahamas. If these companies are unable to prove their legitimate origin, they will face seizure and confiscation on suspicion of money laundering.
In fact, this reflects the current international community's general concern for improving fiscal transparency and combating tax evasion, as well as the urgent need for governments to collect revenues. Specifically, the United States asked NATO to raise military spending to 2%, but the United States and European countries are financially tight, and the British defense secretary has not received the defense budget, so he is eager to seek new sources of fiscal revenue, so he has turned his attention to a large number of offshore companies registered in tax havens.
Source: Nikkei Asian Review
The Cayman Islands is well-known in China because the three giants of Chinese Internet companies - Baidu, Alibaba, and Tencent - registered offshore companies registered in the Cayman Islands.
It is said that there are many benefits to opening a company in the Cayman Islands. There are roughly the following five aspects:
First, it can avoid taxes. Cayman does not levy corporate tax, income tax, capital gains tax, etc. on companies operating offshore business.
Second, the company's information is highly confidential. The information of shareholders, directors, beneficiaries and donors enjoys the highest confidentiality and is not disclosed to the public.
Third, many companies are registered in the Cayman Islands for overseas listing, which has a high degree of international recognition and is conducive to overseas listing.
Fourth, there is no foreign exchange control in Cayman, the management is lax, there is no threshold, and funds can be freely and flexibly transferred in and out.
Fifth, the registration is simple and convenient, the threshold is low, the bank account opening is convenient, as long as the ID card + passport, and the registered capital is generally 5w US dollars, but it is not mandatory to pay in.
In addition to the three Internet giants, Chinese companies such as Xiaomi, Evergrande, NetEase, Sina, Anta, Country Garden, Giant Network, Focus Media, and Meituan have also registered offshore in the Cayman Islands. At present, tens of thousands of Chinese offshore companies have been registered in offshore financial centers, and the ties between the two sides are becoming increasingly close.
Outside of the Cayman Islands, the British Virgin Islands is also a well-known tax haven. According to the website of the Ministry of Commerce, in 2003, the British Virgin Islands had become the second largest source of foreign investment in mainland China in terms of actual investment amount.
The Cayman Islands (English: Cayman Islands) is an overseas territory of the United Kingdom in the Western Caribbean Islands of the Americas, consisting of three islands: Grand Cayman, Little Cayman and Cayman Brac. The Cayman Islands is the world's fourth-largest offshore financial center and is known as a world-famous diving destination.
But with the United Kingdom and the United States jointly enforcing the law, where will offshore companies outside China go?
The transfer to a non-CRS participant country would outweigh the benefits
In order to combat transnational crime, money laundering, tax evasion and other issues, the tax bureaus of dozens of countries around the world, including China, joined forces to start the first batch of tax information exchange on September 1, 2018. China and Australia are on the list of first-time exchanges of information. As a result, many offshore tax haven accounts will have nothing to hide from overseas purchases, insurance, asset transfers, and profit transfers.
Source: State Administration of Taxation
What if assets are transferred to countries (regions) such as the United States and Cambodia that have not yet committed to implementing CRS?" A senior lawyer who is familiar with CRS-related laws said bluntly.
Although the U.S. does not participate in CRS, the U.S. has a CRS-like Foreign Account Tax Compliance Act (FATCA) designed to prevent U.S. citizens and residents from abusing overseas "tax havens" to transfer wealth for tax avoidance. In order to maximize the implementation of this policy, the U.S. Treasury Department has signed agreements with nearly 100 countries to implement the Foreign Account Tax Compliance Act, which also drives the Organization for Economic Co-operation and Development (OECD) to jointly implement CRS with more than 100 countries to jointly prevent its residents from taking advantage of the difference in tax rates in different countries to flow their wealth to overseas countries with lower tax rates to avoid taxes, causing considerable pressure on the country to lose taxes.
In addition, the U.S. has strict rules on the declaration of the source of assets and the payment of taxes, and the rash transfer of overseas wealth to the U.S. will not only incur anti-money laundering investigations by the relevant U.S. authorities, but also easily face a much higher tax burden than China.
High-net-worth companies need to pay U.S. personal income tax (personal income tax on labor and labor income) and capital gains tax (capital gains tax on income earned through various types of investments) in order to keep their overseas wealth in the United States. However, the average tax rate of these two taxes is not lower than that of China, so this is not a wise move.
"At present, the CRS has covered more than 100 countries and regions, and more countries and regions will join in the future, and when investing, tax is only one of the factors to consider, and more importantly, asset returns and security issues must be considered. ”
Hong Kong may be a better choice
As a free port, Hong Kong has the advantage of low taxation, and capital gains tax, gift tax, value-added tax, sales tax, and business tax are not included in the Hong Kong tax system.
Deloitte China believes that:
First, the world-class business environment is conducive to offshore companies establishing a business substance in Hong Kong. Adjacent to Chinese mainland, the HKSAR has always been Asia's international financial and trade center, as well as a major platform for international financing and investment and an important transportation hub.
Secondly, for offshore companies, Hong Kong provides a clear and standardized business registration system and guidelines. For all non-Hong Kong companies incorporated outside Hong Kong and having a place of business in Hong Kong, Hong Kong also provides a business registration system that requires the company to register as a "non-Hong Kong company" with the Hong Kong Companies Registry and apply for a Hong Kong business registration certificate.
Thirdly, a competitive tax system and easy tax compliance requirements are beneficial for operating in Hong Kong. With a basic profits tax rate of 16.5%, Hong Kong has a simple and competitive tax regime with a number of tax incentives enacted and implemented, such as the two-tiered profits tax concession, the preferential tax rate reduction of the tax rate for specific industries (treasury centres, aircraft leasing, etc.), and the preferential treatment for additional deductions for R&D expenses. For offshore companies, taxpayers generally make tax returns once a year, and if the Hong Kong Inland Revenue Department does not issue a tax return in that year, taxpayers with no assessable profits can temporarily not file tax returns.
Finally, there is an opportunity to obtain Hong Kong tax residency. Whether it is a Hong Kong company or an offshore company registered in Hong Kong, to successfully apply for a Hong Kong Tax Residency Certificate, it is first necessary to establish a business substance in Hong Kong. The establishment of ES in Hong Kong by companies such as Cayman and BVI will facilitate the application of Hong Kong Tax Residency Certificate, and can also avoid the direct application of the Economic Substance Act of Cayman and BVI (as tax residents of other tax jurisdictions).
In simple terms, the benefits of setting up a company in Hong Kong are:
1. The company name is free to choose. Such as international groups, holding industries, associations, chambers of commerce, federations. The minimum registered capital is only HK$10,000.
2. The registered capital does not need to be verified. Countless companies can be registered in one office.
3. There is no restriction on the scope of business. Can operate a variety of businesses.
4. The tax system is simple and the tax rate is low.
5. Free flow of people, logistics, and capital in and out. Visa-free agreements with more than 100 countries
6. Receive funding from the Hong Kong government. SMEs, up to HK$80,000 Marketing Fund, up to HK$4.11 million Development Support Fund.
7. Easy access to international credit and credit. With the credit of a Hong Kong bank, you can directly issue a letter of credit overseas. Listed on the Growth Enterprise Market (GEM) in Hong Kong.
8. Strive to obtain the right of abode in Hong Kong. There is a chance to get it after 7 years of residence.
On the other hand, Hong Kong is adjacent to Chinese mainland and has always been the first choice for Chinese enterprises to invest abroad. Under the national macro development blueprint of the Belt and Road Initiative and the Guangdong-Hong Kong-Macao Greater Bay Area, Hong Kong has launched a series of measures in recent years to attract Chinese and global enterprises to invest in Hong Kong. Therefore, following the policy may be a good way out.
Entering a tax haven with the mainland that has signed a tax treaty
Chinese enterprises have invested more in Luxembourg, Singapore, Barbados and Cyprus, as well as Ireland, the Netherlands, Switzerland and Greece.
Here are Singapore and Luxembourg as examples.
Source: Digitization of cross-border trade
Luxembourg is not only the gateway to Europe, but also one of the best holding vehicles for global investment, with a super five-star reputation, a well-established financial system and a rich and flexible bilateral tax treaty, which makes Luxembourg the first choice for high-end clients to invest and operate abroad.
Luxembourg's income tax and turnover tax are a two-subject composite tax system. The basic rate of corporate income tax is 22 per cent, and a 4 per cent solidarity surcharge is paid to the National Employment Fund. The basic VAT rate is 15%, medical 3%, gas 6%, mine-based fuels, cleaning products and tobacco 12%.
Compared with offshore companies, a Luxembourg holding company has the following advantages:
1. Most offshore locations, including Cayman, BVI, are blacklisted by EU countries, the United States, and OECD countries, where offshore companies are likely to be taxed. Luxembourg has a good reputation and has never been blacklisted by any country.
2. Offshore companies cannot enjoy bilateral tax treaty benefits, therefore, there will be a withholding tax of 5~10% when paying dividends to shareholders.
Luxembourg holding companies, on the other hand, as onshore companies, enjoy the benefits of Luxembourg's bilateral tax treaties with nearly 50 countries, so they are not subject to withholding tax when paying dividends.
When private and state-owned enterprises in many fields such as coal, new energy, aerospace and other fields invest in Europe, they choose to inject capital into Luxembourg companies, and adopt the "Hong Kong-Luxembourg-Europe" indirect investment model. In September 2008, Zoomlion in Changsha, China, acquired CIFA in Italy, using the same "Hong Kong-Luxembourg" structure.
In addition, Luxembourg implements tax incentives such as investment tax incentives, new business tax incentives, audio-visual licenses, venture capital licenses, etc., to provide the most favorable tax regime for multinational companies, encourage the use of relevant tax treaties between Luxembourg and China, recognize the tax rates that may fluctuate in China, and Chinese products enjoy preferential customs policies in Luxembourg.
Singapore has the following advantages:
1. The tax system is legal and recognized by the world;
2. Foreign-funded enterprises and local enterprises enjoy the same treatment, and the company's account is not included in the exchange;
3. Single tax system, corporate income tax is only 17%, no shareholder dividend tax, no capital gains tax;
4. The tax system is relaxed, and the turnover below S$10 million does not need to be audited;
5. It is only taxed on the turnover generated or received locally, which is globally recognized as a low-tax haven;
6. Unlike Hong Kong, Singapore is an independent and sovereign country.
7. It is one of the four major financial centers in the world, and the company has a high degree of international recognition;
8. The government is efficient and clean, the financial supervision is strict, there is no foreign exchange control, and the assets are stored safely.
In fact, the "instability" of registering in a tax haven has long been revealed.
In 2013, the U.S. Senate held hearings on Apple's overseas tax avoidance, and the EU summit reached a number of consensus on how to crack down on multinational corporations using "tax havens" to evade taxes. Since the OECD published its report "Perverse Tax Competition" in 1998, the campaign against "tax havens" has not stopped. EU officials estimate that widespread tax evasion by companies and individuals costs the EU economy about 1 trillion euros a year, and according to two Democratic lawmakers in the United States, the United States loses about $100 billion a year in tax revenue.
Governments in Cayman, the BVI, Bermuda, Jersey and other places have also implemented economic substance bills since 2019, requiring the establishment of companies and partnerships to engage in specific activities in the local area to meet the economic substance requirements. And this will deal a huge blow to the tax havens full of shell companies such as Cayman and BVI.
According to OECD (Organization for Economic Co-operation and Development) statistics, about 4%~10% of the global corporate income tax is lost due to cross-border tax avoidance, and the annual loss is about 100 billion to 240 billion US dollars.
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(1) European and American governments encircle and suppress "tax havens" Apple has become a key target.People's Daily Online.2013-05-27.
(2) Hong Kong Tax Alert: Considering the Ways for Chinese Enterprises to Deal with the Economic Substance Act from the Perspective of Hong Kong.Deloitte China.2019-09-15.
(3) The tax havens of overseas investment have fallen one after another, and what will be the future under the new situation of CRS.Digitization of cross-border trade.2018-09-14.
(4) Tens of thousands of Chinese enterprises poured into tax havens to evade tens of billions of dollars.Jiangsu Financial Information Network.2024-03-31.
(5) Half of the listed companies in Hong Kong are registered in Cayman.Finance.2019-04-17.
(6) The era of global taxation is coming, and the "tax haven" of China's wealthy is no longer beautiful.21st Century Business Herald.2018-09-06.
(7) The curtain of global anti-tax avoidance has opened, where should offshore companies go?.Eagle Fly International.2019-11-28.