The 2011 Index of Economic Freedom, a project of The Wall Street Journal and the conservative Heritage Foundation, ranked Hong Kong as the world’s freest economy, giving the “Asian tiger” that title for 17 years in a row. The report generally covered the last half of 2009 and the first half of 2010.

Overall, this year’s report saw economic freedom on the rise around the world, with scores on freedom rising in almost two-thirds of the countries examined.

The study’s executive highlights found “those gains are particularly welcome and significant given the fact that the biggest improvements have been achieved in developing and emerging economies where poverty reduction is a top priority.”

Four economies saw their scores rise at least three points: Rwanda, Djibouti, Seychelles and the Solomon Islands.

According to Heritage, six areas — Hong Kong, Singapore, Australia, New Zealand, Switzerland and Canada — have set themselves apart as the world’s “free” economies. Ireland and Denmark also ranked above the United States in this year’s index.

Venezuela, Cuba and North Korea were among the countries in the rear of this year’s rankings.

The Top 10

1 Hong Kong (89.7 points)

2 Singapore (87.2)

3 Australia (82.5)

4 New Zealand (82.3)

5 Switzerland (81.9)

6 Canada (80.8)

7 Ireland (78.7)

8 Denmark (78.6)

9 United States (77.8)

10 Bahrain (77.7)

On November 19, 2010 the State Council promulgated Regulation of the Administration of Representative offices of foreign enterprises (order of the State Council no. 584). Regulations will come into effects on March 1, 2011.

The previous Regulations provided that Representative Office shall only engage in activities which are not profit-generating unless otherwise stipulated by the agreement between China and the country in which foreign enterprise resides. The Regulations promulgated recently expressly provides that activities related to the business of the foreign enterprises which a Representative Office may engage in includes:

-          market investigation, display, promotional activities in connection with the products or services of foreign enterprises;

-          Liaison activities in connection with products sales, services provision, domestic procurement and domestic investment of foreign enterprises.

Article 35 of the Regulations expressly provides the legal liabilities for the engagement in profit-generating activities and increases the fine and legal liabilities for such violations, including ordering a Representative Office to correct and confiscate the illegal gains and the tools, equipments, raw materials, products (commodities) and other property that are specially used for engaging in profit-generating activities, and imposing a fine of no less than RMB50 000 and no more than RMB500 000. In egregious cases, the registration certificate of a Representative Office shall be revoked.

The Representative Offices shall provide an annual report to the Registration Authorities between March 1 and June 30. The content of such annual report shall include the legal existing and standing information of the foreign enterprises, the information on the carry-out of business activities of the Representative Offices and the information on the expenses and expenditure and revenues audited by their accounting firms and other related information.

Failure to provide such report will result in a penalty of RMB10000 to RMB30000.

The Regulation provides the new rules for the publication of the establishment registration. The Regulations provide that the registration authorities shall record the registration matters of a Representative Office in the registrars to be made available to or copied by the general public. Moreover, the Regulations provide that foreign enterprises shall announce the establishment or change of the Representative Offices to the general public via media designated by the registration authorities.

This month we are glad to present new jurisdiction available for our clients seeking to register offshore company – Samoa.

Quick facts about Samoa:

-ranked 3d out of 24 countries in the Asia-Pacific Region in the category of “starting a Business”, and 5^th in the “Protecting Investors” category in the latest edition of the World Bank’s survey for doing business

Advantages of Samoa over other offshore jurisdictions:

-          Inexpensive with very “solid” international reputation

-          Well known by the major banks

-          Best jurisdiction for re-domiciliation

-          Confidentiality : only M&A is on public record

-          Next business day Certificates of Incumbency/Good Standing

-          Annual renewal fees don’t change with Authorized Capital/number of shares

-          Easier processes for bearer shares

Our incorporation package price is USD900 and the registration process will take 9 working days. Annual maintenance fee is USD800.

For more details please visit our Samoa incorporation page.

We have now added Saint Vincent & Grenadines as one of the jurisdictions to choose from for our clients looking to set up an offshore company/IBC. We have signed a strategic partnership with one of the leading Saint Vincent financial service firm, through which we will be able to offer to our clients in China and abroad Saint Vincent offshore companies, trusts, bank accounts and more.

Nominee shareholders and directors are available for Saint Vincent & Grenadines companies, subject to an indemnity agreement, contract, and declaration of trust between the nominee and the client.

The base price for the Saint Vincent and Grenadines IBC formation is USD750, with annual maintenance charges at USD550, which makes it one of the cheapest available offshore jurisdictions. The total set up time is about 10 days (from order confirmation to the receipt of the company kit by client)

We also have a full package which include the Saint Vincent and Grenadines company formation, a nominee director, a nominee shareholder, and the opening of a corporate bank account, for a total of  USD2,150.

For more details, please visit our Saint Vincent and Grenadines incorporation page. You can also review the complete fee table and our special packages here.

The People’s Bank of China end of September released regulations to allow foreign institutions to open cross-border RMB-settlement accounts at locally registered banks from Oct. 1, which will further expand its ongoing RMB-settlement trial program.

According to the rules published on the central bank’s website, an overseas institution can choose either a domestic bank or a local unit of a foreign bank to open an RMB-settlement account.

However, the PBOC posted some restrictions on such accounts. For example, the RMB in these accounts are not allowed to be converted into foreign currencies or withdrawn in cash.

The central bank said the rules do not apply to RMB-settlement accounts opened by foreign central banks, interbank settlement accounts set up by foreign banks, special RMB accounts opened by qualified foreign institutional investors for trading securities in China, or special accounts for investing in China’s interbank bond markets.

After months of preparation, we have now made available from our website our China Investment Projects database. This database has been compiled of selected projects from various provincial investment promotion agencies, Chinese investment zones and parks, and direct project promoters and owners met at investment fairs in China. Our goal is to make this database the most comprehensive database of investment projects for foreign investors looking to invest in medium to large scale projects in mainland China.

You can access the database now from our Project Consulting page or directly at projects.sinoinvest.hk .

We are continuing to add new projects to the database while updating existing ones.

For any inquiry or question regarding investment projects listed at our website, or to suggest/add a new project, please contact us.

Sinoinvest Consulting is happy to announce that it has become a partner with Citibank China and will be offering to its clients both personal and business offshore accounts. Offshore business accounts will be available for clients with companies registered out of China (Hong Kong, BVI, Seychelles etc.). Details will be posted later on our blog and through our newsletter.

Hong Kong was the world’s fourth-largest Foreign Direct Investment (FDI) recipient in 2009, according to the World Investment Report 2010 (WIR) released by the United Nations Conference on Trade and Development (UNCTAD) on July 23. This marks the first time that Hong Kong has attained fourth place in the global rankings and represents a jump from its ninth position in 2008.

For the 12th consecutive year, Hong Kong continues to be the second-largest FDI recipient in Asia, after mainland China.

Although the global financial and economic crisis drove global FDI inflows down by 37% in 2009 compared with 2008, the impact on Asia was less profound. The US$48.4 billion FDI inflows to Hong Kong, for example, represented a 19% decrease. Hong Kong’s share of FDI inflows into Asia held up at about 21% in 2009, similar to 2008.

Looking ahead, the WIR 2010 provided a glimpse of the global economic recovery picture, highlighting Asia’s rapid recovery in FDI flows compared with the more gradual improvement in global numbers. For example, in the first quarter of 2010, FDI inflows to Hong Kong, amounted to US$20 billion, representing a significant increase of 72% compared with the same quarter last year.

On February 20, 2010, the State Administration of Taxation issued the Provisional Measures for Tax Collection and Administration for Foreign-Enterprise Representative Office (“Provisional Measures”).  The Provisional Measures bring significant changes to the existing taxation rules and may have significant implications for the tax liabilities of representative offices (“Rep Offices”).

The Provisional Measures, which apply to representative offices established in China by foreign enterprises, including enterprises in Hong Kong, Macau and Taiwan (i.e. essentially all Rep Offices), are the first regulations clarifying taxation issues relating to foreign representative offices after the Corporate Income Tax Law (“CIT Law”) took effect in 2008.  The Provisional Measures bring significant changes to the existing taxation rules related to Rep Offices.  The Provisional Measures bring the Corporate Income Tax (“CIT”) of Rep Offices in line with the CIT Law applicable to other enterprises, and clarify that Rep Offices are subject to business tax and value-added tax (“VAT”) on their relevant taxable incomes.

Released on February 20, 2010, the Provisional Measures apply retroactively from January 1, 2010.

Below is a summary of the significant issues in the Provisional Measures

(1) Previous Tax Exemptions  Revoked as of January 1, 2010

As of January 1, 2010, the provisional measures invalidate previous tax circulars governing various tax exemptions for representative offices.  The tax authorities are prohibited from accepting new CIT exemption applications, whist being required to review and clean up the existing tax exemptions granted to Rep Offices.

The Rep Offices’ income eligible for preferential taxation treatments under a Sino-foreign double taxation agreement (“DTA”) may continue to enjoy such preferential treatments.  However, from October 1, 2009, as a prerequisite for enjoying the DTA treatments, the qualified non-tax-resident taxpayers are required to seek approval from or to file for record with a competent tax authority before enjoying such DTA treatments.  The application shall be conducted in accordance with the Administrative Measures of Enjoying Tax Treaty Treatments by Non-Tax-Residents (Trial) (GuoShuiFa [2009] 124).

(2) Tax Registration and Filing Requirements

Rep Offices are required to perform tax registration within 30 days after the business registration certificate is issued.  When there are any changes to the registration or where the Rep Office is to be closed, the Rep Office shall amend the tax registration or deregister it after liquidation and settlement of all the outstanding tax liabilities.

(3) Accounting and Record-keeping

The Provisional Measures require all Rep Offices to keep accurate accounting books and records according to laws and regulations and to determine the taxable income according to the principle commensurate with the functions and risks the Rep Office actually undertakes.  On meeting the statutory requirements of accounting book and record-keeping, Rep Offices are permitted to use actual taxable income to file the CIT returns.  If the actual taxable income is used, the Rep Office shall file quarterly the CIT and business tax returns within 15 days of the end of each quarter.  Filing of VAT returns is required to be done in accordance with the rules set out in the Provisional Regulations on Value-Added Tax and the implementing regulations.

(4) Taxation of Representative Offices

CIT on the profits of a Rep Office is at the statutory rate of 25% on its taxable profit, and the Rep Office is also liable to pay business tax or VAT.  The Rep Office is required to pay CIT and business tax to the appropriate tax authorities within 15 days after the end of each quarter, while it has a duty to report and settle VAT with its tax authorities by the due date according to the revised VAT provisional regulations and its implementation rules.

The Provisional Measures provide that a Rep Office is chargeable to taxes on an actual basis if the Rep Office keeps proper books and records, and can accurately account for the taxable income commensurate with its functions performed and the risks assumed.  The normal transfer pricing principles will extend to Rep Offices.  However, if a Rep Office does not have proper financial records that accurately reflect revenue, costs or expenses, then the tax authority is empowered to assess the Rep Office’s taxation profits by using a deemed profit rate of no less than 15% of its deemed income, which is either the total revenue (if such figure is available from the records of the Rep Office) or a figure derived using a formula based on the cost-plus method.

Conclusion

Given the impact of the Provisional Measures with the recent developments relating to the administration of Rep Offices (i.e. the limitation on the number of representatives and the restriction on the scope of activities), clients are strongly urged to consider whether a Rep Office is still the most efficient platform for entering the PRC market.

Due to its financial and business center status, as well as its proximity to mainland China, Hong Kong is usually at the top of the list for our clients looking to set up an offshore company with the main purpose to trade with China. While Hong Kong clearly has its advantages, there are however three other alternatives worth considering: the British Virgin Islands, Marshall Islands and Seychelles.

The advantages shared by these three, as compared to Hong Kong are the following:

-Low incorporation and yearly maintenance fee.

-No profit return filling requirements.

-No filling or annual audit of financial statements.

-Better privacy as to the scrutiny from the Chinese government.

-Better protection of company shareholders/directors which cannot be checked from the public record.

-Clear distinction between the onshore/local companies and the offshore ones (International Business Corporations or IBCs).

-Possibility to issue bearer shares, or shares with or without par value (Please note however that most banks currently do not accept to open bank accounts for companies with bearer shares).

The British Virgin Islands are one of the oldest and better established offshore jurisdictions. While concerns exist as to subsequent tax treaties BVI has entered in recent years, it is still a very suitable jurisdiction for setting up an offshore trading company.

Seychelles is a younger offshore jurisdiction, the International Business Act dating only from 1994. It is an increasingly popular jurisdiction worldwide, and is gaining acceptance in China as well.

The Marshall Islands are much less known than the BVI or even Seychelles. This jurisdiction has the lowest fees for both registration and annual maintenance. Most of the functions of the Marshall Islands IBC are similar to the BVI or Seychelles ones.

Offshore companies registered in the BVI, Marshall Islands or Seychelles can also easily open a bank account in Hong Kong. Sinoinvest Consulting provides a remote account opening service for a one-time USD400 fee; you can also contact any Hong Kong bank and travel to Hong Kong to set up your account provided you have all the paperwork in place.

The BVI, Seychelles are Marshall Islands are true offshore jurisdictions, while Hong Kong companies do not have a separate regime for companies operated from within or from outside Hong Kong, but only specifies that non-Hong Kong sourced income is not liable for tax with the Hong Kong government. However, even when that is the case, one needs to apply for exemption from the tax authorities, and in case you operate your bank account in Hong Kong, you might be required to justify that the operations of the company are not related to Hong Kong. To avoid all this hassle, if your company will be mainly used to buy or sell to/from China, selecting one of these three jurisdictions will make a better business sense in the long term.