Accounting Professional Seminar :
Risks associated with holding structure and tax of China IPO in Hong Kong

One of the key reasons for companies to go public is the ability to tap into the big pool of investors, thus raise large amounts of capital for future growth. However, recent failure of China companies to get listed in the US has reminded investors of risks involved. Do you think you have already got a full understanding of the “Risks Factors” specified in the prospectus concerning the holding structure and the tax issues?

A professional seminar with the theme: “Risks associated with holding structure and tax of China IPO in Hong Kong” was organized by HKU SPACE College of Business and Finance. In the seminar, Miss Bolivia Cheung, who is experienced in advising on IPO projects, M&A and real estate industry, will use real-life examples to explain the risks on holding structure and tax, particularly the problems of structures of Variable Interest Entity (VIE)and how entrepreneurs can overcome hurdles of the rules to set up an overseas listing structure in China.

Insights of a China Business Expert

Being one of the members of both Steering Teams of ACCA Southern China and Shanghai, and member of the Advisory Team of Guangdong Council for the Development Promotion of Small and Medium Enterprises, Miss Bolivia Cheung, Contracted Corporate Trainer, MORSE Trainer, has been advising on China tax and business matters for over 15 years with KPMG China and of which 7 years as a tax partner before switching herself to a trainer for China tax starting September 2011. Bolivia has stationed in Guangzhou and Shanghai over eight years and this means a lot of practical solutions in real life problems of clients.

Bolivia is experienced in advising on IPO projects, M&A and real estate industry which fund flow is critical. Her experience in dealing with government officials of various cities in China enables her to understand the practices. In addition to tax, she focuses on business operations, the implications the holding and operating structures, foreign exchange, fund flow and cash trap, and business regulations which integrated with tax planning. Although she is definitely a pro in the finance and investment world, we all know she will give no stock trading tips. Instead, participants of the seminar are confronted with such a question: “Are all China Enterprises Red Chip stocks?”

Complications in Company Structure Analysed

Bolivia then cited a few famous brand-names that are well-established enterprises in China, but not listed as Red Chips, including a well-known shampoo product “BaWang”, property developers, web technology firm alibaba.com and e-commerce platform taobao.com. Analysing the company structure of BaWang, Bolivia explained that HK Stock Exchange has not lifted the barrier to accept BVI (British Virgin Islands) registered companies until recently. That is why the typical structure of listed companies in Hong Kong will have a Cayman Islands registered company as the holding company. She also revealed that the company responsible for BaWang’s product manufacturing was held by a Hong Kong registered company, in order to enjoy a lower tax rate. Bolivia explained, “It was a common practice for Chinese entrepreneurs holding foreign passports to own public listed companies in China. But since the adoption of new regulations in September 2006, they were not permitted to do the same. Various sorts of non-typical structures were formed thereafter.”

Get a Thorough Understanding of China Business

Another example is the controversial case of alibaba.com and taobao.com. With a number of Cayman Islands registered companies, none of them holds controlling share rights of taobao. Bolivia explained that according to the “Catalogue of Industries for Guiding Foreign Investment”, foreign companies are not allowed to hold controlling share rights of a China enterprise in several industries.

Alibaba, which is a web technology firm, is not within the limitations. But controlling share rights of online trading platforms such as taobao.com is restricted. Not even a Hong Kong company can hold more than 50% controlling share rights of taobao under the “Mainland and Hong Kong Closer Economic Partnership Arrangement” (CEPA). The contractual relationship between the two enterprises therefore led to the dispute of the payment gateway subsidiary. To facilitate executives in understanding these potential risks, HKU SPACE offered a series of programmes about taxation, law and accounting technologies of China business. Further details available on our website.