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FULL SUPPORT TO A FOREIGN-OWNED COMPANY


CASE STUDY

A Story of Success

The client is from UK in footwear business that encompasses 3 streams: wholesale in UK; retail business in UK; and design and sourcing of footwear supplemented by handbags for a large overseas retail chain. Production takes place predominantly in Guangdong Province and the neighbouring provinces in China with small portions in India and Brazil.  

When we first discussed with the management, we identified we should separate the last stream of business – design and sourcing - to a new Hong Kong company (“the HKC”). In doing so, it would no longer be subject to the high profits tax in UK. The structure suggested was the HKC would be a separate entity from the company in UK (“the HC”) and they would deal with each other at arm’s length.

 

Without having the need to rent an office and employ a team of staff, we provide our office as the registered and operation address of the HKC with a full spectrum of service:

 

a.     Daily administration covering work and correspondence with the HC, the buyers, the Hong Kong government departments and outside parties;

 

b.     Application of bank accounts and assisting in running their daily operation, such as processing documentary credit transactions;

 

c.      Compliance in Hong Kong with the government departments including the Companies Registry and the Inland Revenue Department and the banks the HKC is handling business with;

 

d.     Bookkeeping on a monthly basis and handling enquiry thereof; and

 

e.  Assisting annual audit of accounts and profits tax return.

 

Sales to the said overseas retail chain are booked with the HKC. It also sells to new customers.

 

The HC provides the following types of service and charges the HKC service fees:

 

a. Sales cultivation;

b. Sales and marketing activities with the overseas retail chain, existing and new customers;

c. Design of footwear and handbags;

d. Arrangement of dispatch of finished goods; and

e. Management consulting service.

 

With the HKC up and running, we organized to establish a Representative Office for the HKC (“RO”) in Dongguan City, Guangdong Province that is the ideal location in relation to where the suppliers are located. An RO provided the establishment that the HKC had its staff there for liaising directly with the suppliers, placing orders, production and quality control, and dispatch arrangement and the designers and other personnel from the HC could occasionally work there on a China business visa.

 

Before the RO was established, the HC had to contract work to local companies in China that the reliability and trust level was a far cry from your own team.

 

Same as for the HKC, we were responsible to sort out all compliance issues for the RO – on staff recruitment, tax clearance for the RO and its staff, monthly accounts, annual government inspection of the RO, renewal of its licence and other administration matters.

 

We were much closer than the HC to the RO in distance and virtually there was no cultural difference between us, so whenever there were issues with staff, the local tax bureau, suppliers or other urgent matters, we were always ready to assist. The 3-hour travel distance was no comparison with the time taken for a trip from UK to China.   

 

In addition to the monthly retainer service as mentioned above, there are bound to be management issues of the HKC, RO and the HC from time to time, for instance personnel issues, co-ordination of their business flows, financing needs (how to apply with banks and after approval how to operate amongst the 3 entities with the financial institutions) or working out a tie-up with a local PRC company. We are attuned to the needs of our clients, business savvy and have accumulated years of practical experience to tend all these business issues.

 

When the scale of operation grew, an RO would not fit for purpose. An RO cannot conduct business directly like to issue invoice or engage in production or making samples. 3 years after establishing the RO, we helped set up a Foreign-invested Commercial Enterprise (“FICE”) that is 100% owned by the HKC with the number of staff increased from 7 to 30 and then to more than 100 after substantially design and making samples were localized that the FICE became a fully-fledged trading company providing service and conducting sales both domestically and internationally.

 

An RO is a local liaison office and not a profit centre. The HKC every month remitted enough money to the RO bank account in China to cover salaries, running expenses, various corporate taxes, individual income tax and some extra money as reserve.

 

For a FICE, the HKC enters into service agreements with it to conduct service that enables execution of sales with its buyers, including design, costing, making samples, selection of manufacturers, production and quality control, and dispatch arrangement. In return, the HKC pays it service fees that more than cover its running costs with a small profit.

 

In both cases, profit is kept by the HKC. The FICE on its own also develops local business.

 

The scale of a FICE is so much greater than the RO, we send our staff to work at the office on a part time basis to supervise its accounts and finance departments to make sure the accounts are accurate, all taxes are properly assessed and timely paid, no illegal activity is commited, and internal policies and regulations are adhered to. Our staff stationed there, on top of his normal duty, is responsible for carrying out consultancy work that relates to the FICE.  

 

For Chinese is the only official language in PRC and the proximity of our office to the FICE, by supervising if the accounts and finance functions are in order saves a lot of trouble for the client.

 

There is no need for the HKC to employ any staff in Hong Kong. We take care of all necessary work. The service we provide helps the client: 

 

  1. To concentrate on what they are good at for example design, sales and marketing, production and quality control, scrutinizing prospective manufacturers, and strategic planning without worry of support service;

  2. To improve efficiency as our suite of service fits in their needs;

  3. To get closer to suppliers and buyers with local operation in China;  

  4. To save in profits tax (if we meet the conditions, we will apply for exemption of profits tax); and

  5. To better budget their expenditure as in addition to our monthly retainer, service fee is charged only when additional service is required.

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