Offshore investing with a FinTech Structure in Hong Kong -the digital age

What are the Advantages of Hong Kong as an Offshore Jurisdiction for Investors?

  • Hong Kong (HK) as a an offshore jurisdiction, is now in high demand of international firms setting up office in HK in order to trade / invest.
  • HK has a very good reputation in the world; foreigners are more willing to trade with HK Companies and build up a good image for it.
  • HK is an international finance center with a wide range of financing channels, easy borrowing and financing.
  • Funds parked in HK can increase the flexibility of its utility.
  • Stable banking system.
  • No foreign exchange control, no restriction and no need for application.
  • No restriction on operating activities.
  • Simple tax structure, only profit tax for companies, no capital gain tax, business tax and etc. Bank interest income and dividends are not taxable.
  • HK companies can be used to invest in China or elsewhere.
  • If the company has no activity on the territory of HK and did not receive income from the sources located in HK, they are not the subject of taxation.

With regards to FinTech, OFC takes the view that it will not seek to regulate its platforms that only provide general advice on asset allocation among different asset classes without providing advice concerning specific investment products. However, when business activities involve providing order execution services and/or financial advice via an online environment using algorithms and other technology tools, we claimed exemption as an SRO against licensing and regulation under Type 1 “dealing in securities” and Type 4 “advising on securities” regulated activities. Type 9 “asset management” may also be relevant if the automated platform is given full discretion in terms of investment decision-making.

Several licensing exemptions are available. For example, our offshore division entity is exempt from licensing when the trading order execution is carried out by a third who is licensed for Type 1 activities – this is rare as OFC does not engage in trading stock – and does not engage in trading stock that is active on an exchange. Another relevant exemption is the provision of advisory services on an intra-group basis. So for instance, advising on securities, being a Type 4 regulated activity, is exempt from licensing so long as the advice is provided to its 100%-parent, subsidiaries or fellow subsidiaries. This intra-group exemption is particularly relevant to single-shareholder family offices.

In respect of the trading profits of the offshore entity itself, Hong Kong applies the territoriality principle of taxation: only profits arising in or derived from Hong Kong from a trade, profession or business carried on in Hong Kong are subject to profits tax. Accordingly, while the Hong Kong entity’s service fees are subject to profits tax (being sourced from activities rendered in Hong Kong), the trading or investment profits may or may not be subject to profits tax depending on the application of the territoriality “source” test. Whether certain profits or gains in a particular case are chargeable to profits tax has to be considered on the basis of its individual facts and circumstances. The existing laws concerning profits tax are equally applicable to transactions involving virtual assets, including the general exemption of capital gains from taxation.

Following recent legislative amendments, privately-offered onshore and offshore investment funds operating in Hong Kong can enjoy profits tax exemption for their transactions in qualifying assets, provided they meet certain criteria. However, it appears that digital assets, which are not considered “securities”, may not be treated as qualifying assets. Therefore, relevant crypto funds may find themselves assessable for profits tax. Nevertheless, this does not affect the territoriality principle of taxation: the exemption is not relevant where profits are considered to be sourced offshore or arise from the sale of capital assets.

***PLEASE NOTE***
Due to the constant flip-flopping on heavy restrictions and bans on Cryptocurrency by the Chinese Government, OFC has moved the majority of its Crypto Division to its Georgetown, Ky Office. This includes – Secondary Market FinTech (Blockchain and DLT) – The OFC Sky Fund & all Crypto related investments.

Given the rapid evolution and increasing digitalisation of the trading/asset management space, investors are met with consulting experts in the area when considering the structure of their investment activities. This will enable them to avoid hefty legal and financial complications.

The offshore RMB market in Hong Kong is an early promoter and full‑cycle participant of RMB internationalization. For a long time, through cross‑border trade and investment transactions, the offshore RMB market has functioned as a new investment channel for foreign investors and an enhancement to the diversification of RMB business modes, which could be considered building up the advantages of first‑mover by the volume of transactions. In 2022, Hong Kong will promote the further development of an offshore RMB hub and enhance the depth and breadth of the RMB market, thereby continuously enriching the currency basket of Hong Kong as an international financial center and adding more unique competitive advantages to it.

1. Steadily Increasing RMB Exchange Rate has Bolstered the Development of the Offshore Market

In 2021, the exchange rate of RMB against USD showed a rising trend amid two‑way fluctuations. From the beginning of 2021 to early September, this exchange rate fluctuated in both directions, while the rate of USD to RMB hit its highest point this year, which refers to RMB’s depreciation to 6.577. Since then, from September to the end of 2021, the RMB exchange rate had performed a trend of volatile appreciation and recorded its lowest point within the year at 6.3458 against USD.

The dominant factor for the recent strengthening of the RMB exchange rate is that the balance of payments of China remains in good condition, and the surplus on the balance of trade in goods and services has brought a large demands for foreign exchange settlement. In the third quarter of 2021, China’s trade surplus was 476.2 billion yuan, a year‑on‑year increase of 30.7%; the capital and financial account recorded a deficit of 311.9 billion yuan, accounting for a year‑on‑year increase of 63.3%. In the first 11 months of 2021, the trade surplus in goods and services reached 2.7571 trillion yuan, accounting for a year‑on‑year increase of 18.1%.

In general, the marketization of the RMB exchange rate has been further improved, and the exchange rate flexibility has gradually increased. The RMB exchange rate has remained stable against the items in the currency basket, while it shows two‑way expectations and two‑way fluctuations against the USD. It can be said that while maintaining the flexibility of the exchange rate, the RMB has improved the resilience of fluctuations and improved the confidence of the global market in RMB assets.

In line with the steady and rising trend of the RMB exchange rate, the offshore RMB market in Hong Kong has developed steadily and is characterized by the fact that the size of the RMB capital pool remains the world’s leading, and the RMB product system is increasingly diversified.