Investment opportunities in Asia Pacific via the Hong Kong platform

Siegfried Verstappen,Invest Hong Kong

Brussels office

Thessaloniki and Athens seminarsMarch 17-18 2015

Hong Kong’s advantages when doing business in Asia

Where BusinessGoes to GrowDiscover the Best Place to Do Business in Asia

Are you an SME? (MKB in the Netherlands)

• BECAUSE, IF YOU ARE, YOU ARE:

• - short of cash

• - short of management time

• - short of affordable qualified personnel

Are you an SME? (MKB in the Netherlands)

HONG KONG WILL HELP YOU OVERCOME THOSE SHORTCOMINGS

This speech will show you how a Hong Kong presence will optimize your operations with a minimum of commitment in terms of risk, cost and personnel

Connectivity to the World

4hoursMost of Asia’skey marketswithin four hours’flight time

5hoursFrom halfthe world’spopulation

• Rule of law and independent judiciary• Level playing field and no foreign ownership restrictions• Political stability and pro-business governance • The World’s Freest Economy for 20 consecutive years • Hong Kong negotiates and signs its own economic and trade

agreements and is a full and separate member of the WTO and APEC

• Free flow of information

One Country Two Systems

• VAT/GST/Sales tax

• Capital Gains Tax

• Withholding tax on investments

• Estate duty

• Global taxation

• Wine and beer duty

Low and Simple Tax System

NO* There is no standard rate across the Mainland China. Shanghai is used as an example

Percentage

World Class ICT – Connecting8th in the Global Innovation Index Report (INSEAD 2012)

2nd in AsiaCloud Readiness Index(Asia Cloud Computing Association,Sept 2011)

Fastest broadband globally 65.4 Mbps

The safest place in Asiafor setting up datacentres(Data Centre Risk Index, Cushman $ Wakefield, 2013)

Highest mobile internet usage rate in Asia Pacifc

(96% users online daily)(Google)

Mobile phone penetration rate >238.6%(Feb 14, OFCA)

Forbes Tax Misery Index 2009

Hong Kong - 3rd lowest tax misery score = 41.5

Singapore - eight positions higher, score = 78.5

Bulgaria – 7th lowes, score = 73.5

Belgium – nr 3, score = 156

China – nr 2, score = 159

France – nr 1, score = 167

Low and simple tax system

Hong Kong: best place to launch a new venture

• In Hong Kong you have freedom to move:• - capital• - people• - ideas

• Unmatched anywhere else except Silicon Valley• Source: Dr. Jong Lee, CEO RGL Holdings Ltd• (Korean venture capitalist, moved his global

head office to Hong Kong)

“””No other city in the world can help overseas investors manage the risks inherent in entering

Mainland markets as well as Hong Kong. This is an important part of the reason why overseas firms

prefer Hong Kong for the highest-value activities that they perform in the Asia-Pacific region.”

Michael Enright, Sun Hung Kai Properties Professor, School of Business, University of Hong Kong

Hong Kong is China’s Risk Manager

Hong Kong’s Elements of Strategic Confidence

• Intellectual property rights and brands issue

• Legal recourse

• Access to the Chinese market (CEPA)

• Credit risk insurance

• Chinese wall between suppliers/customers

• Lower financing cost

• Low threshold for starting up HK office

• Market research

• Support for SME loans and marketing

• RMB currency developments

• Taxes

Access Chinese markets: brand problem

• Because quality guarantees are insufficient in mainland China, Chinese consumers have a positive bias towards foreign brands.

• But if those brands aren’t present in Hong Kong, they lose credibility in China, because the Chinese consumers trust Hong Kong’s IPR and brand protection regulatory framework and its enforcement

• Source: Prod. Dr. Justina Yung, Polytechnic University Hong Kong, speech on long term PRD development December 2013

IP rights in China: latest update• Intellectual Property Rights Protection in China are improving

• 2010: 42.000 IPR related lawsuits filled in PRC

• Highest number in the world

• MNC’s success rate as plaintiffs:60-90% vs below 60% in USA/EU

• BUT damages awarded are very small: Microsoft receives on average 50000 RMB

• Strong,determined,aggressive policy on building PRC’s own IPR governance regime

• 2010: 750.000 patens applications filed – world largest patent-filing country

• 2011-2015: 2.000.000 domestic applications ANNUALLY

• The annual patent transaction annual target is to reach 100 billion yuan (USD 15 billion) by 2015

• Major sectors: technology and clean energiesSource: SCMP, “China’s reputation in IP rights is still dismal” Denise Tsang

Legal recourse: problem

• Mainland China has no tradition of Western style law and jurisprudence

• Many lower courts are not yet fully conversant with new laws regulating commercial, investment or IPR issues

• Non-Chinese firms (and most Chinese firms) find it very difficult and time-consuming to obtain their rights through the Chinese courts

Solution A: HK International Arbitration Centre

• Insert clause in contract with the mainland Chinese partner that any disputes regarding the execution of the contract will be submitted to the Hong Kong International Arbitration Centre.

• Both Hong Kong and mainland China have signed the Convention of New York : any arbitration award from HK is immediately executable in China*

• HK based law cabinets confirm that the system is working speedily, smoothly and satisfactorily

• Website: www.hkiac.org

*(enforceable between HK and mainland China since February 2000)

Sol. B: Sue in HK, enforce in China

• A new agreement on July 16, 2006, between HK and mainland China : if parties provide for this in their contract, verdicts from the Hong Kong courts are immediately executable in mainland China*

• It covers money judgments and commercial cases

• The contract has to stipulate expressly in writing that the HK court has exclusive jurisdiction

• Applicable whenever the judgment debtor keeps his assets in mainland China

*(enforceable between HK and mainland China since August 2008)

Access Chinese markets: problem

• Many foreign investors find that, although China has joined the WTO, its markets remain closed or protected against foreign competition

• This applies both to trade in goods and trade in services

Solution: Closer Economic Partnership Arrangement (CEPA)

• Since July 2003, Hong Kong and mainland China have signed a type of free trade agreement, providing preferential access into mainland China for HK based goods and service providers (CEPA)

• Overseas companies can take advantage of CEPA by outsourcing to, partnering with a CEPA qualified manufacturer or service provider, or having their goods qualified as HK origin.

• CEPA being rolled out in phases : current scope and benefits of CEPA likely to expand – CEPA VII now applicable. Listing of applicable CCN can be found at:http://www.tid.gov.hk/english/cepa/tradegoods/files/mainland_2010.pdf

Solution: Closer Economic Partnership Arrangement (CEPA)

• Latest development: free trade by 2015China’s Vice Premier of the State Council Li Keqiang announced in Hong Kong in August 2011 that the latest supplement of the Hong Kong-mainland Closer Economic Partnership Arrangement, expected to be signed in October, will broaden Hong Kong’s access to mainland services industries.

• “The target is to realise free services trade with Hong Kong by the end of the 12th five-year period,” Mr Li said at a Hong Kong forum on China’s 12th Five-Year Programme.

Hong Kong: Chinese wall between supplier and customer

• merchandise can be shipped directly from mainland factories to end customers overseas without showing the factories’ details if you follow these steps

• HK office is the shipper and books the shipping line with forwarding company. A shipping order (S/O) will be prepared by the forwarding company and sent to the HK office. Since HK office is the shipper, there is no need to show the Chinese manufacturer's details.

• When the HK office receives the shipping order, they send it to the Chinese manufacturer who take this to send the merchandise to the forwarding company

Hong Kong: Chinese wall between supplier and customer

• After shipment, a set of bill of lading (B/L) will be sent by the forwarding company to the HK office. The B/L information is prepared according to the info on S/O, and there is no info of manufacturers.

• Then HK office could send the B/L to their customer for collecting goods at forwarder. As such, from shipping order to bill of lading, no manufacturer’s info will be shown.

• HK office can also hide the consignee info on the shipping order so that the Chinese factories cannot access the customer info when they take the S/O to send the goods to the freight forwarder.

Hong Kong: Chinese wall between supplier and customer

• Please note:

• this works when the importing country requires no country of origin (C/O) for the importing goods. If C/O is required, then it might not be possible to hide the manufacturer's details in some other documents

• is only applicable to the documents of shipping order, bill of lading, invoice and packing list

Hong Kong’s credit risk insurance advantage

• Hong Kong based firms exporting goods to other markets can obtain both country risk and buyer risk insurance from a HKSAR agency called:

• Hong Kong Export Credit Insurance Corporation (ECIC)

• Website: http://www.hkecic.com/eclink/infoCenter.jsp

• Insurance premium can be as low as 0.39%

Hong Kong’s lower financing cost advantage

• Hong Kong based firms trading goods with other markets can obtain a lower financing cost as the base rate HIBOR is consistently lower than EURIBOR, since Hong Kong in effect follows U.S. monetary policy

HIBOR VS EURIBOR - 6 MONTHS (Jan 2009 - Feb 2011)

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Hong Kong’s lower financing cost advantage

• CAUTION !!!!!

• Eurozone firms wishing to use this benefit have to accept a currency risk exposure, as the financing will be handled in the HK $ zone

• Hong Kong was, is and will remain a global financial center attracting high volumes of capital to support growth

• Hong Kong usually is the best option for your route into China• As a financial center it brings innovation by offering RMB financial

products• Hong Kong is currently the main player in the globalization of the RMB

and will have the highest volumes and liquidity going forward• Renminbi liquidity is supported and controlled by the PBoC by means

of currency swaps with HKMA resulting in sharper pricing for your foreign exchange in HK and support for your capital investments, trade flows, and repatriations of profits.

Hong Kong: China’s offshore renminbi centre

Low threshold for starting up HK office

• New arrivals worry about 2 major cost aspects in Hong Kong:

– labour cost

– real estate expense

Low threshold for starting up HK office

Typical gross salary cost to the employer will vary

between 25K and 35K annually

Most positions will also have variable bonus of 10% to 30% of the

salary

A typical contract is for 12 months, the average notice

period is 1 month

Low threshold for starting up HK office

• Real estate expense: HK is ranked among the 3 most expensive cities in the world

• But there are low entry solutions in the private sector, with prices as low as: – 1000 HK$ per month per workplace (Cocoon)

to – 4500 HKS$ per month per workplace (Hive)

• Some venture capitalists will finetune your concept: e.g. Nest will invest 500,000 HK$ in 3 months time if they accept your proposal

Coworking space: COCOON

CoCoon is a coworking place where entrepreneurs, creative talent, successful leaders and investors meet, collaborate and deliver results together

Theodore Ma, Co-founder - T: 852 3158 2999 - theodore@hkcocoon.org

www.hkcocoon.org - 3/F, Citicorp Centre - 18 Whitfield Road -Causeway Bay, Hong Kong

Coworking space for creative industries:The Hive

The Hive is Hong Kong’s first purpose designed members’ co worker space for those in creative

industries.Constant Tedder, Founder – 852 9356 7883 – constant@thehive.com.hk

www.thehive.com.hk – 21/F The Phoenix, 23 Luard Road, Wan Chai

Investment Platform: NEST

NEST is an investment platform focused on investing in scalable consumer businesses

in the lifestyle space.

Simon Squibb, CEO - T 852 2721 2787 – simon@nestideas.com

www.nestideas.com – 3d floor Chao’s Building – 143-145 Bonham Street – Sheung Wan

Creative Space for Digital Start-ups

• Cocoon– US$128/mth

• Fill in the Blanks– US$102/mth

• Good Lab – US$230/mth

• The Hive – US$359/mth

• Hong Kong Commons – US$205/mth

Support for SME’s

Hong Kong’s market research advantage

• Hong Kong based firms can access the database managed by the Hong Kong Trade Development Council

• The TDC manages an online sourcing platform that connects over 120,000 credible suppliers

• over 800,000 worldwide buyers use the platform to source products and services provided by China, Hong Kong, and Asian suppliers for free at www.hktdc.com/sourcing

• Website: www.tdctrade.org

Chinese taxes: problem

• China is nr 2 worldwide on the Forbes Tax Misery Index

Chinese taxes: solutions

• Objective: reduce your taxable income in mainland China

• The Double-taxation avoidance treaty between HK and mainland China allows, to a certain degree, the imputation of expenses by HK parent companies to mainland affiliates

• Examples that could qualify under certain conditions: market research, personnel support or recruitment, quality control inspectors, logistics coordination, etc….

• Hong Kong corporate tax rate is 16.5% and even 0% for offshore incomes

• Hong Kong companies can deduct 50% of their income from joint ventures with mainland Chinese firms from taxable revenue

Chinese taxes: solutions

• The Double-taxation avoidance treaty (DTAT) between HK and mainland China brings in new and highly favourable rates for transfer of dividends, interest, and royalty payments from mainland China firms to their HK parent companies

• In practice, withholding taxes are now greatly reduced on these forms of transactions:

• 5% for dividend payments

• 7% for interest payments

• 7% for royalty payments

Confirmed Double Taxation Relief Agreements with 23 trading partners:

Double Taxation Agreements

In negotiations: • Bangladesh

• Canada

• Finland

• India

• Korea

• Macau

• Malaysia

• Mexico

• Saudi Arabia

• the United Arab Emirates

• Austria

• Belgium

• Brunei

• Czech Republic

• France

• Hungary

• Indonesia

• Ireland

• New Zealand

• Portugal

• Spain

• Switzerland

• Thailand

• Italy

• UK

• Vietnam

• Japan

• Jersey

• Kuwait

• Liechtenstein

• Luxembourg

• Mainland of China

• Malta

• Netherlands

As of February 2013

* - Pending entry into force

How InvestHK helps investors

Networking events,introduction to service

providers

PR and marketing support for launch/expansion

Facilitation of visaapplications, schooling

Information to aidplanningand evaluation

• Rue d’Arlon/Aarlenstraat 118, B-1040 Brussels, Belgium• Telephone +32/2/775 00 76• E-mail: siegfried_verstappen@hongkong-eu.org • Websites: www.investhk.gov.hk and: www.hongkong-eu.org• Hong Kong background information:• http://www.brandhk.gov.hk/en/#/en/facts/factsheets/index.html

Invest Hong Kong Brussels office