Hong Kong remains a common intermediate holding jurisdiction for many mainland Chinese companies expanding overseas. It can connect a mainland operating business with offshore financing, listing plans, banking arrangements and treaty-based tax analysis. The assumptions around these structures have changed, though: from 2024 to 2026, shell structures have become increasingly difficult to defend.
This guide looks at three practical questions: how the structure is usually built, how capital can move out lawfully, and what must be maintained on the Hong Kong side. It is a market and regulatory overview, not legal or tax advice. Any tax conclusion must be assessed case by case, and professional tax, legal and foreign exchange advice should be obtained.
Why Chinese Companies Use a Hong Kong Structure for Overseas Expansion
The value of a Hong Kong intermediate holding company is not that it simply exists. Its value depends on whether it performs a real, documented function within the group structure.
There are usually three reasons for inserting a Hong Kong layer. First, Hong Kong has a tax arrangement with mainland China, and in specific cases a Hong Kong resident company directly holding mainland equity may apply for a lower dividend withholding tax rate. Second, Hong Kong can serve as a documented node for offshore financing, collections, dividends and reinvestment. Third, for companies planning offshore listings or US dollar financing, a Hong Kong layer is often used together with BVI, Cayman and mainland WFOE entities in a red-chip structure.
A typical four-layer structure is: founders or employee holding platform → BVI top holding vehicle → Cayman financing or listing company → Hong Kong intermediate holding company → mainland WFOE. If the business operates in a sector restricted to foreign investment, the WFOE may control the mainland operating company through VIE contracts.
Compared with Singapore and BVI, Hong Kong is often positioned as a bridge between mainland China and international markets. Under Hong Kong’s two-tiered profits tax regime, the first HKD 2 million of assessable corporate profits is taxed at 8.25%, with profits above that taxed at 16.5%; within a connected group, generally only one entity can enjoy the two-tiered rates in a given year. Singapore’s standard corporate income tax rate is 17% and it has a broad treaty network, making it common for ASEAN planning. BVI is frequently used for top-level holding and equity arrangements, but it has no comparable treaty network and pure holding entities still need to consider economic substance requirements.
Based on Chan & Chung’s brand configuration, the owned offerings that may be described as our services include Hong Kong company formation, company secretary and annual compliance coordination. The tax effect, listing suitability and treaty benefit analysis must always be assessed case by case.
Two Main Holding Models: Red-Chip Equity Control and VIE Contractual Control
The first structural question is often not whether to use Hong Kong or Singapore. It is whether offshore investors can directly hold the mainland business.
A red-chip equity control structure is generally used for sectors that are not restricted to foreign investment. The offshore holding company, through the Hong Kong layer, directly holds the mainland WFOE or other mainland equity interests. Control comes from shareholding. For companies targeting offshore listing, US dollar financing or offshore equity incentives, the red-chip structure is familiar to many investors and exchanges.
A VIE structure is more common in foreign-investment-restricted sectors such as value-added telecommunications, internet content and certain online education businesses. The offshore listing company does not directly own the mainland operating company. Instead, the WFOE signs a package of contracts with the mainland operating company and its shareholders to obtain economic benefits and control effects.
The Four Core VIE Contracts and the Risk Point
A VIE package usually includes an exclusive technical services agreement, equity pledge agreement, voting rights proxy agreement and exclusive purchase option agreement. The core risk is that contractual control is not the same as equity ownership. Its stability depends on contract enforceability, regulatory attitude, cooperation of mainland shareholders and review by the relevant listing venue.
The practical sequence should therefore be: first determine whether the sector is foreign-investment restricted; then compare red-chip, VIE, Hong Kong intermediate holding and other jurisdictional options. The final choice should be made with legal advice based on the company’s licence requirements, equity structure, listing plan and regulatory context.
Hong Kong Tax Advantages and the 5% Dividend Withholding Tax: Conditions, CoR and Beneficial Ownership
When a mainland Chinese resident enterprise pays dividends to an offshore shareholder, the general withholding income tax rate is 10%. Hong Kong structures attract attention because Article 10 of the Mainland-Hong Kong tax arrangement may allow a 5% rate where a Hong Kong resident company is the beneficial owner and directly holds at least 25% of the dividend-paying mainland company.
This is not automatic. It is not enough to incorporate a Hong Kong company. In practice, at least four conditions are central: the Hong Kong company must be a Hong Kong tax resident, usually evidenced by a Certificate of Resident Status (CoR); it must be the beneficial owner of the dividend; it must directly hold at least 25% of the mainland payer; and the 25% threshold must have been met at any time during the 12 consecutive months before the dividend is received.
China’s State Taxation Administration Announcement No. 9 of 2018 lists adverse factors for beneficial ownership analysis. These include an obligation to pay more than 50% of the income to a third-country resident within 12 months, lack of substantive business operations, conduit-company characteristics and back-to-back loan or royalty arrangements. The rules also include safe harbours and look-through concepts, but whether they apply depends on the holding chain, commercial substance and documentary evidence.
What a CoR Is, and What It Is Not
A CoR may support the position that the applicant is a Hong Kong resident for treaty purposes. The Inland Revenue Department’s guidance provides an administrative framework for processing such applications. But having a CoR does not mean the mainland tax authority must grant the 5% dividend withholding tax rate. The mainland authority may still examine whether the Hong Kong company has real decision-making, personnel, office presence, banking management, contract negotiation, risk assumption and retained funds.
For this reason, cross-border tax, source-of-income and banking collection arrangements may be described as Chan & Chung advisory services, but only on a case-by-case basis and in coordination with accounting, tax and legal professionals. No one should promise guaranteed access to the 5% rate, guaranteed tax savings or automatic approval. A CoR application itself is an external tax procedure, not an owned Chan & Chung product.
How Can Capital Lawfully Leave China? The ODI Three-Authority Process
A Hong Kong outbound structure cannot be assessed only by looking at the offshore bank account. The first step for lawful capital outflow is often ODI, or outbound direct investment.
A typical ODI process involves three regulatory layers: project filing or approval with the NDRC, an overseas investment certificate from the commerce authority, and foreign exchange registration through SAFE or a bank. Research materials commonly describe the full process as taking around two to three months, although the actual timeline depends on locality, project type, sector and documentation quality.
For investment-size classification, projects with Chinese investment of USD 300 million or above generally involve the national NDRC, while non-sensitive projects below that level by local enterprises may be handled at provincial level. Sensitive countries, regions or industries may require approval rather than filing. Sensitive categories include weapons, cross-border water resources, news media, and restricted directions such as real estate, hotels, cinemas, entertainment, sports clubs and offshore equity investment platforms with no substantive industrial project.
The Ministry of Commerce overseas investment certificate also has a timing implication: investment normally needs to be made within two years after the certificate is obtained, otherwise it may lapse. For red-chip structures, mainland residents setting up or controlling offshore SPVs must also consider Circular 37 foreign exchange registration. ODI, Circular 37 and foreign exchange registration are external statutory procedures. They are discussed here as compliance steps and should not be described as Chan & Chung’s own filing service.
Advanced Capital Channels: Hong Kong Cash Pools, Offshore Lending and Onshore Guarantees for Offshore Loans
ODI addresses the initial equity contribution. Once a group operates across multiple markets and subsidiaries, it may also need cash concentration, one-off offshore financing, parent-company credit support or offshore reinvestment of profits.
Three market options are often discussed: cross-border cash pooling, offshore lending and onshore guarantees for offshore loans. Cross-border cash pooling is mainly for group treasury management and depends on scale, revenue, domestic and offshore entities and bank capability. Offshore lending can support funding from a mainland company to an offshore affiliate. Onshore guarantees for offshore loans use onshore bank or parent-company credit support to assist offshore financing.
PBOC and foreign exchange documents on integrated RMB and foreign-currency cash pooling show that nationwide promotion comes with entry thresholds tied to international receipts and payments, domestic revenue, offshore revenue and group-member requirements. These are regulatory thresholds, not marketing labels. Each option carries quota, filing, foreign exchange, tax and bank-review implications, and must be confirmed with banks and professional advisers. Cross-border cash pooling, offshore lending, onshore guarantees for offshore loans and QDLP are market options or externally integrated services, not Chan & Chung agency services.
Hong Kong-Side Maintenance: TCSP Licensing, Statutory Audit, SCR and Annual Return
A Hong Kong company cannot be left unattended after incorporation. If the Hong Kong layer is expected to support holding, collections, financing or treaty-based tax analysis, annual maintenance records are part of the substance evidence.
First, TCSP licensing. The Hong Kong Companies Registry licenses trust or company service providers under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO, Cap. 615). Licence numbers usually follow the TCxxxxxx format and licences are valid for three years. Regulated services include company formation, registered office, company secretary, director arrangements, trustee services and nominee shareholder services. Carrying on regulated business without a licence may constitute an offence under AMLO section 53F, punishable by a fine of up to HKD 100,000 and imprisonment for six months. Chan & Chung is not a licensed TCSP. Regulated trust or company services are provided by Intelligent Services Limited (TC010349).
Second, statutory audit. Hong Kong does not provide a general audit exemption for small active companies. Active Hong Kong companies usually need annual audit by a Hong Kong practising CPA. The “reporting exemption” under the Companies Ordinance simplifies certain financial statement and directors’ report requirements; it is not an audit exemption. A dormant company may be treated differently only if it has properly followed the statutory dormant-company route.
Third, the Significant Controllers Register. Persons holding more than 25% of shares or voting rights, or otherwise exercising significant influence or control, generally need to be identified and recorded. Breach may result in fixed and daily default penalties.
Fourth, annual return filing. A private company must file its NAR1 annual return within 42 days after its incorporation anniversary. Late filing fees increase over time, and persistent non-compliance may lead to strike-off risk.
Chan & Chung may assist with Hong Kong company formation, company secretary and annual compliance coordination. Statutory audit is performed by a Hong Kong practising CPA, and licensed TCSP services are provided by Intelligent Services Limited (TC010349). These should not be conflated with regulated services provided by Chan & Chung itself.
Five Common Misunderstandings and the Momo Tax Case
The first misunderstanding is that a Hong Kong company automatically gets the 5% dividend withholding tax rate. In reality, CoR, beneficial ownership, direct ownership of at least 25% and the 12-month holding condition all matter.
The second misunderstanding is that a Hong Kong shell company is enough. If the Hong Kong layer is merely a conduit with no people, office, decision-making or risk assumption, beneficial-owner status may be denied, the 10% rate may be applied and back tax may arise.
The third misunderstanding is that mainland profits can be distributed or transferred out freely. Mainland foreign exchange control still applies, and equity contribution, dividends, service fees, loans and other routes all require contracts, tax basis, foreign exchange records and bank documentation.
The fourth misunderstanding is that small Hong Kong companies are audit-exempt. Active Hong Kong companies generally still require audit; reporting exemption is not audit exemption.
The fifth misunderstanding is that split personal remittances or underground money shops are faster solutions. Such conduct may involve foreign exchange evasion, illegal foreign exchange trading or illegal business operation risks, and should not be treated as an outbound capital strategy.
Negative Example: Momo / Hello Group
A law firm article has discussed the Momo / Hello Group (NASDAQ: MOMO) situation, stating that its Hong Kong parent was treated as lacking sufficient substance and as a conduit company. The 5% dividend withholding tax rate was reportedly denied and the 10% rate applied, with back tax said to be around RMB 540 million to 550 million. Adverse facts reportedly included dividends being moved to the United States within a short period after receipt and limitations on directors’ governance authority. The exact amount is cited from an external law firm article and should be treated as pending verification, not as a definitive figure.
The point is not one company’s fact pattern. The same principle runs through CoR, offshore claims, FSIE and the 5% mainland dividend withholding tax position: Hong Kong substance increasingly matters.
Risk Warning: Illegal Funding Methods for Compliance Comparison Only
Splitting funds across individuals’ annual USD 50,000 convenience quota, using multiple people to remit on behalf of a company, or using underground money shops may be treated as disguised foreign exchange trading or foreign exchange evasion. Administrative liability may arise under Articles 39 and 45 of the Foreign Exchange Administration Regulations. Criminal exposure may also arise under foreign exchange evasion or illegal business operation offences. This section is for risk identification only and is not an operational guide.
Three New 2025–2026 Variables: SAFE Circular 43, Nationwide Cash Pooling and BEPS 2.0 Pillar Two
The first new variable is SAFE Circular 43 of 2025. Issued and effective on 15 September 2025, it addresses reforms such as cancelling preliminary expense registration for certain direct investment matters, allowing reinvestment of FDI foreign exchange profits within China, and providing certain external debt facilitation quotas for high-tech and specialised enterprises. It also repeals Circular 16 of 2022. Companies should confirm the latest local bank implementation requirements before acting.
The second variable is the nationwide rollout of integrated RMB and foreign-currency cash pooling. PBOC Circular 251 of 2025 extends the pilot framework nationwide and sets a one-year transition period. This may help large multinational groups, but the entry threshold is high and does not mean smaller groups can set up cash pools without meeting the conditions.
The third variable is BEPS 2.0 Pillar Two. Hong Kong has introduced a global minimum tax and Hong Kong minimum top-up tax framework through the 2025 amendment ordinance. IRD materials indicate that certain electronic notification mechanisms have opened from 2026 for in-scope MNE groups with fiscal years beginning on or after 1 January 2025. In broad terms, groups with consolidated revenue of at least EUR 750 million need to assess the rules carefully.
FSIE and the Substance Requirement
Under Hong Kong’s foreign-sourced income exemption regime, specified foreign-sourced income received in Hong Kong may still need to satisfy economic substance, nexus or participation exemption requirements depending on income type and taxpayer profile. Hong Kong’s removal from the relevant EU watchlist in February 2024 does not mean companies can ignore documentation, staff, decision-making and risk-assumption evidence.
Mainland Review of Hong Kong Intermediate Holding Substance
The 2024–2026 trend is a more detailed review of Hong Kong intermediate holding substance by mainland tax authorities. If the Hong Kong layer has no real commercial purpose and simply passes through dividends, interest, royalties or service fees, the risk of tax challenge increases.
A Five-Step Decision Framework for Outbound Structuring
Step one: determine whether the sector is restricted to foreign investment. If it is not restricted, a red-chip equity structure may be assessed first. If it is restricted, legal professionals should evaluate VIE or other compliant structures.
Step two: determine whether the ODI is sensitive and whether the Chinese investment reaches USD 300 million. This affects the NDRC, commerce and foreign exchange route and timeline.
Step three: test whether the Hong Kong layer has substance: office, personnel, board decision-making, bank account, audit, contracts, CoR, fund retention and risk assumption. These records affect the 5% dividend withholding tax position, offshore income analysis and bank review.
Step four: select the capital route: ODI equity contribution, offshore lending, onshore guarantee for offshore loans or another market option. Each route has foreign exchange, tax, banking and related-party transaction implications.
Step five: assess whether BEPS 2.0 applies. If the group’s consolidated revenue reaches EUR 750 million, Hong Kong minimum top-up tax, IIR, notifications and filing duties should be included in governance planning early.
The objective is not to design the lowest-tax structure on paper. A better test is whether the structure has enough substance, whether the capital route works, and whether the compliance burden can be maintained. Each step must be assessed case by case with professional tax, legal and banking advice.
When Should You Speak to an Adviser?
If your company is preparing for offshore financing, listing, cross-border collections, offshore team setup or distribution of mainland profits, the structure should be reviewed before incorporation, not after banks, tax authorities or investors raise questions.
Chan & Chung may assist with Hong Kong company formation, company secretary and annual compliance coordination; cross-border tax, source-of-income and banking collection advisory on a case-by-case basis in coordination with accounting, tax and legal professionals; and Traditional Chinese and English SEO and overseas-market content support. Regulated trust or company services are provided by Intelligent Services Limited (TC010349), not Chan & Chung Consultancy Services Limited itself.
To discuss your industry, capital scale, listing plan and Hong Kong compliance checklist, you may book a consultation through the brand homepage at https://chanchung.com/zh-hant/ or the services page at https://chanchung.com/zh-hant/services. This article is general information only and is not legal or tax advice. Actual structuring and tax treatment must be assessed case by case with professional advice. We do not guarantee tax savings, tax avoidance outcomes or regulatory approval.