PRC Taxes on Hong Kong & Foreign Companies: Clarifications, Changes, Challenges & Opportunities

By Neal Stender, Qingsong (Kevin) Wang and Peter Connors
Orrick, Herrington & Sutcliffe

In order to increase the predictability and reduce the amount of their PRC enterprise income tax liability, Hong Kong and foreign resident companies that previously provided services to clients through frequent visits to the PRC should now consider establishing a subsidiary there to provide these services. Holding such a China subsidiary through a Hong Kong subsidiary, and using a Hong Kong subsidiary to receive China-sourced loan interest and intellectual property royalties has become more attractive to companies based in the United States¹ and other foreign countries, due to preferential tax rates under Hong Kong's recently revised and expanded tax arrangement with the PRC central government² (the New Arrangement).

But a Hong Kong subsidiary may be denied PRC tax preferences if its role does not serve a reasonable commercial purpose (not including enjoyment of the preferences). Moreover, PRC tax policies are evolving quickly and, in the future, a Hong Kong subsidiary may be denied PRC tax preferences merely because enjoyment of the preferences appears to be one of the main purposes of the Hong Kong subsidiary's role.