An average of one new China-based company is incorporated every day in these regions. And the fact is, the owners of these companies may never visit the places where they are incorporated in their entire lives.
It's worth noting that the places these companies choose to incorporate have a distinctive feature - they are almost always international tax havens. However, the amount of legitimate international tax avoidance that can be utilized in these areas is very small under the provisions of China's tax laws and the limitations of China's foreign exchange management system, as our government taxes residents on global income derived from within China.
So, what kind of driving force drives a large number of enterprises, especially private enterprises to rush to these oceanic islands? Reporters with questions, visited a series of people related to this phenomenon - private enterprise bosses, investment bank managers, intermediaries, tax lawyers and professors of international taxation and international economic law, trying to solve this mystery that seems to be unspoken.
The graceful inflection point of curved listing
The first term that probably comes to mind for Chinese insiders familiar with the capital market is overseas curved listing when it comes to registering an offshore company in Cayman or Bermuda.
Overseas curve listing is academically known as "shell listing", that is, to be listed in the location of the overseas stock market or its permitted countries (regions) to set up a Chinese company's holding company, and then apply for listing in the name of the holding company.
Let's review the success of Chinese enterprises listed overseas: October 9, 1992, China's first stock listed on the New York Stock Exchange is "Brilliance Automotive", the full name of the company "Brilliance China Automotive Holdings Ltd.", which was registered in June 1992 in the Bermuda Islands, the listing of all the proceeds raised for the mainland China's industry, "Shenyang Jinbei Bus Manufacturing Co. Ltd"; in early 1999, the Singapore Stock Exchange appeared a new face - Eagle Holdings, registered in the Cayman Islands, behind the listed company - Guangdong Foshan Eagle Ceramics Company became the first overseas listing of Chinese private enterprises; in 1995, Huizhou Qiao Xing through its original registered in Hong Kong, a company registered in the British Virgin Islands, registered in the British Virgin Islands set up Qiao Xing Global, in the name of Qiao Xing Global repurchase Qiaoxing Group 90% of the equity, and then listed on February 17, 1999 in the United States NASDAQ, became the first Chinese private enterprises listed on the NASDAQ; January 31, 2000, registered in Bermuda, "Yuxing Computer Science and Technology Holdings Limited" as a successful listing in Hong Kong's Growth Enterprise Market, the first mainland private enterprises, raising funds of 420 million Hong Kong dollars.
Following the path of success opened by these pioneers, the successors, full of confidence, have embarked on this difficult road of curved listing. And the first stop on this road is often to run to Cayman, Bermuda and Virgin to register one or several companies. A veteran of the overseas investment banking business describes them as "these bullet islands are a graceful inflection point in the curve of Chinese companies going public overseas."
It is true that from mainland China, via this inflection point, private companies can lead to both Hong Kong's Growth Enterprise Market (GEM) and the U.S.'s Nasdaq. Because the laws of Bermuda, Cayman, British Virgin Islands belong to the common law system, is the United States Nasdaq listed companies legal place of registration. And according to the Hong Kong Stock Exchange in July 1992 promulgated the "Hong Kong GEM Listing Rules" on the GEM listed companies registered in the first, in addition to the Chinese mainland, Hong Kong, Bermuda, the Cayman Islands is also listed. According to incomplete statistics, there are far more Hong Kong GEM listed companies choosing Cayman and Bermuda as their place of incorporation than those registered in Mainland China and Hong Kong: we have selected any of the 10 listed companies with codes between 8003 and 8028 in the Hong Kong GEM stocks, and found that there is only one locally registered in Hong Kong, and the other nine companies (four with their main place of business in the Mainland) are all registered in either Cayman Islands or Bermuda - a glimpse through the tube.
So why don't these listed companies choose to register in the places where their stock markets are located instead of taking a detour to the distant and unfamiliar Cayman and Bermuda? People from all walks of life have different opinions, but when you think about it, they seem to be more or less on the same page. There are four reasons: simple registration procedures, risk reduction, avoidance of foreign exchange controls and legal tax avoidance.
Wanting to go public, will inevitably face a variety of complex approval procedures, rules and requirements, the enterprise headache is absolutely inevitable. However, can be exempted from a pile is a pile, Cayman, Bermuda, Virgin these small islands as the offshore registration of the paradise, can give the enterprise to save a lot of cumbersome procedures and rules of the trouble: the company can not have to be in the registered place of production and operation, you can move the registered capital for other purposes, the company set up the promoter is not required to be a resident of the local or nationals, do not need to provide financial statements to the local tax bureau. Moreover, there are now a large number of intermediary organizations in China that handle the registration of offshore companies on behalf of the company, so there are no more barriers to what seems to be a long distance.
A relaxed legal environment and good confidentiality are also prominent features of places like Cayman and Bermuda. A lawyer engaged in legal counseling for companies listing overseas pointed out that this can reduce legal risks for companies listing through a curved path. Taking the Cayman Islands located on the Caribbean Sea as an example, it is a partially autonomous British colony, and its company law is based on the British Business Companies Act (1948), but after several revisions made by the Cayman government over the years, which has already taken on many local characteristics. Under Cayman Islands company law, tax-exempt companies can receive a 20-year guarantee from the government that they will not be taxed, they can issue shares with no par value, and they do not have to hold an annual general meeting, and even the names of their shareholders can be kept secret. In fact, many offshore jurisdictions have express provisions that provide for the right of confidentiality of a company's shareholders' information, shareholding ratio, earnings status and other information. The relaxed legal environment and the high level of confidentiality of the company's business make the listed company's own security fully protected and greatly reduce various risk factors. If a listed company is involved in a legal dispute with an investor during its future operations, the Caymanian laws applicable during the adjudication process can often enable the listed company to avoid certain responsibilities or occupy a favorable position.
In addition to the lax laws, Cayman, Bermuda and Virgin are quite favorable in terms of taxation, with no income tax or capital gains tax levied on companies registered there. This means that while companies engaged in actual operations in mainland China must pay corporate income tax to the Chinese government, offshore holding companies that are their investors can avoid double taxation on the entire system of overseas-listed companies, as the governments of the places of incorporation do not tax or have very low rates of taxation on the investment income of the holding companies.
In addition, the Cayman Islands, Bermuda, Virgin and other regions generally do not have foreign exchange controls on exempted companies, foreign exchange in and out freely. This makes many Chinese enterprises listed through the curve of foreign exchange raised in overseas capital markets first placed in offshore companies, according to the needs of the actual operation of enterprises in mainland China, the funds remitted to the country one by one, rather than a time all the foreign exchange raised overseas into the domestic enterprises.
In addition to the above reasons, there seems to be an unspoken secret: very often, the company listed overseas in the curve of the "inflection point" more than one, and may be in a number of tax havens to register a number of "shell" companies. The process of injecting domestic assets into overseas shell companies is accompanied by layers of interlocking holding relationships and confusing asset swaps." The more complicated it is, the safer it is." A gentleman who has been in the investment banking business for many years explained this phenomenon vaguely. In these tax havens all kinds of properties and company situations are kept secret. Therefore, it is generally difficult to figure out what relationship there is between the various companies, which facilitates related transactions within the enterprise!" Instead, an intermediary consultant hit the nail on the head.
Venture capital "soft obscene treasure armor"
While Cayman, Bermuda, Virgin, these unknown islands into the Chinese people's field of vision originated from the Chinese enterprises overseas listing road, but in these islands registered more than 10,000 mainland China-related enterprises, in fact, only a small portion of the relevant to this purpose. An information consultant for an intermediary organization believes that many domestic high-tech enterprises that receive overseas venture capital are now the real force behind the offshore registration corps.
Compared with those who have the idea of listing overseas before embarking on the registration of offshore companies, many of the high-tech enterprises that have successfully attracted foreign venture capital seem to be more prescient, and the company's place of incorporation at the start is usually in Cayman, Bermuda and Virgin. A Zhongguancun high-tech enterprise manager pointed out that, in order to bypass the restrictions of domestic policies, foreign venture capital generally take the form of indirect investment in overseas offshore companies to intervene in China's venture capital market, so as to facilitate the realization of value-added investment in the smooth exit. As an entrepreneurial enterprise, of course, we should cooperate with the investor in order to achieve a win-win situation. Therefore, they usually choose Cayman, Bermuda, Virgin and other offshore legal zones to register their company, and use the offshore company as a transit point for the investor's capital. In the face of the economy, the law are in a period of transition in China, through indirect investment in the form of offshore companies, overseas venture capital for their own cloak a knife and gun difficult to enter the "soft obscene armor.
The listing of startups is the best form of exit for venture capital. Due to the imperfections of China's capital market, the domestic route is not possible, and that can only be done through overseas listing to ensure that the venture capital is fully retired, thus, the problem returns to the original article - venture capital enterprises and invested enterprises have also realized the charm of the small islands of Cayman, Bermuda, and Virgin Islands. Take IDG, an international data group that first entered China's venture capital market in 1992, as an example, its investments in Sohu and Kingdee were successfully listed on Nasdaq in the United States one after another, and both of them are typical of overseas curved listings realized through the registration of offshore companies.
The transfer of equity in the invested company is another important means of exit for venture capital. If the startup is an offshore company registered overseas, then when shareholders transfer their shares or change the shareholding structure due to the exit of venture capital, the domestic approval procedures are bypassed, making the transfer procedures and process simplified. However, if the direct investee company is registered in China, according to the relevant regulations, its equity transfer must be reported to the original approval body for approval (approval by the approval body also needs to obtain the consent of the Ministry of Science and Technology), and then go to the State Administration for Industry and Commerce to handle the relevant procedures. Complicated procedures, long waiting, may lead to the approval of the enterprise has long missed the market opportunity. Coupled with the fact that double taxation on investors can be avoided in places such as Cayman, this makes it less expensive for VC firms to operate overseas than at home.
In fact, in order to change the foreign capital bypassing the involvement of the domestic venture capital industry, our government has made positive efforts. Recently, the Ministry of Foreign Trade and Economic Cooperation, the Ministry of Science and Technology and the State Administration for Industry and Commerce jointly issued the "Interim Provisions on the Establishment of Foreign-invested Venture Capital Enterprises," which allows "foreign investors, alone or in conjunction with Chinese companies, enterprises or other economic organizations, to set up venture capital as business activities in China, foreign-invested limited liability companies or Chinese-foreign cooperative enterprises without legal personality." However, objectively speaking, the current environment for domestic venture capital is still not optimistic. Mr. Wang Shu, Vice President of IDG, pointed out that China's Company Law, Law on Foreign Investment Enterprises, Tax Law and other relevant regulations are not sound at the moment, for example, there still exists a restriction in the Company Law that the foreign investment shall not be more than 50 percent of the net assets; the problem of double taxation faced by limited partnership VCs has not been resolved in the Tax Law; and there are no restrictions in the Foreign Investment Enterprises Law for foreign investment in China; and there are no restrictions on foreign investment in China. Foreign Invested Enterprises Law's restrictions on investment in intangible assets; all of these will hinder foreign investment in China to develop the venture capital industry.
It seems that foreign investment in venture capital on this "soft obscene treasure armor" for a moment not to go down!
Accumulation of the "face" place
In fact, in addition to the above reasons, the purpose of overseas registration of enterprises and a variety of them, for them, Cayman, Bermuda, Virgin ...... these distant islands in the sea is to change their identity, to realize the "face" of the ideal place.
In Hebei Province, "5-18" economic and trade fairs, the reporter noted that there are two registered as "British Virgin Islands" private small businesses to the identity of foreign enterprises. In fact, this is just a native Chinese enterprises to the Virgin Islands registered an offshore company only, the owner of the enterprise himself on the world map can not find where they are registered. The purpose of this is clear - in order to enjoy the preferential treatment of foreign enterprises, the tax can be reduced to a certain extent in a few years. This phenomenon, China University of Political Science and Law, Professor of international economic law blue analysis that, although China has joined the WTO, but the WTO only requires that foreigners are given no less favored treatment than that of their own residents, but at present, China gives foreign investors is far better than the "national treatment" of the "supranational treatment". Therefore, some better private enterprises will think of fake joint ventures to avoid domestic taxes, this phenomenon is difficult to eliminate within a short period of time, because China's current development, need a lot of financial support. For this reason, preferential treatment for foreign investment will still be maintained for a certain period of time.
Private enterprises to engage in fake joint ventures "face" but for a little tax on the small benefits, compared to some of the country's large companies "face" means, is absolutely nothing. A few days ago, a large enterprise in China × × company to achieve a smooth listing in Hong Kong and the process of asset restructuring, registered in the Cayman Islands, an offshore company, the use of the Cayman Islands on the asset quality of the registered company to relax the requirements of the characteristics of the non-performing assets of the enterprise into the new company, so as to successfully realize the quality of the assets and non-performing assets of the divestment is expected in the next few days will soon be coming to the success of the enterprise listed in Hong Kong! Jet news. This kind of "face" magic is really called strong.
Now, even Taiwan-funded enterprises have also engaged in a "face", the idea of investment in mainland China by the Taiwan authorities to limit the policy does not matter, the smart Taiwan businessmen first invested the funds to their own in Cayman, Bermuda, Virgin and other places registered offshore companies to go, and then diverted to run to the mainland, let the Taiwan authorities how to guard is also of no help.
"As returning overseas students, we returned to China to set up this company with the idea of doing something for the country, so we want the company to ensure a pure pedigree and register as a genuine Chinese company. However, our investors are foreign investors, and in order to match their future exit and smooth listing overseas, we now have to consider registering in Cayman, which is really a dilemma." Dr. Xu Hongcai, Vice President of Beijing Science and Technology Venture Capital Co., Ltd. formed by a number of returnees with PhDs and Master's Degrees, revealed his frustration, showing us that not all "enterprises" are keen on this "face" game. Overseas registration still has advantages and disadvantages.
The information was collected for reference only!