Using Your China WFOE / JV Or Hong Kong Company To Access & Fund Investments Into Russia and China’s Belt & Road Initiative

By Chris Devonshire-Ellis & Maria Kotova

China’s Belt & Road Initiative in terms of overseas projects has been receiving project financing to the tune of about US$13 billion a month. This has also had a profound impact on Russia’s Far East as part of that, which alone has been the recipient of 32% of Russia’s total foreign direct investment in recent years, as a priority to develop Russian ties with China.

China has also been improving infrastructure and export capabilities into neighboring Mongolia, Japan and South Korea, and is continuing to enhance this trade by introducing six new export zones to deal with these regions and another 24 ecommerce cross border zones to facilitate online trade processing facilities.

Cities such as Vladivostok are fast developing as a Far Eastern Asian metropolis, and is the financial and services hub for the Primorsky, Khabarovsk, Yakutia and Kamchatka regions where most of the Russian Far East opportunities lie. Far Eastern regional growth is currently three times higher than the Russian average. Change has been rewarded in terms of lifestyles – Vladivostok now boasts a Mariinsky theatre, its football team is on the up, and it has a world class faculty of 15,000 students at the Far Eastern University.

The development of Russia’s Far East has received another boost – China’s Belt & Road Initiative. China and Russia are developing a political alliance to hedge against the United States, but more importantly for trade are also reconnecting old rail and trade links that were dormant during the Cold War. China’s growing and vast appetite for energy resources is impacting on the Russian Arctic in Yakutia, where pipelines are bringing much needed supplies into China’s North-East regions and beyond. India has also started shipping LNG gas from Yakutia, while sun-drenched Mongolia wants to transport solar power generated excess capacity to Korea.  There are opportunities in Vladivostok for the development of the next generation of Arctic Container shipping, and Russia, China, India, Japan and South Korea are all discussing shipbuilding projects to develop such vessels to transport Russia’s massive energy reserves. Foreign suppliers to such industries have an opportunity here.

Road, rail and related infrastructure projects are almost snowing on the Russian Far East as I have witnessed the Presidents of Mongolia, Japan, India and China all make proposals and release funding to get their companies involved. For foreign businesses, their own chambers and embassies in China are well positioned to provide data on what projects are available for participation. There also is a lot happening in Russia elsewhere that is not under any form of sanctions, and background checks are relatively easy to conduct in terms of due diligence. Then there are Belt & Road Initiative projects in Mongolia & Kazakhstan, as well as developments occurring in upgrading Chinese, Russian and Belt & Road trade with Japan and South Korea. The access is there – as long as one asks for the data.

In terms of funding however there are some interesting options, not least in conducting this through China or Hong Kong.

Global businesses have a long track record of having invested in China the past 30 years, and limited liability subsidiaries of such companies are considered as Chinese, although at the same time having the benefit of enjoying some perks only available to foreign investors. Some of these can be turned to use as Russian and Belt & Road investments. There are practical examples as well as financial ones. China’s Foreign Investment Law has been overhauled as from 1st January 2020 and eases up considerably the ability for foreign investors in China to participate in Chinese procurement contracts. Many of these are Belt & Road related, and Russia, Mongolia, Kazakhstan & Pakistan – all Belt & Road Initiative nations – are just next door.

Additionally, China has now approved the establishment of “Project Joint Ventures”- a vehicle invested in by both Chinese and foreign stakeholders that exists purely for the length of time of a particular project, after which profits can be distributed and the venture wound up – perfect for the myriad of Belt & Road infrastructure development projects not just in Russia, but along the entire Belt & Road Initiative – now counting some 152 countries.

Financially, there are benefits here too for existing companies invested in China. Profits tax in China runs at between 15-20% depending on the industry category. But repatriating those profits back to the overseas parent attracts an additional 10% dividends tax. This means that getting involved in purchasing in China for Belt & Road infrastructure project needs will both reduce profits, and mean an investment can be made using the 10% saved on what would otherwise have been lost as a dividends tax. Accounting departments back home should be looking at the implications of using this if they have an existing China subsidiary, and are looking at gaining a foothold into the Belt & Road Initiative.

Another factor to invest in Russia worth considering is Hong Kong. Despite recent social unrest, the territory remains a vibrant financial hub – the worlds largest IPO was realized in Hong Kong in late November and raised US$11.2 billion. Hong Kong also has a Double Tax Treaty (DTA) with Russia, and this gives the potential of significantly reducing taxes in many areas. Should a foreign entity either have, or establish (a simple and inexpensive process) a company in Hong Kong, it qualifies to use the Hong Kong-Russia DTA.

Hong Kong’s profits tax rate is very low. Incorporated entities are subject to profits tax on two-tiered system.The first HKD 2,000,000 ( about US$260,000) of profits are subject to profits tax at 8.25 percent with the remainder subject to profits tax at 16.5 percent. This is quite low when compared with China’s corporate income tax rate (CIT) of 25 percent. Capital gains and receipts that are capital in nature are also not subject to tax. Hong Kong also has a very expansive tax treaty network and does not impose withholding taxes on payments of dividends and interest. Used correctly these can be used to offset taxes in Russia or other treaty countries when engaging in bilateral trade. As a result of the DTA, Russian business in Hong Kong increased 57% in 2017, the year the DTA was implemented, and it continues to grow.

There are opportunities in Russia and the Belt & Road Initiative if international businesses chose to look for them. Using either your Hong Kong or mainland China operations to both search for these and structure them may be an easier route than looking at the Russian Far East from Europe or elsewhere, where it can seem a very long way away.  Flight times from Hong Kong to Vladivostok are just under 5 hours, from Shanghai 3 hours, and from Beijing 2 hours. It is well worth looking at, and Vladivostok also caters for foreign investors by offering six day e-visa access in addition to hosting the usual, China familiar array of free trade, export processing and bonded zones, while also having free trade treaties with Kazakhstan, Kyrgyzstan, Armenia and Belarus – again, all Belt & Road nations.

Chris Devonshire-Ellis is the Chairman of Dezan Shira & Associates, Maria Kotova heads up the practice Russian desk. The firm has been established since 1992 and possesses offices across Asia including 12 in China and one in Hong Kong. Contact: silkroad@dezshira.com or visit www.dezshira.com