How do multinational corporations avoid taxes legally? Why do big shots eventually choose to immigrate to Singapore?

As of the third month of the year 2024, through public media reports, we have seen several heavyweight figures from mainland China changing their identities and moving to Singapore.

Why do these big shots love to go to Singapore?

Perhaps you have seen many answers in various domestic and foreign media reports: children’s education, tax planning, identity planning, and so on.

Indeed, while the reasons for high-net-worth individuals going abroad vary, “tax planning” is still a relatively common reason. So, how exactly is tax planning done? Today, let’s straighten out the logic behind this matter.

What is  the difference between Territorial & Personal Tax?

Taxation policies vary from country to country. In general, there are two common tax collection models: territorial taxation and personal taxation.

➡️ Territorial Taxation

Simply put, if you earn money in my country, you have to pay taxes to me.

For example, if you open a company and earn money in mainland China, then the money earned needs to be taxed.

▪️ Such as China Hong Kong, Singapore, and Malaysia, among others.

➡️ Personal Taxation

Simply put, if you are a citizen of my country, no matter where you earn money, you have to pay taxes to me.

▪️ The United States is a typical country that taxes based on citizenship.

➡️ Both Territorial and Personal Taxation

Simply put, if you are my citizen, no matter where you earn money, you have to pay taxes to me.

In addition, regardless of where you are from, if you meet the criteria of a taxpayer in China, you also need to pay taxes there.

▪️ Mainland China falls into this category.

Currently, most countries tax both based on territory and citizenship. However, this can lead to double taxation:

For example, if your company invests in the United States and makes money, the U.S. collects one tax. When this money is brought back, China, as your country of citizenship, collects another tax. In this way, it is not conducive to corporate globalization.

Therefore, many countries have signed various multilateral agreements to reduce the burden of double taxation. Everyone collects two taxes, but each tax is reduced, equivalent to the cost of the previous single tax.

However, there are currently a few countries and regions in the world that only tax based on territory. For example, the British Virgin Islands (BVI), the Cayman Islands, and China Hong Kong, among others.

Now many people will go to places like BVI to set up a company. On one hand, the procedures are simple and the costs are low; on the other hand, the company law there is not perfect, and the information is not transparent. It is difficult to find information about local companies from the outside, and it is even impossible to find out whether a company exists there, unless diplomatic means are used.

Hence,  many people will still open a company there even if they don’t use it temporarily.

How to plan taxes reasonably?

In practical operations, many companies use the following holding methods to achieve reasonable tax planning:

BVI Company

(Holding)

⬇️

Hong Kong Company

(Holding)

⬇️

Operating Entity Company

We can clearly see the logic behind the architecture diagram:

• Overseas one or two layers: BVI or Cayman companies + Hong Kong companies;
• Domestic one or two layers: (foreign-owned holding companies and) main operating enterprises.

Some observant friends may ask, isn’t BVI already subject to taxation? Why open a company in Hong Kong?

This is where we talk about the “different treatment” of taxation in mainland China:

• Chinese companies in mainland China are subject to a 20% corporate income tax.
• Foreign companies receiving passive income from mainland China usually need to pay a 10% withholding tax.
• Hong Kong companies holding more than 25% of shares in mainland Chinese companies can enjoy a 5% dividend tax.

So, if a BVI company is used to hold a Hong Kong company, and then the Hong Kong company holds a mainland Chinese operating entity, the tax rate is reduced from 20% to 5%.

Why do the big shots still go to Singapore?

Some friends may wonder, after all this explanation, why do the big shots all go to Singapore?

The answer to this question is coming up next.

We just talked about the “territorial” part, and through a series of overseas company holding operations, the tax rate has been reduced to 5%.

But don’t forget, China also operates on a “territorial” basis, so you still have to pay a 20% personal income tax.

So, some people have come up with ideas. Now, there are many investment immigration projects, where you can get a passport without having to live there. In this way, since I am a foreigner, I don’t have to pay taxes, right?

Sorry, Chinese personal income tax is not only for citizens of the country. If you spend more than 183 days in mainland China in a year, according to Chinese law, you are a tax resident and you need to pay taxes.

So what do we do? Where to live for the remaining half of the year?

Therefore, many big shots have found a good place that meets all their requirements:

1. Close to mainland China. It takes only four or five hours by plane, similar to flying from Shenzhen to Beijing.
2. No time difference with mainland China. This is important for convenient remote meetings, etc.
3. Pleasant climate. Places that are too cold are inconvenient and uncomfortable, and it’s troublesome to fly back and forth with clothes.
4. Many Chinese people. There are no language barriers or other obstacles.

In conclusion, this good place is Singapore!

Moreover, Singapore is currently one of the countries where you can obtain permanent residency (PR) the fastest among developed countries globally. There are mainly two ways to obtain PR:

1. The Global Investor Programme (GIP), which allows direct acquisition of PR.
2. Through holding an Employment Pass (EP)/S Pass for at least six months before applying for PR.

In our practical cases, obtaining PR through an EP has taken less than a year.

Of course, everyone’s situation is different, and it requires a practical assessment before recommending a suitable immigration plan.

With this, the tax part related to “belonging to a country” is reasonably planned. Isn’t it easy to understand why so many big shots like to go to Singapore?

If your company has plans for overseas expansion but you wish to minimize costs as much as possible, you can consider the holding structure we discussed today.

Of course, whether you want to establish companies or plan identities in places like BVI or the Cayman Islands, China, Hong Kong, or Singapore, “Eden” can customize an exclusive solution for you, providing end-to-end one-stop service.

If you have specific needs or require further details, feel free to contact us for more information.