Editor's Note: With the restructuring of the global economy, going global has become a necessary choice for enterprises adapting to the times, and the "Age of Discovery" has arrived. At present, China's opening-up has entered a new stage, and Chinese enterprises "going global" have reached a new historical juncture. Driven by macro policies and capital support, Chinese enterprises are going global at an accelerating pace, and the threshold for going global has been significantly lowered. In this wave of "going global," how to better plan equity structures, how to seize opportunities and ride the momentum while avoiding risks, are topics of concern for many Chinese business leaders.
In the process of going global, an ideal global investment structure for an enterprise group must not only balance a lower tax burden with the needs of commercial operations and achieve optimization of the group's effective tax burden worldwide, but also ensure the smooth operation and sustainable development of business across the globe. A well-planned equity structure has a significant impact on the success of an enterprise's "going global." This article, based on applicable law, investment practice, and project experience, explains several major structures for going global via Singapore and provides compliance reminders for outbound enterprises, for reference.
Source: JengaBCG
01 Basic Concepts
- "Outbound Direct Investment" (ODI), also known as "going global," refers to economic activities in which Chinese enterprises invest in foreign countries and in Hong Kong, Macao, and Taiwan in the form of cash, physical assets, intangible assets, etc., with control over the operation and management of overseas enterprises as the core.
- "Going global" refers to an operating strategy through which enterprises promote their domestic business models, products, services, etc. to overseas markets to achieve greater development and profits. Going global can not only expand an enterprise's market scale, but also help it acquire more resources and advanced technology, thereby better enhancing its market competitiveness.
- "Company going-global structure" refers to a domestic individual or company establishing and setting up companies overseas, using an offshore company structure to achieve the purpose of taking domestic business overseas or developing overseas business.
02 Common Purposes for Establishing Cross-Border Corporate Structures:
- Establishing an international headquarters, exploring overseas markets, and expanding overseas business;
- Using an overseas structure to reasonably plan tax for international business;
- Global asset allocation and wealth management;
- Enjoying investment promotion policies for foreign-funded enterprises in certain regions;
- Facilitating overseas capital operations such as financing, mergers and acquisitions, as well as overseas listings.
03 When constructing a cross-border equity structure, the following factors need to be comprehensively considered:
Tax planning:
An important consideration in a cross-border equity structure is how to optimize, to the greatest extent, the taxation of the company's business in each country. This may involve choosing low-tax countries as a financial base, using industry tax incentives, and complying with international tax regulations.
Legal compliance:
The company must comply with the laws and regulations of different countries. This may include compliance requirements in areas such as intellectual property law, labor law, and contract law.
Foreign exchange management:
Managing currency transactions between different countries and foreign exchange risk is also a key issue.
Equity structure:
A reasonable equity structure is related to the company's internal management and operational efficiency, as well as its external financing capability and sustainable development capability.
A reasonable corporate equity structure is one of the key factors for a company's success. Therefore, companies should carefully plan their equity structure. What are the current mainstream corporate structures for cross-border business?
According to the latest Lianhe Zaobao report in February 2024, there are 4,200 enterprises with headquarters in Singapore, far exceeding Hong Kong, making Singapore the preferred Asian location for multinational enterprises establishing international headquarters.
04 Common structures of Singapore companies in international business include:
- Sole corporate or joint venture
- Investment holding company structure
- Import-export and cross-border trade structure
- Asset management structure & family offices
- Intellectual property holding company
- Non-profit organization (or foundation)
- Public company limited by guarantee (CLG)
- Red-chip structure (VIE)
Let us look at each of these common structures below.
1. Wholly Owned Enterprise or Joint Venture (Sole Corporate or Joint Venture)
A sole or joint venture holding structure refers to one or more corporate shareholders controlling a Singapore company to achieve overseas expansion, overseas settlement, or tax optimization.
Key Benefits
Each shareholder company bears limited liability, and the operating model is flexible. Income of the operating company can be repatriated to the shareholder company through dividends; dividend distributions to the shareholder company are not subject to a second layer of taxation. Surplus funds can be retained in overseas accounts, isolating or deferring potential individual income tax obligations of shareholders, while enjoying Singapore's tax incentive policies and the convenience of Singapore's banking and foreign exchange settlement system.
Suitable for
- Companies intending to expand into Southeast Asian and global markets;
- Companies intending to make overseas investments and conduct mergers and acquisitions;
- Companies intending to establish a global financial settlement center.
2. Investment Holding Company Structure (Investment Holding)
An investment holding company is incorporated to hold financial assets and to hold shares in branches or subsidiaries with specific purposes. The holding company does not transact with its subsidiaries; it merely acts as the holder of the corresponding equity interests through the allocation of company shares. As shown in the diagram below, the holding company will hold shares in Subsidiary A and other companies, which may be established as the business grows.
Advantages of establishing an investment holding company in Singapore:
New development
The company wishes to expand its business into (a) more industries and (b) more countries. For example, a Singapore company establishes a factory in Malaysia; manufacturing is carried out in a country with lower labor costs, while order revenue remains in the Singapore holding company, enjoying the low tax rate of 17% and the convenience of international currency exchange.
Partnership
A holding company acquires shares in a partner company and becomes its parent company, holding shares in the subsidiary and appointing directors, thereby expanding its original business through the subsidiary's operations. For example, Alibaba acquired equity in SingPost to achieve smooth expansion into a new industry, making itself a trusted partner with a professional logistics operations team in Singapore.
Shareholder governance
Changes in the equity or directors of the holding company do not affect the structures of its subsidiaries.
Tax benefits
It enjoys tax exemptions on dividend income received from subsidiaries and on capital gains tax.
3. Import-Export or Cross-Border Trade Structure (Import-export and Trading Company)
Singapore has always been known as an important "port of call" for traders. To carry out trading business in Singapore, you need to first incorporate a company. It can be a Singapore subsidiary of your existing business or a newly established independent Singapore entity for a new business.
Using a Singapore company as the purchasing and sales entity for international business and establishing a Singapore company as an international headquarters makes it convenient to sign business contracts with suppliers and buyers from various countries and to fully enjoy Singapore's sound legal system and credibility, foreign exchange convenience, and tax policies. Dividends of after-tax profits of a Singapore company to local individual shareholders are not subject to additional tax; whether profits need to be repatriated to shareholders who are not Singapore tax residents can be decided based on the shareholders' individual tax circumstances.
4. Asset Management Structure and Family Office (Asset Management Company and Family Offices)
In an asset management structure, there are usually at least two entities: the management company and the fund entity (such as the VCC structure commonly used in Singapore), so as to separate asset ownership from management and maximize asset security. A Singapore asset management company must apply to the Monetary Authority of Singapore (MAS) for an asset management license before it can operate (for details, please refer to Jenga's previous article: Latest Details on Singapore CMS Asset Management Licensing After the Abolition of RFMC). A licensed management company may issue and manage multiple funds. Fund assets are held by a custodian bank and subject to joint supervision by an independent fund administrator. The family office structure is similar to an asset management company: the family office entity acts as the management company, managing the assets in the family fund, and the ultimate controlling persons behind it are the family's beneficiary members (i.e., investors).
Common Structure
Singapore's property trust funds are also a very mature similar structure: assets such as the hotel's land and property are placed into a property fund/trust (the investor), while a limited liability company responsible for hotel operation and management is established (the manager). Any daily operation and management activities, including potential disputes, will be resolved at the manager company, without affecting the hotel's assets and investors, thereby better safeguarding asset security.
While the property fund owns assets such as real estate, it usually also holds shares in the hotel operating company. After the operating company deducts management fees from hotel operating profits, the profits will be distributed to the property fund in proportion to its shareholding.
5. Intellectual Property Holding Company
An intellectual property holding company refers to a structure in which an individual or institution holds intellectual property (such as copyright or patents) through an offshore company (such as a British Virgin Islands or Cayman Islands company), and then incorporates a Singapore company to license the patents or copyrights to the Singapore company for use.
Advantages:
- The offshore company holds the intellectual property, allowing tax optimization of income generated by the intellectual property;
- The operating model is flexible; it can be operated offshore after opening a bank account, or it can be put into operation onshore;
- Income of the Singapore company can be repatriated to the shareholder company through dividends, and dividends received by the shareholder company are not subject to a second layer of tax;
- Surplus funds can be retained in overseas accounts and enjoy overseas tax policies;
- The intellectual property is protected by Singapore's intellectual property laws.
Suitable for:
- Companies globalizing their brands;
- Companies holding multiple intellectual property rights;
- Companies intending to optimize taxes on overseas income.
6. Non-profit Organization (or Foundation)
A Singapore non-profit organization is a legally established organization whose main purpose is to support or participate in public interest, and which does not have any commercial interest. Unlike profit-making organizations, the "profit" earned by a non-profit organization is referred to as surplus and will be retained as funding for its other activities rather than distributed as profits among its members. Non-profit organizations are commonly referred to as "voluntary welfare organizations" (VWOs).
Characteristics of non-profit organizations:
- Independently managed and operated by a board of trustees or management committee composed of persons with trustee qualifications;
- Creating benefits for a group outside the organization, usually for public welfare;
- Members within the organization are prohibited from sharing company profits;
- Full tax exemption can only be obtained after obtaining "charity status."
7. Public Company Limited by Guarantee
Most charities and non-profit organizations are usually established in Singapore using the company limited by guarantee (CLG) option. Such groups engage in non-profit activities that have a national or public interest basis, such as promoting the arts or charitable causes.
In a CLG structure, there are only members, with no shareholders or share capital. The members guarantee/undertake to provide a predetermined amount for the debts of the company due upon winding up. The amount set aside as a guarantee may be as low as S$1. A company limited by guarantee, like a company, is a separate legal person. It may sue or be sued in its own name; it may enter into contracts and own property in its own name.
CLGs are also commonly used in international token issuance structures because they meet the community management functions and structural requirements needed for public fundraising public blockchain projects.
Common structure:
An offshore company acts as a member of the non-profit foundation to achieve management control over the foundation (votes of more than 75% of the members may determine the appointment and removal of foundation directors). The foundation wholly owns an offshore entity (usually a BVI company) as the issuing entity, ensuring the nature of the token-issuing entity (non-profit) and addressing potential tax obligations that could arise from direct issuance of digital assets by an onshore entity.
As the Monetary Authority of Singapore (MAS) supports and encourages financial innovation, Singapore remains the international financial center with the most comprehensive regulation of the digital industry among onshore jurisdictions. After completing issuance, some projects choose to establish a private limited company as the R&D and operating company. After successfully opening corporate accounts and completing bank account opening, they sign an operating agreement with the foundation and, through compliant OTC transactions, convert digital currency income into fiat currency and inject it into the operating entity to conduct business and fulfill tax obligations normally.
Society: A society is defined as a club, company, partnership, or association of 10 or more persons, regardless of its nature or objectives, and which has not been registered under any other law. A society is suitable for membership-based or volunteer-based groups, especially small groups with strong community ties that do not rely heavily on donations and external funding.
For a society registered with the Registry of Societies (ROS), if surplus funds come from members' contributions, it is exempt from income tax; or if more than 50% of its total income comes from members, and members cannot be tax-exempt. To obtain full tax exemption, the society must apply for charity status after registration.
8. Red-Chip Structure (Variable Interest Entities, "VIE")
In essence, a VIE structure refers to a structure in which a wholly foreign-owned or partially foreign-owned entity established in China (the "holding company") has control over an operating company in a sector where foreign direct investment is restricted or prohibited (the "operating company"). Accordingly, foreign investors adopt various contractual arrangements between the holding company and the operating company to gain actual control over the operating company. The profits of the operating company will also flow back to the holding company and then ultimately be consolidated by the foreign investors.
############## Composition and Diagram of a VIE Structure:
A VIE structure generally consists of three parts: an offshore listing entity, a wholly foreign-owned enterprise (WFOE) in China or a foreign-invested enterprise (FIE) in China, and a licensed (actually operating) company (the holder of a business license in a sector restricted for foreign investment). Among them, the offshore listing entity is generally a Cayman company, but Singapore/Hong Kong companies may also be used, and even multiple models may coexist. However, when building the structure, it is necessary to ensure the overall stability of the structure and the consistency of shareholders' interests.
Role of each layer of equity entity in the VIE structure:
- Establishing the first-layer offshore equity entity — BVI company
- Register the first-layer equity entity, a BVI company, in the British Virgin Islands (BVI).
- Establishing the second-layer offshore equity entity — Cayman company
- The Cayman company serves as the listing entity, with its shareholder being the first-layer BVI company.
- Establishing the third-layer offshore equity entity — Hong Kong company or Singapore company
- The Cayman company wholly owns the Hong Kong or Singapore company as the overseas operating entity to obtain operational convenience and tax benefits.
- The Singapore or Hong Kong company establishes a WFOE in mainland China
- The WFOE controls the domestic operating entity through agreements to complete the distribution of the enterprise's profits and assets.
The VIE structure is now mainly used for:
- Enterprises expanding into overseas markets, financing, and compliant movement of funds;
- Avoiding numerous unnecessary procedures and restrictions;
- Achieving overall tax planning.
Conclusion
Overseas equity structures are more complex than domestic equity structures because their establishment purposes are diverse and they involve tax systems, laws, and regulations of different countries. Entrepreneurs need to fully understand and consult on their strategic objectives, and make detailed and thorough plans and arrangements.
For more information on cross-border business models and outbound structures, please contact the professional consulting team of China-Singapore Legal News
—
Author | Cross-Border Investment Team
This article is for informational reference only and does not constitute formal legal advice.
This article is general information and not legal advice. Specific matters require assessment by appropriately qualified professionals.