There are various reasons why foreign investors use offshore companies to structure their investment in China. Offshore companies add an additional layer of limited liability, removing risk from its valuable parent company. Corporate law of offshore jurisdictions is often very flexible. Sale of the investment in China can be made by transferring the offshore entity, rather than the stake in the Chinese entity, which saves bureaucratic hassles in China.
Most importantly, offshore corporations can be used for tax planning purposes. By correctly arranging financial affairs, significant tax savings can be achieved -- but it should be noted that some schemes may constitute illegal tax evasion, rather than legal tax planning, so great care should be taken before setting up in one of these jurisdictions. Offshore jurisdictions are typically small islands in exotic locations. Examples are the Cayman Islands, British Virgin Islands, Samoa and Mauritius. Hong Kong is also a popular jurisdiction, due to its special status and proximity to the mainland.
It should be noted, however, that removing the administration of a company far from China causes practical difficulties, for instance when opening a bank account or when verifying documents.
All in all, offshore companies offer many advantages to investors, but there are many traps one could fall into. Therefore, sound legal advice should be sought before setting up an offshore company as an investment vehicle in China.
