Update: a holding structure for a family-owned group in Mainland China

Family-owned Mainland Chinese groups restructuring their offshore holding arrangements now face a more demanding environment on three fronts simultaneously: beneficial-ownership transparency, economic-substance requirements at the offshore tier, and treaty-access conditions that determine whether a Hong Kong intermediate holding company adds genuine value or simply adds cost. The governing instruments are the Foreign Investment Law (the principal statute regulating inbound and outbound investment structures involving Mainland entities) and the tax-treaty network accessible through Hong Kong, together with the Foreign-Sourced Income Exemption (FSIE) regime, which imposes economic-substance conditions on passive income received in Hong Kong with effect from 1 January 2023.

This briefing identifies what has changed, who across the Hong Kong – Mainland China corridor is most immediately affected, and the steps that matter now.

What Has Changed – and Why It Matters Now

The pressure point is not a single new rule. It is the convergence of three overlapping regimes, each of which was reformed or came into full effect within a short window.

First, the FSIE regime in Hong Kong now requires that a Hong Kong entity receiving dividends, interest, royalties or disposal gains from an offshore source satisfies an economic-substance test – or, in certain cases, demonstrates a participation condition – before that income is treated as exempt from Hong Kong profits tax. A holding company that exists only on paper, without genuine decision-making activity in Hong Kong, risks losing the exemption entirely and becoming liable at the standard rate.

Second, the Mainland's own beneficial-owner (实际受益人, shíjì shòuyì rén) rules, applied through the tax-treaty anti-avoidance framework, require that a Hong Kong entity claiming treaty benefits – most commonly the reduced withholding rate on dividends paid up from a Mainland operating company – be the genuine beneficial owner of that income. A pure conduit, holding a registration but exercising no genuine function, is increasingly unlikely to survive Mainland tax-authority scrutiny.

Third, the Significant Controllers Register requirement, in force in Hong Kong since 1 March 2018 under the Companies Ordinance (Cap. 622), means that the beneficial-ownership chain above a Hong Kong intermediate holding company must be disclosed and kept current. Where the chain runs through BVI or Cayman structures above the Hong Kong tier, those layers must also satisfy the economic-substance regimes of their own jurisdictions.

The combined effect is that a holding structure drawn up five or more years ago – one designed around the chart rather than around substance, treaty access and transparent ownership – may now carry material regulatory and tax exposure that was not present at inception.

Who Is Affected Across the Corridor

The groups most immediately exposed are family-owned Mainland enterprises that placed a Hong Kong company or an offshore holding company above their Mainland operating entities without building genuine substance into the intermediate tier. This pattern was common when the priority was simply to hold shares, facilitate reinvestment, or access an offshore capital pool.

The risk is highest where the Hong Kong entity: receives dividend remittances from the Mainland operating company; relies on the Mainland–Hong Kong double-taxation arrangement to obtain the reduced withholding rate; holds intellectual property or intercompany receivables that generate royalties or interest; or is itself held by a BVI or Cayman parent that has not established substance in its own jurisdiction.

In our cross-border practice, we regularly see family groups where the holding structure was set up during a period of rapid growth and has not been reviewed since. The legal environment has moved. The structure has not.

Groups considering a dividend upstream in the near term, or planning a transaction – a partial sale, a listing preparation, a refinancing – face heightened scrutiny at exactly the point when the structure is most visible to regulators, counterparties and advisers on the other side of the table. For a practical read on how these issues interact with offshore bond and support arrangements, see our matter note on keepwell deed and offshore bond support structures.

The Immediate Action

Three steps define the near-term response for an affected family-owned group.

First, map the actual holding chain against the current substance and beneficial-ownership requirements – not the chain as it appeared at incorporation, but as it stands today, including any changes in the family's residence, the location of key decision-makers, and the functions genuinely performed at each tier. For background on how a Hong Kong intermediate holding company fits into this analysis, our guide on a Mainland China holding company over a Hong Kong operating entity sets out the structural options in detail.

Second, assess treaty-access eligibility for any anticipated upstream payment. The beneficial-owner analysis under the Mainland–Hong Kong double-taxation arrangement is not a formality. It requires documented evidence that the Hong Kong entity has the right to use and enjoy the income, and that the structure was not put in place primarily to obtain treaty benefits.

Third, address the FSIE substance position before a dividend is received, not after. Substance that is retrofitted after income has already been paid up is harder to defend and may not be accepted by the Inland Revenue Department.

Our holding structures practice works with family-owned groups and their advisers to review the existing structure, model the holding options across Hong Kong and the relevant offshore centre, and prepare the implementation steps. For a structured assessment of your current holding position and the substance and treaty-access steps required, write to us at info@lockhartyip.com.

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Related

• Holding Structures
• Keepwell Deed Offshore Bond Support Structure Matter
• Mainland China Holding Company Over Hong Kong Operating

This publication is general information and does not constitute legal advice. For advice on your situation, contact info@lockhartyip.com.