What are the legal issues for mainland Chinese citizens developing business in Hong Kong to do Web3?

Preface

A while ago, the Web3 conference in Hong Kong was in full swing, attracting the attention of the whole world! It is said that when the policy is implemented in June, it will be possible to develop business in Hong Kong in compliance with the regulations. Mainland investors are enthusiastic and eager to try. However, it is actually not that simple for investors from mainland China to do Web3 business in Hong Kong in compliance with regulations, and it involves many legal issues? For example: Hong Kong company establishment issues, financial license application process, virtual currency financial tax declaration and audit, human work arrangements, etc., then Liu Lei's lawyer team will introduce it systematically.

**1. How to set up a virtual currency business company in Hong Kong? **

If you want to set up a company in Hong Kong that can carry out virtual currency business, you must meet the following conditions: First, the company is registered in Hong Kong and has a Hong Kong bank account. This also means that, if referring to past practices, there is a risk of non-compliance in arranging the company's registration place in Cayman, BVI or other regions. Second, you must have a physical office address and get the owner's consent. If you set up a company in Hong Kong, you must choose an office area. If it is a home or other non-compliant place, you will face the risk of industrial and commercial building sweeping. Third, theoretically at least 2 licensed personnel (RO) with virtual currency experience, but in practice, because virtual currency asset transactions are always closed, it is best to require more than 3 licensed personnel. Fourth, the registered capital of the company must be more than 5 million, and the working capital must be more than 3 million. In practice, the higher the registered capital, the higher the approval rate for establishing a company. Fifth, apply for Hong Kong work endorsement for mainland employees who come to Hong Kong to work, which involves Hong Kong's local employee protection policy and foreign talent introduction policy. From a practical point of view, the following section will also provide a compliance interpretation of the key parts of the above-mentioned links.

2.** How do mainlanders apply for a Hong Kong bank account in Hong Kong? **

Mainland Web3 people who want to attract local funds in the Hong Kong exhibition industry involve the issue of setting up accounts in Hong Kong. Judging from the current practice, if a mainlander wishes to set up a personal account in Hong Kong, he or she can go to a bank in Hong Kong offline and handle it face-to-face with an ID card and proof of assets, or contact a customer manager in Hong Kong in the mainland and complete the pre-application online And coordinate the account opening by email. Among them, online processing may involve the witnessing of lawyers in the Mainland. It is necessary to have a lawyer who is registered in China and can search on the official China Legal Service Network to verify the identity of the account holder and check that the copy is consistent with the original. Sign your name and seal.

If a non-local person wants to set up a company account in Hong Kong, the requirements are more stringent, not only the full set of trade materials of the Hong Kong company (sales contract, purchase contract, bill of lading, invoice, customs declaration, etc.), the materials of the related mainland company (business license, sales and Purchasing contracts, bank statements, value-added tax invoices, etc.), directors and shareholders’ identity certificates (ID cards, passports, Hong Kong and Macau passports) and other auxiliary materials (company website, product information introduction, personal asset certificates, etc.), also need to go through strict anti-money laundering The account opening application can only be approved after review. After the account application is successful, the ** company should also ensure operational compliance from various aspects, do a good job in auditing and reimbursement, and avoid problems such as "fast in and out, full in and out" of account funds. **

**3. Questions about working visas for mainlanders coming to Hong Kong? **

Mainlanders who want to continue to work in Hong Kong will inevitably involve the issue of personnel visas. At present, the types of endorsements that Hong Kong opens to the mainland mainly include the following types: Hong Kong tourist visa (including individual endorsement G visa and group endorsement L visa), Hong Kong business visa, Hong Kong work visa, Hong Kong independent travel visa, Hong Kong study visa, etc. The Hong Kong work visa is also the "importation of mainland talents plan/general employment policy", that is, the Hong Kong talent plan. Mainlanders are required to possess special skills, knowledge or experience that Hong Kong needs but lack, before they can apply to work in Hong Kong under this scheme.

The Hong Kong Professionals Program not only requires candidates to have professional skills and work experience, but also has conditions for their employers in Hong Kong: First, the company must be established for more than one year. Under special circumstances, the investment amount Significant, high-tech industries, internal company transfers or other people who can show that they have made significant contributions to Hong Kong can try to submit as a start-up company that has been established for less than one year); Second, the company must actually operate, that is Have a local office address in Hong Kong and proof that no less than 3 local employees have paid MPF for no less than 6 months; Third, the company’s annual turnover is not less than 3 million Hong Kong dollars; **Other Fourth, the company should focus on proving that there is indeed a vacancy for the position, and it is difficult to find suitable candidates in Hong Kong, otherwise local people in Hong Kong should be given priority.

**4. What are the tax issues for developing virtual currency business in Hong Kong? **

In Hong Kong, non-cash assets such as virtual currency assets, and even equity, can form financial reports from the perspective of financial data. For a company with a legal entity, all profits should be legal and in line with Hong Kong's local tax policies. If for an investment company, its main business is to earn income from investment, although there is no capital gain in Hong Kong, but because the main business is income from investment, then corporate profit tax will be incurred. In terms of specific amount calculation, Hong Kong companies will be charged a profit tax of 8.25% if the profit after deducting operating costs (wages, office expenses, etc.) tax. Compared with the tax policies of other regions, the tax policies for virtual currency business in Hong Kong are relatively friendly. Regarding currency price fluctuations, the financial year of Hong Kong companies is generally at the end of December or at the end of March, which can be selected. Assuming that during the evaluation period, the company’s books have 10 bitcoins, and the company’s initial capital is 5 bitcoins, then the audit agency will correspond to its valuation in the financial year, and then specialize in virtual assets. The audit firm of the audit business must issue an audit report in order to complete the financial tax declaration.

5** What kind of financial license to apply for and the application process? **

To carry out financial business in Hong Kong, it is necessary to apply for a financial license according to the specific nature of the business and the underlying transaction logic. At present, the development of virtual currency business in Hong Kong is mainly a combination of applying for No. 1 securities trading, No. 4 securities investment consulting services, No. 7 automated trading services, and No. 9 asset management licenses. Take the application of No. 9 license and its virtual asset sub-license as an example. If you want to obtain the No. 9 virtual asset sub-license, you can apply for the ordinary No. 9 license and apply for the Virtual Assets (virtual assets) sub-license based on the ordinary No. 9 license. In one step, directly apply for the No. 9 license of Virtual Assets (virtual assets). But the one-step requirements will be relatively high: there needs to be a suitable licensed person in charge (RO) who has managed virtual currency assets. In theory, there must be two licensed persons in charge. But because virtual currency asset trading currently does not have the so-called "closed time" of the stock market. Therefore, in practice, the Hong Kong Securities Regulatory Commission requires at least three licensed responsible persons, which is equivalent to the logic of three shifts. The person in charge of the license needs to have at least two years of experience in the management of virtual currency assets, and more than 6 years of asset management experience in accordance with the No. 9 license RO. And if the candidate has engaged in virtual currency asset business in the Mainland after September 2021, he will not be able to become a qualified licensed person in charge.

In terms of the application timeline, it usually takes about 9 months to apply for a general financial No. 9 license in Hong Kong. The length of the application depends largely on the complexity at the shareholder level. If the number of shareholders is small and the investment structure is relatively simple, the application period may be relatively shortened. When the ordinary No. 9 license is upgraded, a questionnaire (questionnaire) will be attached, listing the service providers hired, the exchange, the custodian institution, the type of fund established, the type of investment assets, etc., and it will take at least one year. Under the current situation that the Hong Kong Securities Regulatory Commission has not quickly increased manpower in this field, it takes at least 1 to 2 years to prepare from obtaining the No. 9 license to upgrading the license.

In addition, **Hong Kong has a dual license regulatory policy for virtual currency business. ** For security token trading exchanges, the regulation of security token trading by virtual asset trading platforms is based on the existing regime under the Securities and Futures Ordinance. For non-securities token exchanges, according to the virtual asset service provider system under the Anti-Money Laundering Regulations, non-security token transactions conducted by virtual asset trading platforms are supervised, requiring VASP license + trust license.

6** Can unlicensed trading platforms participate in the transitional arrangements? **

Due to the unabated popularity of the virtual currency business, some customers have considered that Hong Kong has been licensed for a long time, and asked our team whether they can start the relevant business first and then apply for the license. In this regard, Liu Lei's lawyer team replied: It needs to see whether it complies with Hong Kong's transitional arrangements. According to the "Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance 2022" passed by the Legislative Council, trading platforms already operating in Hong Kong before June 1, 2023 can participate in transitional arrangements. A trading platform that submits an application for a VASP license to the China Securities Regulatory Commission before February 29, 2024 can be "deemed to be licensed" and continue to operate its existing business until the China Securities Regulatory Commission makes a decision to issue or refuse to issue a license. The China Securities Regulatory Commission further clarified in the consultation document that **Only platforms with "significant and substantive business" in Hong Kong before June 1, 2023 are eligible to participate in the transitional arrangement. When it comes to meaningful and substantive business, the SFC will consider various comprehensive factors of business substance. **

**7. Is it feasible to use mainland assets in Hong Kong as collateral for currency issuance? Does the Mortgage of Mainland Assets Need to be Reviewed by the Commission of Commerce? **

Many mainland Web3 practitioners have consulted Liu Lei's lawyer team with the same question, that is, whether they can use mainland assets in Hong Kong as collateral assets for currency issuance and whether the assets need to be reviewed by the Commerce Commission. To answer this question, it is necessary to refer to the "Notice Concerning Issues Concerning Foreign Exchange Administration of Overseas Investment and Financing and Return Investment by Domestic Residents Through Special Purpose Companies" issued by the State Administration of Foreign Exchange on July 4, 2014 (Huifa [2014] 〕No. 37, hereinafter referred to as Document No. 37). According to this regulation, individual investors within the territory of the People's Republic of China can only legally invest overseas if they complete the registration and review in accordance with Document No. 37 and meet the qualifications for qualified investors. According to the existing regulations, the following documents need to be submitted for the initial registration under Circular 37:

(1) Written application and the "Foreign Exchange Registration Form for Overseas Investment by Domestic Resident Individuals";

(2) personal identification documents;

(3) Registration documents of the special purpose company and certification documents of shareholders or actual controllers (such as register of shareholders, register of subscribers, etc.);

(4) The resolution of the domestic and foreign enterprise authorities agreeing to overseas investment and financing (if the enterprise has not yet been established, provide a written explanation of the owner's consent to overseas investment and financing);

(5) The assets or rights and interests of domestic enterprises that intend to invest and finance overseas held directly or indirectly by domestic resident individuals, or the certification documents for legally holding overseas assets or rights and interests;

(6) Supplementary materials required when the aforementioned materials cannot fully explain the authenticity of the transaction or the consistency between the application materials.

Liu Lei's lawyer team believes that according to the document, it is feasible for mainland Web3 practitioners to hope to use mainland assets as collateral assets for currency issuance in Hong Kong, which is not fundamentally different from conventional investments other than virtual currencies. Only Chinese domestic individual investors who have completed the registration under Document 37 and meet the relevant requirements can ensure that the return of funds benefiting from overseas investment is legal and compliant. In addition, investors must also provide the completed No. 37 registration documents to relevant departments when the income generated by overseas investment (including transaction income, dividends, interest, etc.) returns to China. Therefore, if a mainlander develops a business in Hong Kong and wishes to mortgage mainland assets as capital contribution, he must meet the requirements of Document No. 37 and go through the strict review and registration process of the Commerce Commission, otherwise he cannot become a qualified investor. There will also be obstacles to the return of beneficiary funds.

**However, at present, in practice, whether the use of mainland assets as collateral assets for currency issuance in Hong Kong can successfully pass the review of the Commission of Commerce remains to be verified. We also look forward to the official release of investment in the mainland in the future a more friendly signal. **