How to Structure and Report Cross Border Operations Between Hong Kong and Mainland China

For international groups operating across Hong Kong and Mainland China, getting the structure and reporting right is fundamental. While the two jurisdictions are closely connected commercially, they remain distinct from a legal, tax and regulatory perspective. Misunderstanding that distinction is where many compliance and operational issues arise.

This article sets out how cross border operations are commonly structured, how activities should be reported, and what companies should review in 2026 to reduce risk and maintain operational clarity.

Understanding the role of each entity

A clear starting point is defining the purpose of each entity within the group.

Hong Kong entities are commonly used for regional management, group financing, IP ownership, procurement, or as a holding company. Mainland China entities typically carry out manufacturing, sales, service delivery or local employment.

Problems emerge when the actual activity does not match the stated role. If a Hong Kong company is presented as a passive holding entity but is in practice negotiating contracts, directing staff or controlling pricing in China, this creates tax and regulatory exposure on both sides of the border.

A proper structure aligns legal form, commercial reality and documentation.

Common cross border operating models

There is no single correct structure, but the most common models include:

• A Hong Kong holding or regional headquarters entity with one or more Mainland China operating subsidiaries

• A Hong Kong trading company selling to or purchasing from a China manufacturing entity

• A Hong Kong service company providing management, technical or support services to China entities

• IP ownership or licensing structures involving Hong Kong as an intermediary

Each model carries different implications for tax, transfer pricing, withholding taxes and reporting obligations.

Transfer pricing and intercompany arrangements

Transfer pricing remains one of the most sensitive areas in Hong Kong-China structures. Mainland China tax authorities expect intercompany transactions to be priced on an arm’s length basis and supported by contemporaneous documentation.

Companies should review whether:

• Intercompany service agreements are in place and reflect reality

• Fees charged are commercially justifiable and consistently applied

• Cost bases and mark ups are defensible

• Supporting documentation exists for management, technical or IP related charges

Hong Kong tax filings must also align with these arrangements. Inconsistencies between Mainland China transfer pricing positions and Hong Kong profits tax reporting are increasingly visible to authorities and banks.

Tax reporting alignment between jurisdictions

Hong Kong and Mainland China operate under fundamentally different tax systems. Hong Kong applies a territorial profits tax regime, while China taxes income on a more comprehensive basis with additional indirect taxes.

Cross border groups should ensure that:

• Income is reported in the correct jurisdiction based on actual activity

• Offshore claims in Hong Kong are properly supported

• Withholding tax exposure on service fees, royalties and dividends is assessed

• VAT implications in China are correctly managed

A lack of coordination between Hong Kong and China tax reporting is a common trigger for audit queries and compliance reviews.

Management, control and substance

Management and control is a recurring theme in cross border reviews. Authorities and banks increasingly expect substance to match structure.

This includes:

• Clear board and management decision making processes

• Evidence of where strategic and operational decisions are made

• Proper documentation of meetings and approvals

• Alignment between banking activity and declared operations

Where Hong Kong entities are described as decision making centres, that role must be demonstrable in practice.

Financial reporting and consolidation

From a reporting perspective, consistency is key. Group accounts, local statutory accounts and management reporting should tell the same story.

Companies should review whether:

• Intercompany balances reconcile across jurisdictions

• Revenue and cost allocations are consistent

• Currency treatment and timing differences are understood

• Audit approaches in Hong Kong and China are coordinated

Discrepancies are often identified during audits, due diligence exercises or banking reviews rather than through routine compliance.

Regulatory and operational considerations

Beyond tax and accounting, cross border operations must also consider:

• Foreign investment and approval requirements in Mainland China

• Contract enforceability and governing law

• Data, payroll and employment compliance

• Banking and foreign exchange controls

Changes in one jurisdiction can have unintended consequences in the other if not reviewed holistically.

Reviewing your structure for 2026

As regulatory scrutiny continues to increase, 2026 is an appropriate time to review whether existing Hong Kong China structures remain fit for purpose. This is particularly relevant for groups that have grown organically, expanded rapidly or adapted structures without a full review.

A proactive assessment helps identify misalignment early, supports cleaner reporting, and reduces the risk of challenge from tax authorities, banks or commercial counterparties.

Professional advice can add value not only in fixing problems, but in designing structures that support growth while remaining compliant on both sides of the border.

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Woodburn Accountants & Advisors is one of China and Hong Kong’s most trusted business setup advisory firms.

Woodburn Accountants & Advisors is specialized in inbound investment to China and Hong Kong. We focus on eliminating the complexities of corporate services and compliance administration. We help clients with services ranging from trademark registration and company incorporation to the full outsourcing solution for accounting, tax, and human resource services. Our advisory services can be tailor-made based on the companies’ objectives, goals and needs which vary depending on the stage they are at on their journey.

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