Hong Kong (which comprises a group of islands as well as part of the mainland on the southeast coast of China) is a former British colony which was officially handed over to the People’s Republic of China (“PRC”) in 1997 and is now a “Special Administrative Region” of the PRC. Hong Kong despite a relatively small population of 7 million is annually ranked as one of the top jurisdictions in the World Bank’s “Doing Business” guide and is the 5th largest financial centre in the world. It also has the largest stock exchange in Asia outside of Japan.
Key features & benefits include:
- Sound Legal System: Hong Kong boasts a Common Law Legal (& British style court system) based on English Common Law
- Access to China: Hong Kong has 2 official Languages, Chinese and English, and is the major gateway for inward investment into China
- Political Stability Hong Kong elects its own legislature and is considered very stable politically
- Tax Free: Hong Kong does not tax its companies on income or profits earned offshore
- Ownership Privacy: Hong Kong has signed no Tax Information Exchange Agreements with any major player
BUSINESS STRUCTURES & LEGAL REQUIREMENTS
There are three business structures in Hong Kong:
- Sole proprietorship or partnership.
- Limited liability companies.
- Branch office or representative office of a foreign company incorporated outside Hong Kong.
Limited companies may be either private or public, the operation of which is mainly subject to the provisions of the Hong Kong Companies Ordinance. The liability of members of the company for the company’s debts is limited to the issued share capital or, in the case of a company limited by guarantee, to the amount of the guarantee.
(a) Private Limited Company:
Most business operations in Hong Kong are private limited companies whose articles of association as provided in Section 29 of the Companies Ordinance:
- Restrict the right to transfer the company’s shares.
- Limit the number of members to 50.
- Prohibit any invitation to the public to subscribe for shares or debentures.
When requesting incorporation, the memorandum and articles of association of the proposed company and a statutory declaration of compliance with the Companies Ordinance must be filed with the Registrar of Companies. If the company name is similar to that of an existing company, the Registrar may direct the company to change its name within 12 months of incorporation at his discretion. It takes approximately two weeks to process and the business cannot be commenced until the Registrar issues the Certificate of Incorporation. Ready-made “Shelf Companies” can be supplied if time is of the essence.
(b) Public Company:
Any company whose articles of association do not contain the three restrictions as specified in Section 29 of the Companies Ordinance is a public company. A public company must provide a prospectus, or a statement in lieu thereof, setting out full details of the proposed share issue, a history of the organisation if it is an existing company or, in the event of a new company, full particulars of the proposed organisation. The prospectus or the statement must also give details of the company’s capital, its business generally and future prospects, supported by certificates from the promoters, directors and reporting accountants.
(c) Listed Company:
A company wishing to have its shares quoted on the Stock Exchange must first be a public company and apply for a listing to the Stock Exchange. It must also comply with the requirements provided in the Companies Ordinance; the Securities Ordinance; the Securities (Disclosure of Interests) Ordinance; the Protection of Investors Ordinance; the Listing Rules; and the Hong Kong Code on Takeovers and Mergers.
There is no statutory minimum authorised capital requirement, however, for practical purposes, the minimum authorised capital should be at least HK$1,000. Capital duty is payable at the rate of HK$1 per thousand or part thereof and at the maximum of HK$30,000. A minimum of two ordinary shares must be issued.
A company may issue preference shares, which are redeemable out of profits or the proceeds of a new share issue, and/or debentures which may be fully transferable and quoted on the Stock Exchange, subject to the requirements set out in the various Ordinances and Rules as mentioned above.
Any changes in the authorised and/or issued share capital of a company must be lodged with the Registrar of Companies within the time limit prescribed by the Companies Ordinance.
At least two shareholders, who can be corporate entities, are necessary to satisfy statutory requirements. In addition, every company should have at least two directors who have attained the age of 18. There are no restrictions on foreigners forming companies in Hong Kong and no residency requirements for directors and shareholders. It is necessary to appoint a company secretary who must be ordinarily resident in Hong Kong, in the case of an individual, and have its registered office or a place of business in Hong Kong, if a body corporate. Corporate directors and/or corporate secretaries are not permitted except for a private company which is not a member of a group of companies of which a Hong Kong listed company is a member.
A Hong Kong incorporated company must also maintain a registered office in Hong Kong. Any changes in the directors, the secretary or the registered office must be filed with the Companies Registry within 14 days of such change.
Details of any mortgages or charges on the company’s property or other assets must be filed with the Registrar within five weeks of the creation of such mortgages or charges.
Accounts AGMs & Record Keeping
It is also a statutory requirement for a company incorporated in Hong Kong to prepare annual audited accounts, and the Companies Ordinance requires each company to appoint an independent auditor. Public companies must file their balance sheet and profit and loss account together with the directors’ report and auditors’ report. However, this filing requirement is not applicable to private companies.
In addition, a Hong Kong company must, in every calendar year and at an interval of not more than 15 months, hold its Annual General Meeting for the following purposes:
- To consider and receive the audited accounts and directors’ report.
- To declare dividends.
- To elect directors in place of those retiring, if any, and to fix their remuneration.
- To appoint auditors and to fix their remuneration.
The Companies Ordinance provides that a company must file annually with the Registrar of Companies an Annual Return made up to the anniversary of the date of incorporation with the following information:
- Details of the share capital.
- Particulars of directors and company secretary.
- Total amount of indebtedness in respect of all mortgages and charges required to be registered under the Companies Ordinance.
- Particulars of shareholders.
In addition, signed prints of resolutions passed by shareholders in general meetings, other than those covering the ordinary business of an Annual General Meeting, must be filed within 15 days at the Companies Registry.
Companies are also required to maintain the following statutory records:
- Accounting records of all sums of money received and expended, all sales and purchases of goods and all assets and liabilities of the company (for a period of at least seven years from the end of the financial year to which they relate).
- Records of proceedings of all directors’ and shareholders’ meetings for a period of five years.
- Register of directors, secretaries, members, debentures and charges or mortgages, detailing their particulars for a period of five years.
Branch or Representative Offices
The Companies Ordinance requires any overseas company which establishes a place of business in Hong Kong to register pursuant to Part XI of the Ordinance. For the purposes of Part XI, a place of business includes a share transfer or share registration office and any place used for the manufacture or warehousing of goods, but does not include a place not used by the company to transact any business which creates legal obligations.
The registration under Part XI requires certified copies of the company’s documents of incorporation, particulars of the directors, details of the company secretary and a power of attorney or other document appointing the person authorised to accept notices in Hong Kong. The company must also give details of the address of the principal place of business in Hong Kong, and the address of the registered office and of the principal place of business in the company’s country of incorporation. It may also be required to file a copy of its balance sheet once every year subject to the requirements of the country in which the company is incorporated.
If the office in Hong Kong has purely a liaison function and no business is conducted in Hong Kong which creates legal obligations, then the only action that must be taken is for the company to register a representative office under the Business Registration Ordinance.
TAXATION OF BUSINESS OPERATIONS
A. Taxation Of Profits
Every person who carries on a trade, business or profession in Hong Kong is subject to Profits Tax on profits arising in or derived from Hong Kong.
There is no distinction in the scope of the tax between residents and non-residents. Both individuals and corporations can be liable to Profits Tax. The difference between the Profits Tax on individuals and corporations is that corporations are taxed at a slightly higher rate.
B. Value Added Tax
There is no Value Added Tax in Hong Kong
C. Payroll Tax
There is no Payroll Tax in Hong Kong. However, the Hong Kong Government has implemented a Mandatory Provident Fund whereby each employer is required to contribute 5% of the employee’s relevant income to the scheme. Contributions made by the employers are deductible for Profits Tax purposes.
D. Controlled Foreign Companies Legislation
There is no controlled foreign companies legislation in Hong Kong.
Where a non-resident carries on business in close connection with a Hong Kong resident, and the business is arranged so as to produce no profits for the resident, or less than the ordinary profits that could be expected to be sourced in Hong Kong, the business is deemed to have been carried on in Hong Kong.
The non-resident person is then assessable and subject to tax on the business profits in the name of the resident.
E. Withholding Tax
No Withholding Tax is payable in Hong Kong.
However, certain types of receipts are deemed to be subject to Profits Tax whether or not an actual trade or business is being conducted in Hong Kong. The most important deeming provisions are as follows:
- Income from the exhibition or use in Hong Kong of cinematograph or television film or tape, or similar mechanism.
- Sums received by or accrued to a person for the use and right to use or for imparting or undertaking to impart knowledge connected with the use in Hong Kong of patents, designs, trademarks, copyrights and the like.
The assessable profit from the above sources is deemed to be 10% of the sum received. Tax is then charged at the prevailing Profits Tax rate on that 10%. Where royalty payment is derived from an associate, the general provision is that 100% of the amount of the payment will be treated as an assessable profit.
F. Tax Treaties
Hong Kong has no tax treaties with other countries.
Salaries Tax is charged on all income arising in or derived from Hong Kong from any office, employment or pension and payments for services rendered in Hong Kong.
The rate charged is the lower of:
- Net assessable income less charitable donations at the standard rate.
- Net assessable income less charitable donations and personal allowances, charged at progressive rates.
Salaries Tax is not collected at source, rather an individual is responsible for making remittance on an annual basis.
B. Social Security
Hong Kong operates a major, non-contributory social welfare programme aimed primarily at meeting the needs of vulnerable groups in the community in need of financial and material assistance. There are five key elements of the programme, the main two being the Comprehensive Social Security Assistance Scheme, and the Social Security Allowance Scheme. Eligibility requires residence in Hong Kong for a period of not less than one year and income below a specified level.
C. Capital Gains Tax
There is not Capital Gains Tax in Hong Kong. However, Profits Tax may be levied on speculative profits if they arise from a venture in the nature of trade.
D. Dividend Income
Dividend income is not taxable in Hong Kong.
E. Inheritance And Gift Tax
Estate Duty is payable on the principal value of all dutiable assets situated in Hong Kong passing on death. The residence and domicile status of the deceased are not relevant.
F. Wealth Tax
There is no Wealth Tax in Hong Kong.