In this China law special, Tao Zhang will give a guide to doing business in or through Hong Kong. He will describe Hong Kong’s business climate, as well as the incorporation, operation and maintenance of a Hong Kong company.

Hong Kong is widely recognized as one of the major financial and trading centres in the world. According to data compiled by Bloomberg News, Hong Kong is the best place in the world to do business. It moreover ranks No.2 in “Ease of Doing Business” out of 183 economies according to a report published by the World Bank and the International Finance Corporation. These positions  are the result of Hong Kong’s free-market policies and low corporate taxes as well as the fact that it is seen as the gateway to mainland China and in particular to the Pearl River Delta. Hong Kong further has a deep natural harbour and well developed legal system, capital market and banking system.

1. Introduction to Hong Kong
Hong Kong is located on China’s south coast and on the opposite side of the Pearl River Delta. The Pearl River Delta is an industrial powerhouse well-known for electronic products, garments and textiles, toys and a range of other products.

The port of Hong Kong Victoria Harbour is one of the busiest ports in the world. It allows goods to be shipped directly from and to mainland China and can handle more than 267 million tons of bulk cargo and 23 million twenty-foot equivalent units (“TEUs”) annually.

Hong Kong has a low and simple taxation system. The corporate income tax rate is 16.5% only due on profits arising in or derived from Hong Kong from trade, profession or business. Dividends distributed to and from Hong Kong are not subject to corporate income tax. No import or export duties are levied save for excises on certain products such as Tobacco, Liquors, Methyl Alcohol, Hydrocarbons Oil. Personal income tax is progressive up to a maximum of 17% after deduction of allowances.

Hong Kong has a common law legal system based on British law. The government of Hong Kong enjoys a high degree of autonomy. This will remain to until 2047 when Hong Kong comes under direct supervision of the Chinese government Thereafter the degree of autonomy Hong Kong remains to be seen.

The courts of Hong Kong are efficient, impartial and fair. In addition, arbitration can be conducted under the guidance of the Hong Kong International Arbitration Centre, which awards are recognized and can be enforced in China.

2. Settlement
Reasons of international enterprises setting up a Hong Kong subsidiary include:
A. Regional Headquarters
The close proximity of Hong Kong to China as well as the Philippines, Malaysia, Indonesia, Vietnam, Bangladesh and Thailand make it a good location for regional headquarters. The Pearl River Delta is close and easily accessible. The transportation system allows easy access and flights to all countries. The well developed banking system facilitates trade transactions with all surrounding countries.

Hong Kong provides well trained personnel and excellent living conditions for local as well as expat personnel. Immigration requirements are straightforward and a permanent residency card can be obtained by expats working 7 years in Hong Kong.

B. Trading hub
The port of Hong Kong is strategically located for exports out of and imports into China. The Pearl River Delta, a major manufacturing hub, is approximately one hour from Hong Kong. The absence of import and export duties allows unburdened trading from and to Hong Kong.

C. Sales and marketing centre
The absence of Value Added Tax has made Hong Kong into a major shopping destination of Chinese mainland citizens, in particular for luxury goods. This is further aided by stronger protection of intellectual property rights in Hong Kong. Many luxury brands establish flagship stores in Hong Kong.

D. Joint Venture / Holding company
Establishing a joint venture company in Hong Kong that owns a 100% owned Chinese Wholly Foreign Owned Enterprise (“WFOE”) allows for easier management and easier divestment and changes to the corporate structure than directly investing in China.

Provided the holding company acts as a regional headquarters or ultimate dividend beneficiary, it benefits from a reduced 5% withholding tax on dividends distributed out of mainland China. Dividends are exempted from corporate income tax in Hong Kong and can be reinvested or distributed out of Hong Kong without further withholding taxes being charged.

3. Company establishment
Various types of business organizations can be considered. There are three types of business organizations in Hong Kong, sole proprietorship, partnership and company.

In practice, the most common business organization used by foreign invertors is limited liability company (the “LLC”). A LLC can enjoy limited liability compare to sole proprietorship and partnership. According to the statistics of Hong Kong Companies Registry, the total number of live local companies registered under the Hong Kong Companies Ordinance was 912,242 at the end of June 2011.

A LLC can be incorporated within 7 working days of receipt of all the required documentation. Investors preferring a faster incorporation can also choose to buy a “shelf company”. Shelf companies are companies that are set up already but have never been used. All the formalities of buying these shelf companies can be completed within 1~2 working days. If the company name is not your prime concern or you want to use a company to enter into contractual agreements quickly, then shelf company may be a good choice.

Name and business scope
In Hong Kong company name can be in English or in Chinese or both, but a part English, part Chinese name is not allowed. A LLC must end its name with the word “Limited”.

The Hong Kong LLC is permitted to carry out all business transactions including lending, borrowing, providing security, trading and investing, unless restricted in the memorandum and articles of association, the Companies Ordinance or specific regulations. A LLC also requires a Business Registration Certificate (the “BRC”) to commence business. This requirement enables the public to be aware where such LLC is officially domiciled.

Share Capital
There is no statutory minimum or maximum share capital for a LLC, except for regulated industries such as insurance, security and banking etc. It is common to denominate share capital in Hong Kong Dollar (“HKD”), but foreign currencies are also accepted.

A LLC usually has HKD 10,000.00 as standard authorized share capital, divided into 10,000 shares with nominal value HKD 1.00 each. Shareholders can subscribe to any number of shares within the total number of shares. There is no requirement to subscribe and issue the entire authorized share capital.

Shareholder and Director
A LLC must have at least one shareholder and one director. The shareholders and directors of a LLC can be individuals of any nationality or corporations of any jurisdiction. There is no requirement that a shareholder or director should be resident in Hong Kong. If an individual is appointed as director, he/she should have attained the age of 18. The formation on shareholders and directors is publicly accessible. Investors wanting privacy can appoint a nominee shareholder or director.

Company Secretary
A LLC is further required to have a company secretary. A company secretary is the chief administrative officer of the company, who has the power to bind the company in matters dealing with administration. This includes arranging meetings, preparing minutes of a board meeting, maintaining statutory books, filing statutory returns, registering share transfers and other administrative matters. The company secretary must be a Hong Kong resident or a corporate body having its registered office or place of business in Hong Kong.

Registered Office
The registered office of a LLC is required to be in Hong Kong. A P.O. Box address is not accepted. The registered office is used to receive letters from the Inland Revenue Department (the “IRD”), the Company Registry office (the “CR”) and also banks. Usually the company secretary resides at the registered office.

Bank Account
Every LLC can open a bank account in Hong Kong. Bank account can be easily operated through internet banking in various currencies including HKD, EUR, USD and RMB. There is no exchange control or currency regulation in Hong Kong, therefore the funds in your account can be freely repatriated and remitted overseas.

3. Corporate maintenance
An annual return should be filed once every calendar year within 42 days of the anniversary of the LLC’s incorporation. A LLC which fails to file an Annual Return within the prescribed time period is in breach of the Companies Ordinance and is liable to pay penalties. The CR can strike a LLC off in severe circumstances. It is the responsibility of the director or company secretary of a LLC to observe the requirement of the Companies Ordinance to file Annual Returns and other statutory documents on time.

A LLC usually receives its first annual Profit Tax Return from the IRD around the 18 months from the date of incorporation. The Profit Tax Returns need to be accompanied by an audit report. Corporate income tax is due on all profits arising in or derived from Hong Kong from trade, profession or business. No tax is levied on profit arising abroad, even if they are remitted to Hong Kong.

4. Conclusion
Hong Kong offers logistical, legal and fiscal benefits to business establishment and investment. The specifics of a Hong Kong enterprise establishment depend on the role it is to fulfil. Most commonly used is a LLC. The incorporation, operation and maintenance of a LLC are flexible and straightforward but should be adapted to the specific requirement.

HIL has extensive experience in setting up LLCs in a wide range of businesses such as trading, investment or licensing and specifically as part of a China trading/investment structure. In addition, HIL offers the full range of corporate management services in Hong Kong through our affiliate.

The Hong Kong based enterprise needs to be carefully adapted to the demands of the business strategy, tax and practical considerations. We would be delighted to assess your situation and provide you with further advice on the basis thereof.

Zhang Tao


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