According to the Doing Business 2019 Report published by the World Bank Group, Hong Kong ranks fourth among 190 economies in the world in terms of ease of doing business. Hong Kong's unique geographical location as well as the minimum level of restrictions and bureaucracy are undoubtedly important factors for entrepreneurs expanding their businesses internationally.
Thanks to the extremely favourable tax policies, well-established legal system, and proximity to the huge market in the Mainland, Hong Kong has always been a popular registration destination for offshore companies around the world. This article will inform you about all relevant aspects that you need to know for the registration of a company in Hong Kong. Furthermore it will show you important details on how to maintain its status and stay compliant with the law.
Classifications of HK companies
There are multiple types of enterprises in Hong Kong, which are classified based on the legal liability of its owners. Each type of enterprise has different responsibilities and obligations; therefore, it is always advisable to choose the most suitable Hong Kong company type once you have decided to incorporate your company.
Based on the legal liability, there are two main categories of companies. First of all, there are the limited liability companies. As is the case with limited liability companies in most countries, the owners of a limited liability company in Hong Kong are not personally responsible for the debts of the company. Secondly, there are the unlimited liability companies. In these companies the owners are liable in case the company goes bankrupt. It is rare that investors and people coming to Hong Kong for business opt for an unlimited company, due to the protection concern of personal assets from business risks and liability, however we still wanted to include this option in this article to provide you with a good overview.
The limited companies are further classified to company limited by shares and company limited by guarantee. Furthermore, the company limited by shares can either be private limited company or public limited company, which are companies listed on the stock exchange. Most of the SMEs will choose private limited company registration, while public limited companies are often registered by medium to large scale businesses that decide to offer company's shares to the public. As for company limited by guarantee, this form of company registration is commonly used for non-profit organisations.
Advantages of registering a Hong Kong company
The hassle-free setup
Compared to the abruptly changing rules and regulations, regional differences in rule enforcement, and the multi-bureau handled application process in Mainland China, setting up a Hong Kong company is an easy and straightforward process. Based on our past experience, opening a WFOE in mainland China often takes about 3-6 months, while the entire Hong Kong company incorporation process can be completed in about 2 weeks.
Below are the basic steps that need to be taken in order to set up a new company in Hong Kong:
- Preparation phase to determine the company name, legal structure, business scope
- Submission of registration documents submission and incorporation through the Hong Kong Companies Registry
The documents that need to be submitted are as follows:
- Identification copies of the shareholders' and directors'
- Signed incorporation documents by the shareholders and directors
- Proof of the Company address
- Opening a company bank account
The documentation and application process are straightforward. The company address acts as the address for receiving the company mails from the government and banks. If your company does not have any local business operations or employees in Hong Kong, then it is possible to get a registered office address through a secretarial firm for a small yearly fee. Moreover, there are very few restrictions regarding the business scope of companies in Hong Kong. Whereas in Mainland China there are the negative lists, which mandate the industries that foreigners may operate in. Furthermore, no capital verification is required for the registration of Hong Kong companies. Finally, throughout the entire registration process, the shareholder and director do not have to be present in Hong Kong. Something which saves a lot of travelling and money spent on plane tickets and hotel stays.
Favourable and simple tax system:
For enterprises in Hong Kong there are 3 main types of tax that apply. These are the profit tax, salaries tax, and property tax.
- The profit tax is equivalent to the enterprise income tax in mainland China. The tax rate is 8.25% up to the first HKD 2 million of profit, and 16.5% for anything higher. In addition, Hong Kong adopts a territorial source principle of taxation. This means profits sourced elsewhere outside Hong Kong are not subject to Hong Kong profit tax.
- Property owners are required to pay property tax on rental income of their properties in Hong Kong. The rates percentage charge is 15%.
- Salaries tax is an income tax levied on an individual's income, and the rates range from 2% to 17%. The taxpayers are individuals who derive income from their employment in Hong Kong.
In the meantime, Hong Kong companies have different tax reporting cycles compared Mainland to China. The first tax return will be issued by Inland Revenue Department only on the 18th month after the establishment of the company, and then once annually. Whereas in Mainland China taxes need to be filed on a quarterly or in some cases even monthly basis.
Hong Kong company maintenance and compliance
There are two annual maintenance practices of a Hong Kong company: Annual Inspection and Audits & Tax declaration:
The Hong Kong business registration certificate, which is issued after the incorporation of a company, is only valid for one year. Therefore it needs to be replaced on the yearly basis through an annual inspection. The annual inspection document is required by the Hong Kong Companies Registry, and must state the relevant status of the company in the previous year, including the information of the shareholders, proportion of shares, operating status, etc. Fines are imposed if annual inspection document is not submitted in time.
More importantly, if a Hong Kong company does not file their annual inspection documents for several consecutive years, the company will be cancelled automatically. In this case, it will have negative consequences for any future HK-related activities of the directors and shareholders.
Audits & tax declaration
The annual financial statements of a Hong Kong limited company must be audited by a Hong Kong certified public accountant, and submitted with a profits tax return to the Hong Kong Inland Revenue Department for assessment. As for the tax declaration, if a Hong Kong company does not have any property, bank accounts, business operations, or employees in Hong Kong, then zero taxes can be declared.
After your Hong Kong company incorporation, you can still change the key personnel and objectives of your company, including but not limited to shareholder & director change, business scope change, company name change, etc. All of these changes must be conducted through applying for them at the relevant Hong Kong bureaus, and the process is relatively quick and easy. For instance, it only takes 5 working days to accomplish shareholder & director change.
Simplify your WFOE set-up
A wholly foreign-owned enterprise (WFOE), is the most common entity utilised by foreigners to do business in Mainland China. If you intend to enter the Chinese market with a physical entity, using a Hong Kong company as the parent company can save much time and effort. To register a WFOE in China all of the documents from outside of Mainland China need to be legalised and translated. This process often includes 3 steps. First of all, the incorporation documents must be notarised by a notary in respective country of the parent company. After the notarisation, the documents also need to be certified by the Chinese Embassy in respective country of the parent company. Finally, after all of this has been done the documents need to be shipped to Mainland China, where a Chinese translation must be made by an official translator.
This process is costly, long and can sometimes take months. However, a registration of a Hong Kong parent company only takes around 2 weeks. At the same time, the documents of the Hong Kong company are often in both languages (English and Chinese), which means the translation is no longer requested.
Apart from quicker set-up time, there are no foreign exchange controls in Hong Kong, and the free movement of funds and profits is not restricted. Therefore, with a Hong Kong company as shareholder, the profit distribution and money repatriation to the parent company will be much easier.
Over the years 1421 Consulting Group has supported many clients with both the registration of a Hong Kong company, and the set-up of a WFOE in mainland China afterwards. Next to our registration and formation services in both Hong Kong and mainland China, 1421 provides our clients with hassle-free maintenance & compliance services under one roof, including Taxation, Accounting and auditing, and Company secretarial services, etc. As for cooperate related matters, often the rules & regulations itself are very clear, however, their actual enforcement and implementation can differ per case.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.