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Hong Kong: Country and Foreign Investment

Executive Summary

Hong Kong is not an offshore centre in the traditional sense of the word but rather a territory which offers a non-discriminatory low tax regime governed by the "territorial principle" under which only income arising in or derived from Hong Kong is taxable in the jurisdiction, making it the ideal location for a holding company. As such its attraction lies not in the tight secrecy and minimal corporate disclosure and administrative requirements which characterize a number of offshore common-law island jurisdictions but rather in low tax rates, generous tax deductible allowances, a policy of only taxing income sourced from within the jurisdiction and the complete absence of capital gains taxes, withholding taxes, interest taxes, sales tax & VAT.

The establishment of an office in Hong Kong does not of itself render a company liable to profits tax where that office is not generating profits from within the territory. Indeed Hong Kong has been a favourite choice for regional headquarters, for this reason.

The number of overseas and Mainland Chinese companies running business operations in Hong Kong has increased 2.6% over the past year, to a total of 6,561 companies, according to an annual survey released in October, 2010, by Invest Hong Kong and the Census and Statistics Department.

Invest Hong Kong is the department of the Hong Kong government established to take responsibility for foreign direct investment and support overseas, Mainland and Taiwanese businesses to set up or expand in Hong Kong. The “Annual Survey of Companies in Hong Kong Representing Parent Companies Located outside Hong Kong" aims to understand the profile of those businesses and their views on the business environment in Hong Kong.

Director-General of Investment Promotion, Simon Galpin, said: "The results are very encouraging and reflect the rebound of Hong Kong's economy in the wake of the global financial crisis. Hong Kong continues to be an attractive city for these companies to base their operations in this part of Asia."

Of the total number of companies surveyed, 1,285 are regional headquarters (RHQs), 2,353 are regional offices (ROs) and 2,923 are local offices (LOs). This represents a year-on-year growth of 2.6%, 1.1% and 3.8%, respectively. Galpin disclosed that the survey had shown “the highest increase in the number of LOs. We work with these companies to help them set up and expand their business and to, hopefully, fulfil their potential as the RHQs and ROs of tomorrow."

Of the companies surveyed, 20% indicated that they may expand their businesses in Hong Kong in the next three years, either by increasing staff, expanding the scope of business functions or increasing office size.

In terms of sectors, finance and banking demonstrated the most robust growth and, it was said, reinforced Hong Kong's status as a world-leading international financial centre. Finance and banking regional headquarters increased by 5% to 135, while local offices increased by 3% to 622.

With regards to country of origin, roughly half the parent companies came from four countries. The US tops the list with a total of 1,263 companies, followed by Japan with 1,085, Mainland China with 789 and the UK with 505.

Galpin added that "we are seeing greater numbers of overseas companies setting up in Hong Kong as a base from which to expand into the Mainland and beyond. The same is also true of Mainland companies that use Hong Kong as a springboard from which to go global. This phenomenon highlights the strategic importance of Hong Kong to access business opportunities in the Mainland as well as offer geographical proximity to north and south-east Asian markets."

When choosing to set up RHQs, ROs or LOs, the top five factors in Hong Kong rated as most important were its simple tax system and low tax rate, free flow of information, corruption-free government, absence of exchange controls, and political stability and security.

"We are delighted to see a more optimistic outlook from the companies surveyed this year,” Galpin concluded. “Compared to 12 months ago, 77% of them now consider Hong Kong's outlook as a business location has improved or not changed."

Evidently, the rapid opening up of mainland China, and Hong Kong's special relationship with the mainland, have inceased the attractions of Hong Kong as a regional base from which to operate.



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