Hong Kong: Offshore Business Sectors
Multinational companies are attracted to Hong Kong by a combination of the territory's English common law legal system, its low tax regime and its historical trading links and unique access to the People Republic of China, the world's fastest growing economy and biggest potential market.
According to the results of an annual survey released in October 2011 by Invest Hong Kong (InvestHK) and the Census and Statistics Department, the total number of overseas and Mainland Chinese parent companies running business operations in Hong Kong has recorded its highest level to date, as, in particular, did the number of those operating regional headquarters.
By June 2011, the total number of foreign parent companies with operations in Hong Kong had reached 6,948 companies, a 5.9% increase from 2010. Within that total, the number of regional headquarters was 1,340, an increase of 4.3%.
Director-General of Investment Promotion, Simon Galpin, said: "Hong Kong is the perfect base from which to access Mainland China. At the same time, Mainland companies are also using Hong Kong as a springboard from which to go global."
"In the first half of 2011,” he added, “InvestHK assisted close to 200 overseas and Mainland companies to set up business in Hong Kong. This level of activity supports our experience on the ground where we are seeing an increasing number of smaller, high-growth companies from all over the world choosing Hong Kong as the base for their regional operations."
Furthermore, of the 6,948 companies in the survey, 24% indicated that they plan to expand their business in Hong Kong in the next three years. This was a 4% increase compared with 2010.
With regard to the country of origin, roughly half of the parent companies come from four countries. The United States (US) tops the list with a total of 1,328 businesses operating in Hong Kong, followed by Japan with 1,150, Mainland China with 805 and the United Kingdom with 562.
The major lines of business were mainly import/export trade, wholesale and retail; financing and banking; professional, business and education services; and transportation, storage and courier services.
Key favourable factors affecting the choice of Hong Kong as a location for regional headquarters, regional and local offices for foreign or Mainland companies include a simple tax system and low tax rate; free flow of information; absence of exchange controls; corruption–free government; communication, transport and other infrastructure; free port status; political stability and security; geographical location; rule of law and independent judiciary; and, availability of business and professional support services.
Articles 106-8 of the Basic Law guarantees that Hong Kong can maintain an independent taxation system free of Chinese interference until the year 2047 while article 116 guarantees that the territory will remain a free port and a separate customs area from the mainland. The continuation of the SAR's common law legal system free of Chinese interference is also guaranteed and there is a memorandum of understanding with China under which:
- Chinese source income earned by Hong Kong based shipping, aviation and land transport operations is exempt from tax on the mainland;
- Hong Kong enterprises are only taxable in China if they have a permanent establishment there. (A permanent establishment is defined as an activity which continually lasts for more than 6 out of 12 months);
- Hong Kong resident individuals are not subject to tax for services rendered in mainland China so long as they do not reside more than 183 days in the country in any tax year;
- Hong Kong will give a tax credit for any tax paid in mainland China.
However, China has overhauled its tax laws, in part to reduce the incentive for domestic companies to 'round trip' offshore in order to qualify for generous tax incentives afforded to foreign-backed enterprises based in China. Prior to corporate tax reforms which were introduced in January 2008, domestic firms paid corporate tax at a rate of 33%, but foreign-owned firms could reduce their rate through various tax breaks down to as low as 13% in some cases.
By round tripping, where Chinese groups set up shelf companies in Hong Kong and elsewhere, domestic firms can use them as mainland investment vehicles in order to qualify for "foreign" rates of tax. This practice has inflated China's foreign direct investment figures for years.
Under a 2008 reform, China has unified the income tax treatment of domestic and foreign enterprises with the new Enterprise Income Tax Law (the “New Law”). The New Law, which became effective January 1st 2008, provides for a 25% statutory rate that applies to both domestic and foreign-funded enterprises and, subject to transition relief, enterprises that have enjoyed preferential treatment. Many foreign-funded enterprises will face higher rates due to the new unified rate and the loss of tax holidays and certain other incentives, but new and high-technology enterprises may still benefit from a 15% rate.