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International Company Formation - Hong Kong

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July 31, 2013


A record 213 foreign companies from 33 countries were set up or expanded in Hong Kong in the first half of 2013, and well over one million companies are now registered in the jurisdiction, highlighting its importance as a regional business and finance hub. This feature serves as a guide to incorporating a company in the Hong Kong Special Administrative Region.


An Introduction To Hong Kong

Hong Kong is a former British colony in South-East China, near Canton and Macau. With a surface area of 404 sq miles, Hong Kong is densely populated with 7m people. Chinese and English are the official languages of Hong Kong, but the overwhelming majority of the population – about 99% – is ethnic Chinese.

Since July 1, 1997 Hong Kong has been a special administrative region (SAR) of the People's Republic of China. The constitution is known as the "Basic Law" and is modelled on the constitution of the People's Republic. Under the guiding principle of "one country, two systems" which was established before the handover, the Chinese Government agreed that Hong Kong's capitalist system would remain unchanged until the year 2047. The SAR therefore maintains a common law system, and the regulation and taxation of business and financial services follow Western patterns.

Hong Kong has thrived historically as a trading entrepot serving many Asia Pacific countries, and also as a low-cost manufacturing centre. Latterly the rise of cheaper Asian competitors has driven the SAR more into the provision of services, particularly financial services, and Hong Kong is widely recognised as the world’s third largest financial centre after New York and London.

Other significant industries are re-exporting, shipping and other services.

The government has consistently followed business friendly policies and Hong Kong maintains an attractive fiscal environment. Low taxation, combined with its position as the gateway to China combines to provide attractive opportunities for investors in the mainland.


Company Forms

In Hong Kong businesses normally trade as either limited companies, limited partnerships or sole proprietorships. Being a common law jurisdiction the concept of a trust is readily understood and widely used.

In general the minimum capital requirements for a business corporation are very low or non-existent and all legal business forms are open for foreign participation.


Private Limited Companies

Corporate entities are governed by the provisions of the Hong Kong Companies Ordinance 1984 which brought the territory's company law into line with United Kingdom company law. Their key features are as follows:

  • The minimum number of subscribers and shareholders is two; if the number of shareholders falls to one, the remaining shareholder is personally responsible for the company debts; 
  • There is no minimum authorized or issued share capital requirement; 
  • Shares of no par value and bearer shares are not permitted; 
  • Shares can be issued at a premium or discount (if sanctioned by the court); 
  • A company may purchase its own shares out of distributable profits; 
  • Nominee shareholders, directors and secretary are permitted; 
  • The minimum number of directors is two; corporate directors are permitted (unless the company is a public company); 
  • The articles can provide that the directors' liability for the company be unlimited; 
  • Every company must have a secretary which can be an individual or a corporate body, but must be resident in Hong Kong; 
  • Meetings can be held anywhere in the world; 
  • Accounts must be prepared, filed and audited; 
  • The migration and re-domiciliation of corporate entities to or from a foreign jurisdiction is not permitted; 
  • Annual returns must be filed.

The Articles of Association of a private company must restrict the right to transfer shares, must limit the number of members to fifty (excluding employees), and prohibit any invitation to the public to subscribe for any shares or debentures of the company.

Every Hong Kong company must register annually under the Business Registration Ordinance. If the application for re-registration is delivered within 42 days after the anniversary of incorporation the fee is HKD105. However, the annual fee rises considerably if the registration documents are delivered after 42 days, up to a maximum of HKD3,480 if the registration documents are delivered more than nine months after the anniversary of incorporation.


Public Companies

A public company (plc) is any limited company which is not a private company.


Branches

Overseas companies starting businesses in Hong Kong can form a private company limited by shares, as above, or can simply establish a branch.

A branch office is relatively easy to set up but is open to greater potential liability than a limited company since it is not treated in Hong Kong law as a separate legal entity.

The territorial basis of taxation means that the branch will be taxed exactly as a limited company, on Hong Kong-source income.


Limited Partnerships

The law is contained in the Limited Partnership Ordinance. Limited partnerships have the following characteristics:

  • The maximum number of partners permitted by law is 20;
  • Limited partnerships consist of general and limited partners; there must be at least one general partner whose liability for the firms debts is unlimited; the remaining partners are limited partners whose liability is limited to the amount of their unpaid share capital;
  • A limited partner cannot reduce or take out his share capital whilst the partnership continues in existence and is not allowed to take an active part in the management of the partnership nor bind the same vis a vis third parties in default of which provision he assumes the liability of a general partner;
  • Limited partnerships must be registered at the Companies Registry under the Limited Partnership Ordinance in default of which they are deemed to be general partnerships with unlimited liability for each and every partner;
  • All partnerships are required to obtain a business license under the provisions of the Business Registration Ordinance


Trusts

Trust law in Hong Kong is virtually identical to English trust law and is contained in the provisions of the Trustee Ordinance (an Ordinance which is modeled on the English Trustee Act 1925).

Both fixed and discretionary trusts may be settled in Hong Kong. Documents do not have to be registered and there are no statutory requirements in Hong Kong for a trust to make annual returns, submit audited financial statements, etc., unless it is carrying on business in Hong Kong.

More information on Hong Kong companies law can be viewed on the Hong Kong: Forms of Company page of our partner website, www.lowtax.net.


Companies Ordinance Rewrite

A comprehensive exercise to rewrite the Companies Ordinance (Cap. 32) was launched in mid-2006 with the aim of modernising Hong Kong's company law and further enhancing Hong Kong's status as a major international business and financial centre. Following five rounds of public consultations and numerous discussions during a series of public forums and seminars over the years, the Companies Bill was finalised and introduced into the Legislative Council on January 26, 2011. A Bills Committee to scrutinise the Bill was set up in February 2011, and after 44 meetings lasting a total of over 120 hours and consideration of over 200 papers or submissions, the Committee completed its scrutiny of the Bill in June 2012. On July 12, 2012, the Companies Bill was passed by the Legislative Council.

The New Companies Ordinance (CO), which consists of more than 900 sections and 11 schedules, provides a modernised legal framework for the incorporation and operation of companies in Hong Kong. It aims to achieve four main objectives, namely, to enhance corporate governance, ensure better regulations, facilitate business and modernise the law.

To facilitate implementation of the new CO, over ten regulations will have to be made in 2013-14. In parallel, the Companies Registry will enhance its information system and carry out an overall review of its procedures and forms for the implementation of the new legislation.

The new CO is expected to commence operation in 2014.


New Disclosure Regime

Following the enactment of the Securities and Futures (Amendment) Ordinance 2012 in May 2012, Hong Kong’s statutory regime for the disclosure of inside information by listed companies came into operation on January 1, 2013.

The new regime brings Hong Kong’s regulatory regime for listed corporations more in line with other international financial centers and enhances Hong Kong's strength as a capital formation platform.

Under the new law, listed corporations must disclose price sensitive information (PSI) to the public in a timely manner. Compared with pre-existing listing rules, the statutory regime provides clearer PSI disclosure requirements, with obligations and safe harbours explicitly set out in the law, and backed by civil sanctions for non-disclosure.

A listed corporation must disclose PSI to the public as soon as reasonably practicable after the PSI has come to its knowledge. The Securities and Futures Commission (SFC) is the enforcement authority and the Market Misconduct Tribunal (MMT) determines whether a breach of the PSI disclosure requirement has occurred.

The SFC can directly institute proceedings before the MMT, without having to first refer the case to the Financial Secretary for his decision, to enforce PSI disclosure requirement, and to deal with the existing six types of market misconduct under the Securities and Futures Ordinance – insider dealing, false trading, price rigging, disclosure of information about prohibited transactions, disclosure of false or misleading information inducing transaction and stock market manipulation.

The SFC has also launched a consultation service with a view to assisting listed corporations in understanding and complying with the statutory disclosure provisions.


Trust Law Reform

Following a review of the Trustee Ordinance and the Perpetuities and Accumulations Ordinance, and in response to the various modernization proposals put forward by the trust industry and recent trust law reform in the United Kingdom and Singapore, the Government conducted public consultations in 2009 and 2012, respectively, on reform proposals.

The Trust Law (Amendment) Bill 2013, gazetted on February 8, is aimed at modernizing trust law in Hong Kong by enhancing trustees' default powers while providing for appropriate checks and balances, thereby making trust administration more effective.

The reform package seeks to clarify trustees' duties and powers and better protect beneficiaries' interests. The major proposals would therefore introduce a statutory duty of care on trustees; provide trustees with general powers to appoint agents, nominees and custodians, as well as to insure trust property against risks of loss; allow professional trustees to receive remuneration; provide for a court-free process for the retirement of trustees on beneficiaries' directions; and impose statutory control on exemption clauses that seek to relieve professional trustees from liabilities.

In addition, the bill would also allow settlors to reserve to themselves some limited power; abolish outdated rules against perpetuities and excessive accumulations of income; and relax the market capitalization and dividend requirements for investment in the equity market.

The bill was presented to the Legislative Council for first reading on February 20, 2013 and was passed on July 17, 2013. It will come into force on December 1, 2013.


Incorporation Procedures and Fees

The Companies Registry is responsible for providing services to incorporate local companies with or without limited liability and for registering non-Hong Kong companies.

One-stop company incorporation and business registration service is jointly implemented by the Companies Registry and the Inland Revenue Department. Under the one-stop registration regime, any person who applies for incorporation of a local company under the Companies Ordinance will be deemed to have made a simultaneous application for business registration. The one-stop registration service is applicable to all applications for company incorporation submitted in electronic form and paper form. Registrations in electronic form are processed in 24 hours via the e-registry system at www.eregistry.gov.hk.

Applicants must submit the following documents with the appropriate fees (see below for fee rates): Incorporation Form – Form NC1 (for company limited by shares) or Form NC1G (for companies not limited by shares); a copy each of the company’s memorandum of association and articles of association; and A Notice to Business Registration Office (IRBR1).

Companies, other than those which have been granted licences under section 21 of the Companies Ordinance (which are essentially non-profit companies) or those whose Memoranda are subject to requirements specified in or under other Acts, are not required to state their objects in their Memoranda of Association.

The original memorandum of association and articles of association must be signed by each founder member of the company. The copy delivered to the Companies Registry for registration, however, need not contain the signature(s) of the founder member(s).

A company name may be in English or Chinese. A company may adopt an English name and a Chinese name. However, a company name with a combination of English letters and Chinese characters is not permitted.


Non-Hong Kong Companies

Non-Hong Kong companies are required to register under Part XI of the Companies Ordinance if they are a body corporate and have established a place of business in Hong Kong. Pursuant to section 341 of the Companies Ordinance, a “place of business” includes a share transfer or share registration office.

Non-Hong Kong companies should apply for registration within one month of the establishment of the place of business in Hong Kong and should submit form N1 “Particulars of a Non-Hong Kong Company Registered in Hong Kong” reporting:

  • the date of establishment of the place of business in Hong Kong;
  • the address of the principal place of business in Hong Kong and the place of incorporation;
  • the address of the registered office in the place of incorporation; and
  • the particulars of the directors and secretary of the company and the authorized representative in Hong Kong.

“Authorized representative” refers to a person who is authorized to accept on behalf of the company service of process and any notices required to be served on the company. An authorized representative who is an individual should be resident in Hong Kong or if a body corporate or a firm should be either a solicitor corporation, a corporate practice within the meaning of section 2 of the Professional Accountants Ordinance (Chapter 50) or a firm of solicitors or certified public accountants (practising).

Non-Hong Kong companies must also submit the following documents:

  • a certified copy of the instrument defining the company’s constitution e.g. Memorandum and Articles of Association, Charter and Statute;
  • a certified copy of the company’s Certificate of Incorporation (or its equivalent) issued by the relevant government authority in the place of incorporation;
  • a certified copy of the company’s latest published accounts as required by the law of the place of incorporation, the laws of any other jurisdictions where the company is registered as a company, or the rules of any stock exchange or similar regulatory bodies in any of those jurisdictions; and
  • a Notice to Business Registration Office (IRBR2).

The Certificate of Registration of a Non-Hong Kong Company and the Business Registration Certificate are usually issued in 14 working days.


Fees

The fee for a one-year business registration certificate is normally HKD2,000. An additional non-refundable HKD450 levy for the Protection of Wages on Insolvency Fund is also payable on registration. However, the Government announced in the Budget, tabled in February 2013, that the registration fee will be waived for 2013/14.

Under the Revenue (Reduction of Business Registration Fees) Order 2013, which came into effect on April 1, 2013, the fees payable under section 5A(1)(a) of the Business Registration Ordinance in respect of local companies registered under the One-Stop company incorporation and registration regime will be reduced by a sum of HKD2,000 if the related incorporations are made within the period April 1, 2013 to March 31, 2014. For other cases the fees payable in respect of business registration certificates and branch registration certificates with a commencement date falling within the waiver period will be reduced by a sum of HKD2,000 and HKD73 respectively. However, businesses are still required to pay the levy for the Protection of Wages on Insolvency Fund.

Details of the total amount payable in respect of a registration certificate can be viewed on the Inland Revenue Department website.


Business Taxation                           

Profits tax is levied under the Inland Revenue Ordinance on the "assessable profits" of corporate entities, partnerships, trusts and sole proprietorships. It is levied according to the "territorial principle" meaning that it is the source of the income rather than the residential or non-residential status of the entity that determines whether or not trading income is or is not subject to Hong Kong profits tax.

Companies pay a standard rate of 16.5% on assessable profits. Businesses other than corporate entities pay a rate of 15% on assessable profits. These rates have applied from the year of assessment 2008/9. Prior to that, the standard and unincorporated rates of profits tax were 17.5% and 16% respectively. All taxpayers, whether incorporated or unincorporated, are subject to the same business tax rate irrespective of their residential status.

A number of factors including the territorial principle have created an extremely attractive fiscal regime: dividend income received by a Hong Kong parent company from either a resident or foreign subsidiary is not deemed income in the holding company's hands and is thus not subject to an assessment to profits tax; there is no separate schedule of capital gains tax in Hong Kong; and the territory does not follow the practice of other jurisdictions and tax capital gains as trading income which is subject to profits tax.

The profits and losses of the foreign branch or subsidiary of a Hong Kong company are neither taxable profits nor deductible losses in Hong Kong owing to the territoriality principle.

Interest income received by a resident or non-resident business entity on deposits lodged with a financial institution is exempt from profits tax.

Because of Hong Kong’s territorial tax system, there is no controlled foreign company legislation under which the profits and capital gains of non-resident subsidiaries can be taxed as if they were the profits of a resident parent company.

Consolidated group accounting under which the profits of one company in the group can be set off against the losses of another company in the group so as to reduce the overall profit subject to profits tax does not exist in Hong Kong.

Losses can be carried forward indefinitely. This compares favourably with other jurisdictions which only allow losses to be carried forward for a fixed period of time.

Since there are no debt/equity thin capitalization rules in Hong Kong a foreign parent can set up a resident subsidiary with a minimum of share capital and a maximum of loan capital and thereby reduce taxable profits arising in Hong Kong through excessive interest payments.

The tax year starts on April 1. The assessment to profits tax is provisional and is based on the previous year's assessable profits with 75% of the assessment being due by the 3rd quarter and the final 25% being due at the year-end. Tax payments delayed less than 6 months are subject to a 5% non-deductible surcharge whereas payments overdue by more than 6 months are subject to a 10% non-deductible surcharge. A tax credit is granted where the previous year's assessment exceeds the currents year's assessable profits.

In a bid to make paying tax easier, the Hong Kong government launched a scheme on August 1, 2012, whereby cash payment of salaries tax, profits tax, property tax, tax under personal assessment, business registration fees and e-stamping payments will be accepted at more than 1,000 convenience stores across the city. The maximum limit for each transaction is HKD5,000, and part payment is not accepted for business registration fees.

Hong Kong does not currently have a sales tax, value –added tax (VAT) or goods and services tax, and although proposals to introduce a sales tax have been discussed in the past, currently there are no plans to introduce any of these taxes.

By using the Global Incorporation Guide online search tool, you can search and compare global jurisdictions for the most effective corporate vehicles and structures based on intended use and ownership preferences.

In addition, for more information on business and personal taxation in Hong Kong, please visit the Hong Kong: Taxation page of our partner website, www.lowtax.net, where links can be found to various aspects of taxation in Hong Kong.

 

Tags: Macau | employees | accounting | corporate governance | sales tax | trusts | interest | court | United Kingdom | financial services | proprietors | audit | China | regulation | legislation | fees | services | law | business | tax | Hong Kong

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A regulated corporate service provider with our offices in the UK, Hong Kong and one of leading corporate service providers in Belize. We specialize in the wholesale of international business companies; Hong Kong, LLP and LP companies. We have over 25 years experience and have steadily built a reputation of being a business oriented organization while providing reliable, stable and efficient services to professional intermediaries, as well as prompt services.


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Tel: +501 223 2839
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