Doing business in Hong Kong

Introduction

On 1 July 1997, sovereignty over Hong Kong transferred to the People’s Republic of China with Hong Kong designated the Hong Kong Special Administrative Region of the PRC. Upon resumption of sovereignty to China, Hong Kong became subject to the Basic Law, which is a mini-constitution applicable to Hong Kong for a period of 50 years following the handover date (i.e. until 30 June 2047). The Basic Law provides that during such time, Hong Kong’s capitalist system and way of life will remain unchanged and Hong Kong will have a high degree of autonomy in its internal affairs. Since the handover, it is evident that the change of sovereignty has had little practical effect upon its business community, there being no significant changes in law or otherwise to adversely affect private contractual arrangements.

The Hong Kong Government encourages free enterprise. The formalities and requirements for establishing a business are simple and straightforward.

Generally there are no regulations concerning a company’s minimum capital, the degree of local/overseas participation in the ownership or capital structure, or the relative proportion of local to overseas staff.

There are no exchange control or money market restrictions inhibiting the free flow of capital into or out of Hong Kong, dealings in foreign exchange may be freely carried out and capital can be held in any currency. Efficient local banks and branches of most multi-national banks provide highly competitive banking services.

Every investor has a wide range of business vehicles to choose from when wishing to set up business in Hong Kong. All enterprises are subject to the same rules.

The most common forms of business vehicles foreign investors choose are:

• Private limited companies
• Branch offices of overseas companies
• Representative offices

Private Limited Company

Where the parent company does not necessarily wish to assume responsibility for the liabilities of the business in Hong Kong or where the Hong Kong organization should be monitored separately from the overseas operation, it is preferable to incorporate a new company in Hong Kong.

To establish a Hong Kong company, a minimum of one shareholder, one director and a secretary is all that is required. Neither the shareholder(s) nor the director(s) need to be resident in Hong Kong. Shareholders and directors can be either individuals or companies. The liability of each shareholder is limited to the share capital they have invested. The company secretary, who is responsible for ensuring compliance with ongoing legal returns, accounts, audit and other requirements, must be a resident in Hong Kong if an individual or must have its registered office in Hong Kong if a body corporate. There is no prescribed minimum amount for authorized share capital.

A private limited company established in Hong Kong is an independent legal entity liable for its own debts and obligations.

A limited liability company in Hong Kong is not required to file its accounts with the Registrar of Companies in Hong Kong (although it must do with the Inland Revenue Department for tax assessment purposes) and therefore such information remains confidential.

Branch Office

Where a company incorporated outside Hong Kong establishes a place of business or branch office in Hong Kong as an extension of the investing company, it is referred to as a “non-Hong Kong company”.

Such branch offices are generally subject to the same legal and tax consequences as limited liability companies incorporated in Hong Kong. Non-Hong Kong companies must register their branch with the Registrar of Companies within one month from commencement of business in Hong Kong. Branches are legally required to file returns and audited accounts, on an ongoing basis.

Furthermore, the company must appoint a representative, ordinarily resident in Hong Kong, to accept service of official and/or court documents in Hong Kong, on behalf of the non-Hong Kong company.

The non-Hong Kong company remains fully liable for all the obligations of the Hong Kong branch office.

Representative Office

Like a branch, this is a means by which a company incorporated outside Hong Kong establishes a place of business in Hong Kong. A representative office however can only fulfil a limited range of functions. “Representative offices” are particularly useful for foreign companies that wish to analyse the Hong Kong market prior to committing itself to making a bigger investment in the city.

Whereas a branch and subsidiary company can conduct full operations, a representative office may only collect information or maintain contacts with customers, so-called promotional and liaison work. A representative office cannot enter into contracts, except for employing staff and contracts necessary for running the office (for instance renting office space and for utilities).

A representative office is prohibited from carrying on business in Hong Kong. If it does, it is required to register as a branch. Since a representative office cannot undertake business in Hong Kong, it should not generate any profits.

Business Registration

All businesses, whether limited companies, sole proprietorships, representative offices or partnerships must apply to the Business Registration Office of the Inland Revenue Department for a Business Registration Certificate. The annual business registration fee payable is currently HK$450. The Business Registration Certificate must be displayed at the place of business. You must register within one month of commencing business.

Opening a Business Bank Account

Opening a business bank account is straightforward and transparent. Before applying to open a business bank account, you must complete the business registration and company incorporation. The process and documents required to open a business bank account vary, depending on the type of company and the bank that you choose. Banks normally require a minimum deposit of around HK$2,000 (US$260).

“KYC” guidelines will normally require identity and residence information of all beneficial owners of the company.

Taxation

The Inland Revenue Department is responsible for tax matters in Hong Kong. Hong Kong has a different tax regime and is treated as completely separate to the PRC.

Hong Kong operates a territorial basis of taxation under which taxes are only imposed on profits or income with a Hong Kong source. Foreign-sourced income is not taxable even if remitted to Hong Kong.

Hong Kong has a simple, predicable and low tax system. The principal direct taxes are profits tax on business profits, salaries tax on salaries and property tax on income from property (apart from miscellaneous duties such as stamp duty).

Profits tax – persons and companies carrying on business in Hong Kong are liable to Profits Tax on profits arising in or derived from Hong Kong. Losses from a previous year for the same business can be carried forward.

Salaries Tax – is charged on all income arising in or derived from an office of employment in Hong Kong.

Property Tax – is charged on non-corporate owners at a standard rate on rent receivable from real property situated in Hong Kong.

Hong Kong does not have any capital gains tax, withholding tax on dividends and interest, inheritance tax or GST. Few items attract stamp duty.

Leasing Premises

Before commencing business in Hong Kong it will, in most cases, be necessary to rent premises from which the business will be operated.

Office rental is normally arranged through an agent and procedures are straightforward with the same regulations applying to local and foreign companies.

Leased Offices

Leases are typically two or three years in duration with an option to renew. After agreeing with the landlord on the principal terms of the lease, the landlord will issue a Letter of Offer. This has to be counter-signed and returned by the tenant within a specified period with a security deposit (usually two to three months’ rental plus management service charge and government rates).

Apart from rent (plus the initial security deposit), other office rental costs may also include:

• One-off payment to property agent (normally one month’s rent) after receiving their services in finding the property
• Management service charges – this typically covers air-conditioning, security, common areas cleaning and other building services.
• Government rates at 5% of annual rental value, payable quarterly in advance

Serviced or Virtual Offices

Many companies prefer the option of a serviced or virtual office when they first arrive in Hong Kong. Serviced offices are available across the city and allow for short-term leases, providing tenants with a range of secretarial services. Virtual offices provide a mailing address and receptionist, who will answer the phone in the name of your company.

Employees

Once a place of business has been established in Hong Kong it will often be necessary to engage employees for the business.

The Employment Ordinance (Chapter 57 of the Laws of Hong Kong) sets the minimum entitlements for employees, such as statutory holidays, sick and maternity leave, severance and long-service payments.

Benefits employers are required by law to provide:

• Statutory holidays -statutory holidays are prescribed in law.
• Pension contributions to Hong Kong’s Mandatory Provident Fund (MPF) – Hong Kong’s MPF is a privately managed fund designed to provide retirements benefits. In general, MPF applies to all members of the workforce between the ages of 18 and 65. Both employers and employees are required to contribute 5% of the employees monthly income into a registered MPF scheme, up to a maximum of HK$1,000 each per month. Employees may however choose to contribute more.
• Sick leave – Employees are entitled to paid sick leave, for a period determined by the length of their employment.
• Maternity leave – Subject to eligibility criteria being met, maternity leave is granted for a minimum of 10 weeks.
• Severance payments – Employees who have been employed for at least two years are entitled to severance pay if they are dismissed by reason of redundancy or being laid off.
• Long-service payments – Certain employees who have been employed under a continuous contract for no less than five years are entitled to a long service payment on dismissal.

Immigration and Visas

Hong Kong is a separate travel area from Mainland China. Hong Kong has visa-free entry for residents from over 170 countries and territories for trips ranging from seven to 180 days. In broad terms, short-term visitors may conduct business negotiations and sign contracts while entering Hong Kong on a visitor or entry permit.

Visas requirements

Generally, foreign nationals must obtain a visa before coming to Hong Kong to live, work or invest. Below are the main business/investment visas:

Employment visa
To employ people from overseas it must be demonstrated that the proposed employee has special skills, knowledge or experience not readily available in Hong Kong. The proposed employee will need a sponsor (employer in Hong Kong) and must complete a visa application form.

Investment Visa
This requires you to be a shareholder of a Hong Kong registered company, either by registering and setting up a company in which you are the major investor or investing in a Hong Kong-based company. You will be required to produce details on the viability of your proposed business, or your financial position if you wish to make an investment in an existing company.

Capital Investment Entrant Scheme (CIES)

This requires a capital investment of HK$10 million into a legitimate asset class in Hong Kong. Applicants must also demonstrate that they can support themselves and their dependents without public assistance. Approved CIES applicants are allowed to take up employment or establish a business.

Dependent visa

Persons who are successful in receiving one of the above visas may also bring their spouse and dependent children under the age of 18 to Hong Kong provided there are sufficient funds and suitable accommodation for them. The limit on their stay is same as that of the applicant sponsor.

Normally, dependent visas are issued as a matter of course as long as the requisite relationship exists.

A spouse holding a dependent visa is allowed to undertake any type of lawful employment in Hong Kong.

It normally takes four to six weeks to process a work/employment visa application.

Once individuals have resided in Hong Kong for a continuous period of not less than seven years and made Hong Kong their permanent residence, individuals may apply for their permanent residence, which once granted gives them the right of abode and right to work in Hong Kong without the need to have a work/employment visa.

Hong Kong Identity cards

Every adult (and child aged 11 years or above) who enters and is permitted to stay in Hong Kong for more than 180 days must apply for a Hong Kong Identity Card within 30 days of arrival. Applying for the card from the Immigration Department is simple and is free. By law, you should carry your Identity Card with you at all times.

If you are contemplating doing business in Hong Kong, or any legal transaction, you should consult our solicitors, who can provide you with the advice that you need, for your specific circumstances:

Eddie Look Partner | E-mail

Tim Drew Partner | E-mail

Edmond Leung Partner | E-mail

River Stone Partner | E-mail

Pádraig Walsh Partner | E-mail

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.