Multinational companies considering the establishment of a presence in Hong Kong have a number of different options, including the establishment of a subsidiary of an existing group company, the establishment of a branch office of an existing group company or the establishment of a representative office of an existing group company. In this article, we explore these different options.
A subsidiary will usually take the form of a private company limited by shares incorporated under the Companies Ordinance.
Limitation of Liability
A company limited by shares is a legal person separate from its group shareholders and the shareholders are liable only to the extent they have agreed to subscribe for the shares. In other words, the shareholders of a Hong Kong subsidiary are not liable under Hong Kong company law for the liabilities of the subsidiary.
No Foreign Ownership Restrictions
Typically, the shares of the Hong Kong subsidiary will be owned by the group. Hong Kong does not restrict foreign ownership and accordingly, the group may own 100% of the issued shares of the subsidiary. There are no requirements for directors of the subsidiary to be resident in Hong Kong. However, the subsidiary must maintain a registered office in Hong Kong and must appoint a company secretary in Hong Kong, meaning in the case of an individual, a person resident in Hong Kong or, in the case of a company, a company with a registered office or place of business in Hong Kong.
No Minimum Capitalization
Hong Kong company law does not establish any minimum amount of share capital which must be issued in respect of a Hong Kong subsidiary and Hong Kong tax laws do not impose penalties for thin capitalization.
Under the Companies Ordinance, a Hong Kong subsidiary must undergo an annual financial audit. However, there is no requirement to disclose the annual financial results publicly, whether through the Companies Registry or otherwise. A Hong Kong subsidiary must file annual returns with the Companies Registry as well as returns in respect of certain key changes, such as the allotment of shares or changes in the identity or particulars of directors. Filings with the Companies Registry are publicly available but, save as regards details of the shareholders of the subsidiary, the information in the filings do not result in public disclosure of information about the parent corporate group.
On the basis that the subsidiary carries on a business in Hong Kong and has profits which arise in or derive from Hong Kong from that business, the Inland Revenue Ordinance may subject the subsidiary to profits tax at a rate of 16.5% (with a concessionary rate of 8.25% for the first HK$2 million in profits). Transfers of the shares of a Hong Kong subsidiary may be subject to ad valorem stamp duty at the rate of 0.2% on the value of the shares being transferred.
Dividends paid by a Hong Kong subsidiary to the parent corporate group are not subject to Hong Kong withholding taxes. Interest payments made by a Hong Kong subsidiary to another member of the corporate group are however, not generally deductible for the purpose of calculating assessable profits except in prescribed circumstances. These prescribed circumstances include borrowings for the purpose of the Hong Kong subsidiary acquiring qualifying capital assets.
Unlike a subsidiary, a branch office is not a separate legal person. It is simply a "place of business" for a specific legal entity which is a member of the corporate group.
No Limitation of Liability
One consequence of the absence of separate legal personality is that all assets and liabilities of the branch are in fact the assets and liabilities of that legal entity. Thus, for example, when a branch office enters into a contract, it is in fact that legal entity which is entering into the contract. This means that unlike a subsidiary, a branch office does not offer any ability to insulate the wider corporate group from the liabilities of the Hong Kong business.
No Foreign Ownership Restrictions
Hong Kong is a free market and imposes no restrictions on non-Hong Kong persons from establishing a branch office in Hong Kong and there are no requirements to appoint any Hong Kong resident directors for the branch.
Publicity and Compliance
Branch offices must be registered with the Companies Registry as overseas companies operating in Hong Kong. Registration requires an English or Chinese language version of the constitutional documents of such companies.
Once registered, branch offices must file an annual return with the Companies Registry. Filed annual returns are publicly available. Annual returns provide information in respect of the principal place of business in Hong Kong as well as particulars of its officers and share capital. If the legal entity which is operating the branch office in Hong Kong is required under its home laws, the laws of any other jurisdiction where it operates or any applicable stock exchange listing rules to make its accounts publicly available, then the branch office must file those accounts with the Companies Registry.
Branch offices must file with the Companies Registry details of certain security interests against its Hong Kong assets. Once filed, these details become publicly available.
Each branch office must appoint an authorized representative to accept service of legal process or notices. The authorized representative may be a law firm in Hong Kong or a natural person resident in Hong Kong.
As with subsidiaries, branch offices may be subject to Hong Kong profits tax on the basis that they are carrying on a business in Hong Kong and have profits arising in or derived from Hong Kong from that business. The rate of tax is the same as for a subsidiary, meaning 16.5% subject to a concessionary rate of 8.25% for the first HK$2 million.
Hong Kong profits tax only applies to the profits which arise in or derive from Hong Kong. In practice, where the accounts of a branch office show the true profits which arise in or derive from Hong Kong, the Inland Revenue Department ("IRD") will use those accounts to calculate profits tax. However, where those accounts do not show the true profits which arise in or derive from Hong Kong, the IRD will normally deem profits arising in or derived from Hong Kong based on that proportion of total profits of the legal entity which equals the proportion of Hong Kong turnover to total turnover of the legal entity.
A representative office of a legal entity of a corporate group is an office for market research, information gathering and promotional activities. While a representative office may take on an office address in Hong Kong for its activities, a representative office cannot "establish a place of business" in Hong Kong under the Companies Ordinance. This means that a representative office cannot enter into commercial transactions or transactions which create legal obligations.
Because a representative office does not have a place of business in Hong Kong, it does not need to register with the Companies Registry. As a result, there is no requirement for a representative office to make any annual filing with the Companies Registry and there is no requirement to appoint an authorized representative to receive legal process and notices.
A representative office will not normally be subject to Hong Kong profits tax because it does not carry on a business in Hong Kong and there should be no profits which arise in or derive from Hong Kong from any such business.