Setting Up a Company in Hong Kong: Different Types of Business Organization
Businesses considering setting up a company in Hong Kong have a number of different options to organize their business, including the formation of a Hong Kong company, the establishment of a branch office of an existing foreign company or the establishment of a representative office of an existing foreign company. In our Hong Kong company registration business, we can help with each of these options.
Hong Kong Company Formation
A Hong Kong incorporated company is registered under the Companies Ordinance. Though there are different types of Hong Kong incorporated companies, the most common type of Hong Kong incorporated company is a private company limited by shares. A company limited by shares is a legal person separate from its shareholders. This separate legal personality has a number of important consequences:
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 company limited by shares are not liable under Hong Kong company law for the liabilities of the company
The company can own its own assets. While the shareholders of the company own the shares of the company and have an economic interest in the assets of the company, the company itself rather than its shareholders own the assets of the company.
The company can sue and be sued in its own name.
No Foreign Ownership Restrictions
Hong Kong does not restrict foreign ownership and accordingly, a foreigner or a foreign company may own 100% of the issued shares of Hong Kong incorporated company. There are no requirements for directors of a Hong Kong incorporated company to be resident in Hong Kong. However, a Hong Kong incorporated company must maintain a registered office in Hong Kong and must appoint a Hong Kong company secretary.
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 incorporated company and Hong Kong tax laws do not impose penalties for thin capitalization.
Under the Companies Ordinance, a Hong Kong incorporated company 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 incorporated company 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.
Hong Kong Taxes
On the basis that a Hong Kong incorporated 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 company 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 incorporated company to its shareholders are not subject to Hong Kong withholding taxes.
A foreign business setting up a company in Hong Kong through a branch simply establishes a place of business for a foreign company and registers the branch. Unlike a Hong Kong incorporated company, a branch office is not a separate legal person. It is simply a "place of business" for a foreign company.
No Limitation of Liability
Because a branch lacks a separate legal personality, the foreign company to whom the branch is a part will be liable for all the debts and obligations incurred through the branch. Conversely, all assets and liabilities of the branch are in fact the assets and liabilities of the foreign company. Thus, for example, when a branch office enters into a contract, it is in fact the foreign company which is entering into the contract. This means that unlike a Hong Kong incorporated company, a branch office does not offer any ability to insulate the foreign company 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 companies 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. 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 Hong Kong incorporated companies, 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 Hong Kong incorporated company, 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 foreign company which equals the proportion of Hong Kong turnover to total turnover of the legal entity.
A representative office of a foreign company 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.
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