FORWARD

This booklet has been prepared for the use of Clients, Partners and Staff of HLB International member firms, including HLB Hodgson Impey Cheng.

It is intended to be a general guide to doing business in Hong Kong and is written primarily for business people from abroad seeking an overall summary of the environment in which business is conducted and it is not intended to be a comprehensive document.

You should consult us, therefore, before taking further action.

HLB Hodgson Impey Cheng is the Hong Kong member firm of HLB International. The firm was formed in 1983, but can trace its origins back 50 years in Hong Kong and almost 200 years in the United Kingdom.

We are a firm large enough to give clients a comprehensive range of business and financial advice, international enough to help our clients meet their needs throughout the Asian region and worldwide. Yet, we make every effort to ensure we offer a truly personal service.

We look forward to welcoming new clients to the exciting commercial possibilities that Hong Kong and China have to offer as we approach the 21st Century. For more information, please come to our web site at www.hic.com.hic.

OUR AIM IS QUALITY SERVICE.... meeting our client s needs and exceeding their expectations.

HLB Hodgson Impey Cheng

(7th Edition April 1998)

ABOUT HLB INTERNATIONAL

HLB International is a world-wide organization of professional accounting firms, each providing clients with a comprehensive and personal service relating to auditing, taxation, accounting, and general and financial management advice.

Founded in 1969, HLB has member and correspondent firms in 98 countries and ranks as the 12th largest accounting and business advisory group worldwide, with an annual fee income in excess of US $750 million, generated by more than 1,200 partners and 9,000 staff in over 420 offices.

Up to date information and general assistance on international matters can be obtained from any of the partners of HLB Hodgson Impey Cheng, listed at the back of this booklet, or from the HLB International Executive Office in London.

HLB International Executive Office

Spectrum House

20-26 Cursitor Street

London EC4A 1HY

Telephone +44 (0)20 7334-4783

Fax +44 (0)20 7405-5548

Peter Frost	Chief Executive	pjf@hlbi.com
Jacqueline Weber-Brown	Personal Assistant to Chief Executive	jwb@hlbi.com
Kevin Chowdhay	Finance & Professional Services	kjc@hlbi.com
Sandra Dalmeijer	Communications	sd@hlbi.com

Introduction

This booklet is designed to give some background information to the overseas businessman looking at China and the Asian region, and at Hong Kong in particular, as a base for corporate activity.

Hong Kong was very much in the news when, on July 1, 1997, sovereignty reverted back to the Peoples Republic of China after 150 years as a British colony. As from that date, it became the Hong Kong Special Administrative Region (SAR). Although now fully a part of China, the SAR retains an extraordinary degree of autonomy. This is guaranteed under the Basic Law, a sort of mini-constitution, originally hammered out between Britain and China. Although some (even within Hong Kong itself) were unsure just how much independence would be permitted, time has shown that, in practice, doing business in Hong Kong is exactly the same after July 1, 1997 as it was before.

This fact is greatly welcomed by many who trusted the values and integrity of Hong Kong. What doubts there were have been largely dispelled and, today, it really is a case of Business as usual.

Despite the lack of direct investment incentive, such as tax holidays, Hong Kong has grown from a small backwater primarily responsible for trade to and from China into the tenth largest trading entity in the world and a major financial centre. Within the past decade, the Hong Kong economy has become inextricably linked to that of southern China,. This has been a significant factor in the SAR’s continued prosperity. Even so, important as it is, Hong Kong remains also a centre for trade throughout the rest of Asia and for international companies doing business in the region.

There are many reasons for this success, but probably the main reasons are as follows:

A stable government dedicated to the encouragement of free enterprise and opposed to regulation or intervention unless deemed absolutely essential.

A respected, independent, legal system based on transparent Anglo-Saxon principles.

A free press that is widely-owned, independent, and vocal.

A good blend of entrepreneurial skills and a stable, talented, adaptable and hard-working labour force.

A complete absence of foreign exchange controls, and only minor import duties on a small number of items.

Very low levels of taxation by international non-tax haven standards.

No restrictions on foreign investment.

Superb communications and banking facilities.

A location at the geographical centre of Asia.

The willingness of its businessmen to diversify according to international market demand and react quickly to changing trends.

The complete range of high quality professional services available.

GENERAL INFORMATION

Geography and History

Hong Kong, as a territory, is a small outcrop of China, part island and part mainland, south of Guangzhou (formerly known as Canton). The total land area of Hong Kong is approximately 1,000 sq. km, of which around 10%, comprises Hong Kong Island itself, some of Kowloon and some outlying islands were ceded to the British Government in perpetuity under the Treaty of Nanking. The remaining land area, being the remainder of Kowloon, the New Territories and the other islands, was leased from the Chinese Government. For 150 years it was officially a British Crown Colony, but in reality had an independent government as far as day-to-day administration was concerned.

The leases expired on July 1, 1997 and it was agreed between the British and Chinese Governments that the ceded territory would be returned to China at the same time. From that date on, the territory has been administrated by the people of Hong Kong themselves as a Special Administrative Region (SAR) of China. Under the terms of the Sino-British Joint Declaration, the Hong Kong SAR will enjoy essentially the same system of law, government, and ways of doing business as operated at the time of the return of sovereignty. This will continue for the next 50 years -- until 2047.

Gateway to China

Due to its physical proximity to the mainland of the People.s Republic of China, Hong Kong has developed into the main base for China operations over the years. Most major banks, law firms and ourselves, as a leading accounting firm, have expertise available to assist clients wishing to invest in or trade with China. It is very common for Hong Kong companies to be incorporated as the vehicle for such trade.

As much as two-thirds of the total external investment in China goes through Hong Kong. The financial ties between Hong Kong and the southern Chinese mainland province of Guangdong, which abuts Hong Kong, are especially strong. As many as 5 million people in Guangdong province alone are employed, either directly (through joint-venture operations) or indirectly (in the form of outward processing arrangements) by Hong Kong companies. Three of China.s four Special Economic Zones are in Guangdong province, while the best known of these, Shenzhen, actually lies immediately across the border.

China now and in the future

Today China enjoys one of the world s fastest growing economies. Some analysts argue that the mainland economy is already the third largest in the world, and estimate that during the next century it will be the largest. The rapid growth and industrialisation in the south, and along the eastern and northern coastline is beginning, albeit gradually, to spread out into the hinterland. The move towards an unfettered market economy has brought with it a requirement for modern technology and equipment, for up-to-date management and financial systems, for the latest in design and for consumer goods. These can really only be met from overseas at this stage of China s development.

On top of which there is the consideration of China’s 1.2 billion population. The prospect of being in a position to reach such a huge consumer base, in the not too distant future, has led to many well-known brand names entering the market -- often using Hong Kong as a springboard .

Our China Business Department is able to handle the rapidly growing demands of those wishing to do business with China.

Asian Centre

Hong Kong is often used as the base for the Asian operations of overseas companies. It is arguably the financial centre of Asia, and it is possible to establish a company in Hong Kong which carries on trade with other Asian countries totally free of Hong Kong taxation. (See later section on Tax Structure).

Government

A newly-created post, that of Chief Executive of the Hong Kong SAR, has replaced the Colonial Governor. This is an elected position and must be filled by a local Hong Kong person. In most other respects though, the form and practice of government remains largely unchanged. The Chief Executive is assisted by an Executive Council and a Legislative Council: the former consisting of ex-official members and others from government and the general community, while the latter comprises an elected element. The Government is served by a professional Civil Service. The Government of the People’s Republic of China retain power over matters relating to defence and foreign affairs. In virtually all other areas the SAR is fully self-governing.

Regulations

Regulation of business is kept to a minimum, the Government preferring to rely on market forces. Hong Kong has been fortunate in having a Government which, not only advocates but also, practices the essential role of private enterprise in all spheres of activity.

Availability of Staff

Although Hong Kong is generally blessed with near full employment most of the time, the work force is extremely fluid right up to the highest levels. Consequently, a supply of properly qualified staff is always available, although locating them can sometimes prove more difficult. Shortages of labour can occur from time to time in certain sectors.

Our Executive Search and Recruitment division would be pleased to assist with the recruitment or search assignments, or advise on executive remuneration packages.

Communications

Excellent communication facilities of all types exists both internally and externally. In general, it is possible to have all forms of electronic communications and international telephone services rapidly connected. Telecommunications facilities are reckoned to be among the best in the world; there is a wide choice of Internet Service Providers (ISP), and rates are highly competitive. Hong Kong’s port and airport facilities are of international standard and serve all major carriers. The vast new Chep Lap Kok airport opens in mid-1998. Hong Kong is on the international route network of most major airlines and acts as an Asian interchange point for many of them. The container port is one of the largest and most efficient in the world. Public transport facilities within Hong Kong are of high quality, readily available, and are relatively inexpensive by international standards.

Availability of Office Space

Prime property in the central business/financial district can generally be secured quite quickly at rental levels commensurate with facilities and location. Hong Kong does have a reputation for costly rentals but less well-located property can be obtained at rents significantly below the levels found in Central District, often without any lowering of facilities available.

Availability of Accommodation

Private accommodation can easily be secured on either a short or long-term lease basis, and varying in both size and level of luxury, according to the desires of the occupant or corporate policy. Again, rental levels are rarely cheap, but they vary enormously depending upon location, and reasonably-priced accommodation is always available.

Trade, Monetary and Financial System

Trade

For many years Hong Kong relied on its excellent harbour and proximity to China. Although there was some local manufacturing, the mainstay of Hong Kong’s business was acting as a conduit for goods flowing in and out of China. In the 1950's many factors combined to cause a fundamental change. Based on its free-port laissez-faire business atmosphere and entrepreneurial skills, Hong Kong changed into a large manufacturing centre. Utilizing its large and relatively cheap work force, Hong Kong initially specialized in labour-intensive industries such as textiles and plastics. Since then, the emphasis has changed towards high quality, high value manufacturing, with most of the actual production process being carried out in southern China, but with the value-added element executed in Hong Kong. It is said that the brains of many enterprises - the head office, design, sales and financial functions are still located in Hong Kong, while the brawn , the manufacturing itself, is done north of the border. Nowadays, the service industries, especially financial services, are both Hong Kong’s largest revenue earners and its major employer.

Monetary System

The local currency is the Hong Kong dollar which is currently pegged to the U.S. dollar (US$1.0=HK$7.8). Otherwise, the currency floats freely on the international money markets. The Hong Kong dollar is the universally-accepted unofficial currency in the Special Economic Zone of Shenzhen, across the border from Hong Kong, and in the nearby Portuguese enclave of Macau.

Exchange Control

No form of exchange control exists; nor does any requirement of reporting or obtaining approval for international transactions. As a result, capital and profit can be freely remitted in and out of Hong Kong.

Banking System

Hong Kong has a three-tier system for financial institutions. They are divided into licensed banks, licensed deposit-taking companies, and registered deposit taking companies. More than 60% of the sectors,s aggregate assets and liabilities are external, spreading over more than 100 countries. Of the world’s 100 largest banks, 79 operate in the SAR. Financial services are of a high level and all the sophisticated banking services are available that one may expect in an environment that claims to be the world’s third major financial centre. Statutory requirements are laid down in the Banking Ordinance and the Deposit Taking Companies Ordinance, whilst the Banking Commissioner is entrusted with the supervision of the industry.

Legal System

The legal system of Hong Kong remains based upon that of England and Wales. Legislation is by locally-enacted Ordinance and, in practice, especially as the law applies to ordinary citizens or business people from overseas, little has changed since July 1, 1997. The local Court of Final Appeal has replaced the role previously exercised by the Privy Council in Britain. Courts in the People’s Republic of China have no authority within the SAR and there are no plans to bring Hong Kong’s legal system or its laws into line with those operating on the mainland. The fundamental principles upon which the law operates are to remain because they have been incorporated into the Basic Law of the Hong Kong Special Administrative Region and are thus protected. All sections of Hong Kong society, including government, business, the entire political spectrum, and trade unions, have expressed support for continuing the present system as all agree it is an essential ingredient for Hong Kong’s continued prosperity.

Tax Structure

As a general rule, taxation is only levied on income or transactions having a direct connection with Hong Kong. The concepts of residence, domicile or citizenship have little, if any, relevance. Taxation is based in the territorial concept.

Direct Taxation

There are three distinct taxes designed to tax income derived from Hong Kong:

Profits Tax
Salaries Tax
Property Tax and there are
Other Taxes

There is no taxation of capital gains on transfer or on gifts, save where they fall within the limited gift provisions relating to Estate Duty, which is a death duty charged upon the net value of the Hong Kong assets of the deceased.

Indirect Taxation

There are a few indirect taxes and a Stamp Duty on transfers of shares in Hong Kong companies and of interests in land and buildings located in Hong Kong.

Tax Treaties

Hong Kong has no Double Taxation treaties with other jurisdictions, although an understanding has been reached between the SAR and the PRC Government to prevent double taxation of airline, shipping and other business income in the SAR and PRC. The Government has recently raised the possibility of negotiating such treaties with major trading partners at some future date. However, the existing position greatly assists in maintaining confidentially in the ownership and use of a Hong Kong company. Many countries give unilateral relief for Hong Kong taxation paid when instances of double taxation arise.

Administration

The tax system in Hong Kong is administrated by the Inland Revenue Department under the direction of the Commissioner of Inland Revenue. The department is staffed by qualified professionals and has a reputation of being fair and reasonable in its dealings with the public. Some assistance in interpreting the Inland Revenue Ordinance is given in published interpretation notes. As a general rule, however, the department will only give advance ruling on specific transactions, and will not give general rulings.

The tax year runs from April 1 to March 31, with income being assessed provisionally on the amount reported for the previous year and finally once the taxpayer had reported his income for the tax year in question (normally not more than 7 months after the end of the tax year).

Profits Tax

Profits Tax is levied at the rate of 16% on corporations (15% on unincorporated entities) on business profits which satisfy both of the following criteria:

The company must be carrying on business in Hong Kong.
The relevant profits must be earned in or derived from Hong Kong.

Source

The source of income is generally regarded as a practical hard matter-of-fact. In the context of international operations, this typically means that the person ultimately deriving the income may have some tax planning opportunities. Rates of Hong Kong taxation are low and with care-effective rates can be made even lower. Hong Kong does not have any form of dividend taxation or withholding taxes, and hence, profits accumulated in a Hong Kong company can be distributed without tax deduction in Hong Kong.

Deemed Income

Certain types of incomes are deemed taxable. These are mainly rents or royalties received in connection with the use of equipment, patents, and copyrights, etc., in Hong Kong. Due to the method by which expenses are allowed, the effective rate of tax for royalties, copyright fees, etc., can be lower than the normal rate.

Interest

Deposit interest accruing to Hong Kong companies is only subject to Profits Tax if the bank deposits are placed in onshore accounts in Hong Kong. It is extremely easy for companies to place deposits in offshore accounts which will generate interest completely free of Profits Tax.

Tax Returns

Any company potentially liable to Profits Tax will be issued with a tax return for completion at the end of each tax year. This should be submitted within one month of issue (although in practice longer periods may be granted upon application), together with audited financial statements covering the company’s accounting year ending in the relevant tax year.

This return forms the basis for a final tax assessment in respect of the relevant tax year payable for the current years. For example, a company with a December 31 year-end would report its results for that year-end in its return for the tax year ending the following March 31.

Anti-Avoidance Measures

If a transaction is entered into for the sole or dominant purpose of enabling a tax benefit to be conferred, the Inland Revenue Department has the power to assess tax liabilities as if the transaction had not taken place, or otherwise counteract the tax benefit.

Provided care and advice are taken, there is no reason for these measures to significantly affect Hong Kongs appeal as a low or zero-tax jurisdiction.

Our Tax Department would be pleased to advise clients in the Hong Kong and international taxation consequences of proposed transactions.

Salaries Tax

Although many salary and wage earners pay no tax due to levels of income below the threshold, employment income with a Hong Kong source is strictly subject to Salaries Tax. In most circumstances, where tax is payable, a flat rate of tax (15%) applies, but in the case of annual income levels below $185,000 US (for a single person) or $302,692 US (for a married couple) lower effective rates can apply. These lower rates are applicable irrespective of whether or not the salary earner is a resident of Hong Kong.

Source of Income

Salaries Tax is charged on the basis of the principle of the fundamental source of employment being in Hong Kong. The Inland Revenue Ordinance does not give clear guidance as to whether the fundamental source of a person’s employment is in Hong Kong and it is necessary to rely on case law and Inland Revenue Department interpretations. The basic principle is that if a person’s fundamental employment is in Hong Kong, his or her income is assessable in full to Salaries Tax, unless all the services of the employment are rendered outside Hong Kong. The criteria to determine whether the fundamental source exists in Hong Kong includes: whether the employment contract was negotiated, concluded and is enforceable in Hong Kong; whether the employer is resident in Hong Kong; and whether the remuneration is paid. A concession exists to exempt income derived from services rendered outside Hong Kong if a tax similar to Salaries Tax has been paid on the income. This exemption is principally to reduce the double taxation of those employees who are subject to China’s Individual Income Tax, but has wider applications.

Separate rules apply to directors of Hong Kong companies, as their remuneration as directors is fully taxable in Hong Kong regardless of other factors, because it is considered that the office of director exists in Hong Kong.

If it can be established that the fundamental source of employment is outside Hong Kong, the employee is exempt from Salaries Tax, provided he does not spend more than 60 days in Hong Kong in any tax year.

If you are in doubt as to whether you or your employees are or will be subject to Salaries Tax, our Tax Department would be pleased to advise.

Exemptions

Although Salaries Tax is levied irrespective of whether the salary earners is a Hong Kong resident, as long as an employee whose source of employment is outside Hong Kong and who spends less than 60 days in Hong Kong during a given tax year, he will be exempted from Salaries Tax on his income. This exemption does not apply to directors fees, however.

In addition, an employee who has a Hong Kong source employment and earns salary income for rendering services in places outside Hong Kong is exempt from Salaries Tax if he has paid tax in those places from which the income was derived.

Special rules apply to seamen and aircrew.

No other costs such as Social Security, National Insurance, etc, arise either to the employee or the employer. However, the Mandatory Provident Fund Scheme (MPFS) is expected to be implemented in the year 2000. A tax deduction of up to HK$12,000 per year will be available in respect of employees contributions to the Fund.

Benefits in Kind

Generous tax treatment of company-supplied housing and other benefits in kind makes Hong Kong a competitive location for senior executives of international groups responsible for the Asian region. For example, the provision of air travel for holidays, a company car, domestic furniture etc. should, under suitable arrangements, attract no tax to the employee (whilst the cost should be fully deductible to his employer). Housing provided to an employee is taxed by way of increasing his taxable income by 10%. Only in exceptional circumstances does this have any direct relationship to the actual cost of the housing to the employer; the actual cost is usually significantly higher.

Many employees incorporate a personal service company to assist in arranging their affairs to ensure no Salaries Tax is charges on benefits in kind.

If you or your employees are in doubt as to whether this is worthwhile, our Tax Department would be pleased to advise.

Property Tax

This is charged on rents derived from land and buildings located in Hong Kong. Companies are exempt from the tax, being liable to pay Profits Tax on any such income.

Other Taxes

Rates on land and buildings are levied to support local services and infrastructure. Entertainment tax is levied on certain forms of entertainment (e.g. cinema tickets). Hotel accommodation tax is levied on hotel bills. Airport departure tax is payable on departing through the International airport, and a similar tax is payable on departing Macau. There are tolls payable on use of the cross-harbour tunnels. There are also duties charged on wines and spirits, tobacco, soft drinks and hydrocarbon oil.

Estate Duty

Estate Duty is based upon the legislation which existed in England prior to the introduction there of Capital Transfer Tax (now Inheritance Tax), and in most Australian States prior to abolition. Like all Hong Kong tax, the scope is limited by territoriality and consequently the charge is levied upon the net value of only the Hong Kong property of a deceased person, regardless of the residence or domicile of the deceased’s estate. However, there are complicated provisions, beyond the scope of this booklet, which can bring into charge the Hong Kong property of foreign corporations if the corporations were controlled by the deceased. In arriving at the net values of the estate, only Hong Kong liabilities are allowed as deductions from assets. At present, no duty is charged on estates with a net value below HK$7.5 million and above HK$10.5 million, is 15%. Between the two amounts, progressive rates apply starting at 6%.

Whilst good planning will usually reduce estate duty to nil, or an insignificant amount, many people fail to plan and incur unnecessary liabilities.

If you need Estate Duty planning advice our Tax Department would be pleased to help.

Stamp Duty

Principally, only two types of transactions are subject to Stamp Duty.

The transfer of shares in a Hong Kong company (whether private or publicly quoted) must be stamped. The rate of duty is 0.125%, payable by each of the purchaser and seller involved in a transaction, giving an effective rate of 0.25%. Duty is charged on the sales consideration or the fair market value, whichever is the higher. In evaluating the fair market value, the Stamp Duty Office will normally accept the net asset value shown by the company s audited, accounts, subject to an upward adjustment to reflect a higher value for land and buildings than that shown in the accounts, where appropriate. No Stamp Duty is charged in the case of transfers of shares within a group of companies, where both parties are under 90% common ownership.

Duty, at the maximum rate of 2.75%, is payable on the transfer of land and buildings located in Hong Kong, and on agreements for sale. In order to dampen land speculation the government introduced stamp duty chargeable on agreements to purchase property. It is, therefore, advisable to take advice before committing to a transaction.

Stamp duty is also chargeable in relation to leases of immovable property, to units in unit trusts and to Hong Kong bearer instruments as well as duplicated of any chargeable instrument.

Capital Duty

A Capital Duty, 0.1%, must be paid on the nominal value of, and on any increase in authorized share capital of Hong Kong companies, and on the issue of shares at a premium. The capital duty is capped at HK$30,000 in each case.

Business Infrastructure

Business Organizations

Although the U.K. is no longer the sovereign power, all the forms of business organizations found in systems based on English Law are available in Hong Kong, i.e.: branch operations of non-Hong Kong Companies

Sole Proprietorships

It is open for any individual to engage in business in his own right. Apart from the need to satisfy certain qualification requirements in certain professions, the main legal matter is the need to register the business name and obtain a Business Registration Certificate.

Partnerships

Partnerships are governed by the Partnership Ordinance and the Limited Partnership Ordinance, both based upon the equivalent English Acts. Each type can have up to 20 partners: corporate or individual. Partnership assets are owned jointly by the partners who are also jointly and severally liable for partnership liabilities. If a Limited Partnership is formed, the liability of some partners can be limited, as long as they do not take part in the active management of the partnership.

Trusts

The trust is based on the concept of English law that property can be legally-owned by one person, but for the benefit of another person. Typically this takes the form of assets, (such as shares in a company), being owned by a trustee in trust for the ultimate equitable owner, the beneficiary. Full legal ownership is vested in the person holding the property (the trustee) and he is, therefore, able to deal with it as if he owned it personally; however his actual ownership is limited in equity to holding and dealing with the property for the benefit of the beneficiary under the trust.

Although it is possible for trading operations to be carried out using a trust, in practice, such trading trusts are not common in Hong Kong. Trusts are mainly used in Hong Kong for the following purposes:

Offshore tax planning,
Estate and emigration planning,
Indirect ownership of companies,
Asset protection,
Anonymity in investment,
Long-term family provision, and
Continuity of ownership.

Business Registration

Any person carrying on business in Hong Kong is required to obtain a Business Registration Certificate from the Inland Revenue Department. This is the primary source of information to the taxing authority in respect of new businesses.

Branch Operations (Non-Hong Kong Companies)

In line with the laissez-faire business atmosphere in Hong Kong, no restrictions apply to the carrying on of a business through a company incorporated outside Hong Kong. All that is required is that Hong Kong branch registers within one month of establishing a place of business in Hong Kong.

Under the Companies Ordinance, an overseas company must register by filing the following documents with the Companies Registry:

A certified true copy, plus English translation where appropriate, of the company’s constitution (i.e., the company’s Charter, Memorandum, and Article etc.) and Certificate of Incorporation.

Details of company officers, (e.g. directors, secretary.)

The name and address of at least one individual, residing in Hong Kong, who is authorized to accept documents, notices, etc., served on the company, and the company’s authorization in his favour (e.g. a power of attorney).

For most companies, financial statements also must be filed with the Registrar upon registration and annually thereafter. These should be certified by a director of the company, but need not be audited if this is not required by law in the place of the incorporation.

Any changes to the particulars filed and any commencement of proceedings for liquidation must also be notified to the Registrar.

When such an overseas company ceases to have a place of business in Hong Kong, it must notify the Registrar and for the next 3 years, continue to have an authorized person in Hong Kong to accept service of documents on its behalf.

Place of business in Hong Kong for the purposes of registration is defined so as to exclude a place not used by the company to transact any business which creates legal obligations. Consequently, certain representative offices do not need to register as above.

Our Corporate Services Department would be pleased to advise and assist overseas companies in registering a Hong Kong branch.

Hong Kong Companies

Although it is quite possible to carry on business in Hong Kong via a branch of a non-Hong Kong company, it is normal for a business based in Hong Kong to be carried on by a company incorporated in Hong Kong. Reasons for this will vary, depending on the precise facts but would typically include:

Greater convenience;

High degree of flexibility associated with Hong Kong companies;

Wider acceptance both in Hong Kong and in most jurisdictions;

Economic costs.

Limited Companies

Most companies operating in Hong Kong are private companies limited by shares although other types of company are available, (e.g. unlimited companies.) The main features of a private company limited by shares are as follows:

Minimum of 2 shareholders and 2 directors.
Maximum of 50 shareholders.

· The transfer of shares in the company must be subject to some form of restriction.

We are able to arrange for the provision of corporate nominees to act as shareholders and directors if required.

Share Capital

A particular feature of Hong Kong companies is that the share capital need not be in Hong Kong dollars.

Share capital is divided into two forms:

Authorized share capital, which sets the maximum amount of capital available, and bears capital duty at the rate of 0.1% payable on company formation and on any subsequent increase of authorized capital. The capital duty is capped at HK$30,000 in each case.

Separate classes of shares with different rights to dividends, etc., are permitted, subject only to any restrictions in the company’s Memorandum and Articles of Association. Although shares can be issued which are redeemable by the company, a Hong Kong company cannot buy back its issued shares. No minimum debt to equity ratios and no minimum share capital levels are prescribed for companies, other than those operating in the financial sector (e.g. banks, insurance companies).

Directors and Secretary

The Directors of a private company may generally be either individuals or companies and need not be residents of Hong Kong, but public companies (and private companies in a public group) must have individuals as Directors. All companies must have at least 2 Directors, as well as a Secretary (who must be resident in Hong Kong and who may be a director, although in certain circumstances acts must be done by 2 persons rather than one acting in two capacities). Director’s meeting may take place in Hong Kong and elsewhere. If necessary, an alternate director can be appointed to represent a non-resident director at a board meeting taking place in Hong Kong. There is no restriction which prevents all Directors’ resolutions being made in writing, signed by all Directors, rather than at a meeting of Directors. The particulars of the Directors and the Secretary must be filed with the Companies Registry which must also be notified of any changes in those particulars.

We are able to arrange for the provision of corporate nominees to act as Directors or Secretary if required.

Annual General Meeting

Hong Kong companies are regulated by an Ordinance loosely based on U.K. company law. Apart from tax-related matters, the only other compliance requirement is that an Annual General Meeting must be held within 18 months of incorporation and at least once every calendar year thereafter to receive the accounts and elect/appoint officers etc.

Annual Return

Within 42 days from the anniversary of the incorporation date, an annual return must be filed with the Registrar of Companies setting out:

Share capital.
Indebtedness in respect of mortgages and charges.
Name and address of each shareholder and every person who ceased to be a shareholder in the previous year.

Although the return is available for inspection by the general public the amount of information disclosed is limited since:

Except in the case of a public company, no financial statements need be attached.

Details of shareholders are restricted to the registered shareholders only (e.g. a nominee company), ultimate beneficial owners are not disclosed.

Annual Audit

Every Hong Kong company must has an annual audit performed by a qualified independent auditor.

Our Audit Department is experienced and professionally qualified to perform audits of all sizes of companies.

Availability

Hong Kong shelf companies, with standard Memoranda and Articles designed to permit most general activities, are available immediately, making it possible to commence business at very short notice. It is also possible under the Companies Ordinance for pre-incorporation contracts to be entered into and ratified later by the Company, although this is not a widely used facility due to the personal liability of the contracting parties notwithstanding later ratification.

The name of such shelf company and most provisions of the Memorandum and Articles can be changed within 2-3 weeks. Alternatively, a new company can be formed with a name and provisions in the Memorandum and Articles specific to the particular circumstances. In some situations, it may be preferable to adopt this latter course of action, although in the majority of cases it will not be necessary.

A company may not be incorporated with a name to an existing company. A preliminary names search should, therefore, be undertaken prior to filing incorporation or change of company name documents.

Out Corporate Services Department is able to undertake all matters relating to the incorporation of Hong Kong or overseas companies.

Typical Uses for Companies Based in Hong Kong

International Trading Companies

Acting as an intermediary in the sourcing of goods purchased by an international group or in the sale of a product. Typically the supplier or customer would be in the Asian region, but this is not essential.

The extent to which such a company will be liable to Hong Kong taxation will depend in the factors of source and carrying on business in Hong Kong discussed earlier. In this regard, the locations where the purchases and sales contracts were effected are the major criteria in determining the source of profits for international trading companies based in Hong Kong.

There may be considerable advantages in the country for the profits to be taxed in the Hong Kong company which in turn are either distributed by way of dividend or reinvests.

In a similar context to companies buying and selling goods, it is common for Hong Kong companies to receive commissions either in connection with the sale of goods or by acting as a buying agent. Again, there may be considerable tax benefits to be gained by the payment of such commissions to the Hong Kong company.

Investment Holding Companies

Either because a company has accumulated its own profits from past transactions or because the owners of a company have injected funds into the company, it is not uncommon for Hong Kong companies to have substantial investment funds. These can be freely invested in Hong Kong or elsewhere. In line with the overall flexibility of the Hong Kong taxation system, most forms of the resultant investment income will suffer only the relatively low rates of Hong Kong taxation, if they are taxable at all; reference should be make to the section on deemed income for Profits Tax purposes in this regard.

Specialist Uses

A Hong Kong company is also often used to ultimately hold overseas assets, perhaps in conjunction with trust arrangements. Other more specialized uses of Hong Kong companies are frequently encountered. For example, the tax system coupled with the absence of any foreign exchange control and Hong Kong’s prominence as a financial centre make it an ideal location for intermediary companies in complex international financing arrangements, particularly for China ventures.

Our Tax Department is able to advise on all matters relating to the establishment of a Trust in Hong Kong or overseas, and is able to offer corporate nominee trustees to administer the Trust.

Hong Kong Office

HLB HODGSON IMPEY CHENG

Chartered Accountants

Certified Public Accountants

5th Floor, The Chinese Club Building

21-22 Connaught Road Central

Hong Kong

Telephone: +(852) 2810 8333

Facsimile: +(852) 2810 1948

E-mail: hic@hic.com.hk

Web Site: http://www.hic.com.hk

David K.W. Cheng		dcheng@hic.com.hk
Anthony D. Collings	International Contact Partner	acollins@hic.com.hk
Michael M.C. Choi		mchoi@hic.com.hk
Kenneth C.M. Young		kyoung@hic.com.hk

Hodgson Impey Cheng services include:

Audit

Taxation

Corporate and Trustee Services

Accounting Services

Management Consulting Services

China Business and Recruitment

Litigation Support

Merger and Acquisition Advisory Services

Business Development and Restructuring Advice

General Business Advisory Service for Asian Region

DOING BUSINESS IN HONG KONG

GENERAL INFORMATION

Trade, Monetary and Financial System

Tax Structure

Business Infrastructure

Typical Uses for Companies Based in Hong Kong