Doing Business in Hong Kong – Avoiding the Pitfalls of a Foreign Jurisdiction

Hong Kong’s industry was founded in labour-intensive production in the textile sector in the 1950s, gradually diversifying to clothing, electronics, plastics and others mainly for export. Hong Kong’s industrialisation was largely driven by small and medium sized enterprises and did not follow the industrial conglomeration in Europe. This is still evidenced in Hong Kong’s corporate landscape today. With the opening up of China from the late 1970s, manufacturing followed cheaper labour costs and went across the border. Hong Kong, though, remained as a trans-shipment and trade services hub. Until today, and likely for the years to come, Hong Kong is China’s largest trading partner. 

Hong Kong’s position as a gateway into Asian markets has not stopped with China. Capitalizing on connectivity to Southeast Asia, Hong Kong has established itself as a business centre for enterprises expanding regionally and globally. Not only a global trade hub, but also international financial centre, Hong Kong provides businesses a save harbour as a free-trade port, low and simple tax regime, no VAT, withholding, dividends or capital gains tax and access to an open capital and financial market.

Starting a business in Hong Kong typically begins with the incorporation of a company. The most common business vehicle is a Private Limited Company. The establishment is straight forward and has only a few requirements that must be met. A Private Limited Company is a stock company, meaning it issues shares and there is a clear distinction between ownership and management, although the same person may fill both capacities. Ownership is represented by the members or shareholders of the company. At least one share is to be issued for the incorporation and there is no minimum capital requirement, or par value. A board of directors or a sole director are entrusted with the management and day-to-day business of the company. At least one of the directors must be a natural person. Other officers to the company who must be appointed at inception are the company secretary and designated representative. The company secretary must be a Hong Kong resident natural person or company. In the capacity of an officer, the company secretary assists the directors with corporate governance matters. The designated representative must be a resident natural person being a director, member or employee of the company or a law firm, accounting firm or trust and company service provider firm. The designated representative serves as the contact point for law enforcement agency enquiries with respect to the register of significant controllers of the company.

The incorporation process usually takes only a few days with the assistance and under guidance of a local service provider. Incorporate a Hong Kong company

Hong Kong is hailed internationally for its ease of doing business and economic freedom. And while the overall compliance requirements may be less than in other jurisdiction, compliance is nonetheless as important. Navigating corporate compliance and tax requires local expertise despite its seeming simplicity to avoid non-compliance costs in fines or worse, the closure of a business.

Every Hong Kong company is required under the Companies Ordinance to appoint an auditor and present an audit report for the annual general meeting, as well as, include a copy in the tax return. There is no de minimis rule or exemption other than dormant companies in the register of companies. 

The standard corporate or profits tax rate is 16.5%. The fiscal year (Year of Assessment) is 01 April to 31 March and the assessable income is derived from the profits of the company as per financial year (which may be different from the fiscal year) in the relevant Year of Assessment. From the Year of Assessment 2018/19 onwards, i.e. for financial years closed after 01 April 2018, Hong Kong has introduced a two-tier regime under which profits for the first HKD2million are taxed at half the standard rate, 8.25%. Tax Returns are issued annually in April and must be completed within one month. The appointed auditor can obtain an automatic extension of 6 months by including the company under the block extension scheme.

While Hong Kong’s tax regime is generally simple as a whole, elements of it, in particular, the territorial principle can be complex. The territorial principle provides that only profits arising in or derived from Hong Kong from a trade, profession or business is subject to tax. What this means has been fought over in many court cases. The common misconception that a tax exemption is broadly applied by mere declaration is a myth. Each claim from a taxpayer is assessed on its individual merits and requires considerable and careful preparation.

Hong Kong maintains a publicly accessible companies register and all corporate returns and filings are available for a fee. The register of significant controllers is however not public and only available for inspection at its specified address to officers of the Companies Registry, law enforcement agencies and significant controllers.

Compliance may be seen as burdensome or expensive given that enforcement often takes time. But non-compliance in Hong Kong can cost businesses even more in fines and remedial actions. Enforcement actions come with tight and strict deadlines often insufficient to begin and let along complete remedial efforts. 

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