Guide to Setting up a Business in Hong Kong (1) - Introduction

1. General

A foreign company wishing to carry on business in the Hong Kong Special Administrative Region ("Hong Kong") may do so by either incorporating a Hong Kong company (private company limited shares) or registering a branch of that foreign company in Hong Kong. (The process by which a Hong Kong company is set up is the same whether the incorporator is a foreign company, a Hong Kong company, an individual or other legal entity.) The relevant government authority is the Registrar of Companies (the "Registrar").

The purpose of this article is to assist our clients in setting up and maintaining a business in Hong Kong through a Hong Kong company.

Some of the issues which arise in connection with doing business in Hong Kong, such as registration with the taxation authorities and compliance with visa requirements, involve similar considerations whether the business is to be operated as a separate Hong Kong company or as a branch operation. These issues have accordingly been dealt with generally.

2. Branch or subsidiary

The differences between a Hong Kong branch and a Hong Kong subsidiary of a foreign company stem from the fact that, unlike a branch, a subsidiary is an entity which, under Hong Kong law, is entirely separate from its parent. The business activities available to a company in Hong Kong are generally not dependent upon whether the company is locally incorporated and there is generally little practical difference between operating a branch and a subsidiary company in respect of profit computation. The rate of tax levied on profits is the same for local and foreign companies and dividends are not subject to separate taxation in Hong Kong.

The usual reasons for preferring a subsidiary over a branch include the following:

(1) the parent company will not be liable for the debts of its subsidiary; its legal liability will be limited to the amount of any unpaid issued share capital and its potential loss will therefore be limited (in the absence of a guarantee or other security) to the value of any assets it contributes by way of capital to the company

(2) only that information which relates to the subsidiary must be filed with the Registrar and kept up to date

(3) a subsidiary does not need to file its accounts on the public record whereas in some cases a foreign company will need to (see Guide to Setting up a Business in Hong Kong (3) - Hong Kong Branches of Foreign Companies)

(4) the presence of a branch in Hong Kong makes it more likely that the "parent" company would be sued in Hong Kong even in connection with matters unrelated to its business operations there

(5) it is usually simpler and more cost effective to set up a Hong Kong company than it is a Hong Kong branch

(6) where the constitutional documentation in relation to the "parent" company is not in English or Chinese, this will not require translation if a local company is incorporated, whereas in the case of a branch it will require translation

(7) it is not necessary to arrange for certified copies of any documents to incorporate a Hong Kong company whereas in the case of a branch it is so necessary

On the other hand, the usual reasons for preferring a branch over a subsidiary include the following:

(1) there may be tax advantages under the tax laws of the place of incorporation of the "parent", in particular, in relation to the treatment of any losses which the Hong Kong operations may incur in the first few years of its operation

(2) a branch can often rely on the credit of the "parent" company

(3) if business operations are terminated in Hong Kong, the lengthy liquidation process required for a Hong Kong company can be avoided and any capital can simply be remitted out of Hong Kong

(4) a Hong Kong company can normally only reduce its issued capital with the consent of the Court

(5) share repurchases by Hong Kong companies in some cases will require the consent of the Court

(6) no stamp duty (except in relation to any land or any shares in Hong Kong companies owned by the foreign company) will be payable on any transfer of the Hong Kong business operated by a foreign company, whereas stamp duty will generally be payable on any transfer of shares in a Hong Kong subsidiary company

(7) no duty is payable in Hong Kong on the authorised (or issued) share capital of a foreign company with a Hong Kong registered branch

(8) the ongoing maintenance expenses involved with a branch can be lower than those involved with a subsidiary, in particular, as Hong Kong law does not require the separate audit of a branch

3. Business registration

The Hong Kong Business Registration Ordinance requires that every business in Hong Kong register with the Business Registration Office. This is effected by the issuance of a business registration certificate in respect of each location from which the business is conducted. The certificate must be displayed on the premises. A business registration certificate is valid for one year unless an election has been made for an expiry date of three years from the date of commencement endorsed on the certificate. The fee and levy for the issue of the principal certificate is presently fixed at HK$2,600 per annum and for each additional certificate HK$673 per annum. Normally, a new business registration certificate can be issued immediately upon application and payment of the required fee and levy. There is some relief for small business.

Registration with the Business Registration Office amounts to notification to the Commissioner of Inland Revenue (the "Commissioner") that a business, which may be subject to the payment of profits tax, has been established. It does not mean that any actual profits tax liability exists or is acknowledged.

All Hong Kong companies and foreign companies which have branches registered in Hong Kong are deemed to be carrying on business in Hong Kong and must register under the Business Registration Ordinance within one month of incorporation, even if business operations have not yet commenced or within one month of having a place of business in Hong Kong.

The particulars of the business must be briefly described in the application. The date of commencement of business and, in the case of a company, the address of the registered office or, in the case of a foreign company, the authorised representative must also be specified. A company which has adopted a Chinese name informally only (i.e. it is not included in the company's Certificate of Incorporation or Certificate of Change of Name) may also include this name in its application, but it is not necessary to do so.

The particulars registered with the Business Registration Office are available for public inspection and any change in the registered particulars must be notified to the Business Registration Office within one month.

4. Registration of charges

Both Hong Kong companies and foreign companies with Hong Kong branches must file (with the Registrar) the particulars of any registerable charge:

(1) given by the company over its assets or

(2) existing over assets acquired by the company normally within five weeks of the creation of the charge or the acquisition of such assets, respectively.

Generally speaking, those charges requiring registration include floating charges and charges over land, ships, goodwill, book debts, trademarks and patents and other tangible assets. Foreign companies are only required to register charges over relevant assets located in Hong Kong or which come into Hong Kong.

All companies are required to keep a register of charges over their assets (whether they are registerable charges or not) containing short particulars of the assets charged and the amount secured. In the case of foreign companies, this is limited to assets located in Hong Kong or which come into Hong Kong. Further, all companies are required to keep copies of registered charges. The register of charges must be open for inspection by anyone whereas copies of registered charges are open for inspection by members and creditors only.

Charges requiring registration which are not registered are generally void against a liquidator of a company in a winding-up and against other creditors. For this reason a person taking the benefit of a charge will usually take steps to ensure that the charge is registered if it is required to be.

5. Additional licences and consents

Certain businesses may not be carried on in Hong Kong without a specific licence or other consent to do so from the relevant regulatory authority, in addition to the corporate requirements set out in this brochure. These businesses include banking, deposit-taking, money-lending, securities and commodities dealing and advising, leveraged foreign exchange trading and insurance.

A discussion of the relevant requirements for these businesses is beyond the scope of this article but before commencing to operate any such business, specific professional advice should be obtained.

6. Prospectuses

The Companies Ordinance and the Securities Ordinance contain extensive provisions in relation to the issue and distribution of prospectuses in Hong Kong concerning shares in or debentures of companies, whether the company is registered in Hong Kong or not.