Corporate Establishment. Accounting. Payroll. Taxation. Audit. Due Diligence. Guide To Doing Business In Hong Kong

Transcription

1 Corporate Establishment. Accounting. Payroll. Taxation. Audit. Due Diligence Guide To Doing Business In Hong Kong

2 DEZAN SHIRA & ASSOCIATES 15 th Anniversary in China Welcome to Dezan Shira & Associates and to the emerging Asia markets of China, and Vietnam. With 17 years of experience in the region, our firm is one of the very few cross-border practices operating in emerging Asia. The countries we work in are rapidly evolving as so are the legal and tax environments there. As a professional services firm, Dezan Shira & Associates combines both business advisory and tax disciplines under one roof. Add to this our extensive, local knowledge of each of the markets we operate in, and we are able to provide a uniquely strong platform to help our clients take their businesses forward. Do you want to do business in China? Whether you already have a presence in China or are new to this fascinating market, this guide will be a practical introduction to choosing your China investment vehicle, the first step in setting up any business in China. Our expertise in this area is just one aspect of the specialized business advisory and tax services that our team of experts on the ground in offices throughout China has to offer. We believe our resources and expertise are unmatched in Asia, and this, coupled with our dedication to client service, is the reason our practice has become the market leader it is today. Welcome to emerging Asia. Welcome to Dezan Shira & Associates. Guide to Doing Business In Hong Kong Hong Kong s investment environment, favorable tax system and integration with mainland China has made it one of the most attractive foreign direct investment destinations in the world. As an international financial and commercial center, Hong Kong is important for serving the Asia-Pacific region. This guide will present an overview of Hong Kong from a business perspective and will introduce different entities available to foreign investors, the proper procedures for registration, and an overview of their tax system. A presentation of the Closer Economic Partnership Agreement between Mainland China and Hong Kong is also provided. THE MOST ATTRACTIVE FEATURES ABOUT HONG KONG 1 Territorial based tax system and comparatively low tax levels 2 No barriers to trade 3 Tariff free access to Mainland China 4 A well developed legal system and good protection of intellectual property Key Data 2008 Population (m) 7 Real GDP Growth (%) 2.5 GDP (billion US$) 215,6 GDP (billion US$, PPP) 306,9 Introduction Hong Kong became the hub of Britain s trade with China following the first opium war in Although severely hit by the Japanese occupation during the Second World War, the city was characterized by massive development during the twentieth century. A cheap labor base fuelled a boom in manufacturing during the post-war years and financial services began to take greater importance during the 1970s. In the 1980s, low-wage jobs moved to the mainland. Hong Kong was reverted back into Chinese rule in 1997 as a special administrative region or SAR with 2 DEZAN SHIRA & ASSOCIATES

3 guaranteed autonomy until Hong Kong is governed by a Chief Executive, whose appointment is strongly influenced by Beijing. The legal system is based on a combination of English Law and Basic Law (a mini-constitution underpinned by an international treaty). It is characterized by strict adherence to the principle of the rule of law and an independent judiciary body. The Special Administrative Region has autonomy in all matters except those involving foreign affairs and defense which fall under the authority of the Chinese central government in Beijing. The official languages are English, Cantonese and Mandarin. The Cantonese dialect is widely used in industry and domestic trade while English is the main language used in commercial and political contexts. Hong Kong operates a free trade laissez-faire economic system with minimal government interference in all sectors of the economy. The tax system is only concerned with income generated within Hong Kong's borders, making profits made abroad exempt from taxation. There is no taxation on dividends, nor are there any statutory anti-trust laws. Exchange controls on foreign currency are nonexistent except for those that relate to suspected terrorist financing and money laundering. Hong Kong does not have a central government bank. Note issuing privileges have been granted to HSBC, Standard Chartered Bank and Bank of China. After reuniting with China, the territory kept its currency, the Hong Kong dollar, which is officially pegged to the U.S. Dollar at a rate of US$1=HK$7.80. Hong Kong does not charge tariffs on imports or exports of goods with import and export licensing kept to a minimum. Integration with mainland China has increased with the Closer Economic Partnership Arrangement (CEPA). Hong Kong is also a founding member of the World Trade Organization and a member of the Asia-Pacific Economic Cooperation forum, with the aim of achieving sustained growth and development in the Asia-Pacific region through the promotion of economic interdependence and the reduction of trade barriers. Hong Kong still possesses full autonomy in the conduct of its external commercial relations, enabling it to freely conclude and implement trade agreements with states, regions and international organizations. Structures and requirements for setting up and maintaining a business in Hong Kong The most appropriate business structure will depend on the organization s tax issues, strategic plan, financial aspects, etc. The most common business vehicles for foreign investors are: Private limited companies Branch offices of overseas companies Representative offices Partnership/sole proprietorships Joint ventures Differences between the vehicles The main differences between these vehicles lie in their operating scope. A representative office is not allowed to do business itself, it is, as the name suggests, only for representation. On the other hand, private limited companies are independent vehicles able to conduct business in most sectors. The vast majority of companies incorporated in Hong Kong are private companies limited by shares, although the company can also be public and/or limited by a guarantee. This structure is convenient for foreign companies that want to incorporate a wholly-owned Hong Kong company as a subsidiary. The limited liability aspect is a major advantage of this vehicle. While other vehicles put the mother company s or one s personal assets at risk, the liability of the limited company is restricted to the amount of capital injected to the company. Often referred to as a non-hong Kong company a branch office is an extension of the foreign investing company. The branch operation is required to comply only with limited provisions under the Companies Ordinance of Hong Kong compared to the requirements needed for private limited companies. The major difference between a branch and a representative office is that a representative office can only fulfill a limited range of functions. A branch and subsidiary can conduct full operations, a representative office may only collect information or maintain contacts with customers and conduct so-called promotional and liaison work. A representative office cannot enter into contracts, except for renting office space and paying for utilities. DEZAN SHIRA & ASSOCIATES 3

4 Representative offices are particularly useful for foreign companies that wish to analyze the Hong Kong market before making bigger investments in the city. However, this option is currently limited to only foreign banks. A sole proprietor or partner is personally liable for the debts and liabilities of the business as these bodies do not have a separate legal entity. In the case of limited partnerships (which are rare), liability is limited only for some of the partners. Joint ventures (JV) are an attractive option when two or more companies want to undertake business. Each JV partner will contribute certain resources in return for shares and/or a percentage of profits. This is usually done by setting up a private limited company to operate the joint venture business. General requirements for setting up a business in Hong Kong There are different requirements for every business structure. The following section will cover these and as one will see, private limited companies have the most requirements. Business Registration Certificate All business vehicles need a business registration certificate. The application process is straight forward: complete a prescribed application form from the Business Registration Office, pay the business registration fee, levy for the Protection of Wages on Insolvency Fund with proof of one s identity. Sole-proprietorships, partnerships, and branches need to apply for this certificate within one month from its date of commencement of business. Limited companies should do the same within one month from its date of incorporation (irrespective of whether actively conducting business or not). The certificate must be renewed annually and the respective registration fee paid each time. Company name The company name can be in English, Chinese or both, but it must be unique and not include certain restricted words. It is not possible to reserve a name in advance. Once a company is incorporated with both an English and a Chinese name, both names represent the full name of the company and should be used together. Availability of the proposed company name can be checked by conducting a simple name search at the Companies Registry s Cyber Search Center. Industries with extra requirements Certain businesses require a specific license and other approval from the relevant regulatory authority, in addition to other requirements set out in this guide. These businesses include various financial institutions, telecommunication and broadcasting companies. This guide will not go deeper into these sectors. Process and cost of registration Registration requirements and costs vary from vehicle to vehicle. There are no registration requirements for representative offices and partnerships/ sole proprietorships. These only need a business registration certificate to do business. Therefore, these vehicles are relatively cheap and easy to form. In addition to a business registration certificate, private limited companies and branch offices need to be filed in the companies registry. To be filed, private limited companies must submit a copy of the company s Memorandum and Articles of Association to the companies registry. These must be certified as true by a company founding member. An incorporation form must also be submitted. The forms are different for companies limited by shares than for companies limited by a guarantee. Certified copies of the instrument defining the company s constitution, the company s certificate of incorporation (or equivalent) and the latest accounts of the company must be submitted to the companies registry before a branch office can be registered. If the company is a private company and is not required to A B ESTABLISHMENT WORK PROCESS FLOW FOR A LIMITED PRIVATE COMPANY Check whether the proposed company name is available Provide Copy of Memorandum, Articles of Association, as well as an Incorporation Form to Companies Registry 4 DEZAN SHIRA & ASSOCIATES

5 publish or disclose its accounts to the public, the latest accounts are not required. The companies registry also needs additional details such as the company s directors, secretary and company s authorized representative in Hong Kong, the principal place of business in Hong Kong and the place of incorporation. If the company does not disclose its accounts to the companies registry, the reasons must be stated. The companies registry will process the documents and issue a certificate of incorporation in about 4 working days. Share capital This topic is only relevant for limited companies. There is no minimum or maximum share capital. Authorized share capital (which is the maximum amount of capital which a company may issue) requires a companies registry fee at the rate of HK$1 for every HK$1,000 of share capital up to a cap of HK$30,000. However, there is no such fee on the issue of shares at nominal value. Shares must have a stated nominal value and no par value shares are not permitted. Share capital may be divided into different types or classes of shares such as ordinary, preferred or deferred shares with special rights attached to them as prescribed by the company s articles of association. Shareholders This topic is also only relevant for private limited companies with anywhere from one and 50 shareholders. Thus, a JV could in theory consist of an unlimited number of partner companies. The liability of each shareholder is limited to the share capital they have invested. Shareholders can be individuals or corporations of any nationality, home or residence. Ongoing compliance For corporate entities such as private limited companies and branches, they must observe its legal obligations under the companies ordinance and file annual returns, audited accounts, specified forms etc. within the given time period on an continuing basis. Ongoing requirements are less burdensome for non-corporation entities such as partnerships/sole proprietorships than for corporate vehicles. No audit is required; only on-going compliance work should be done. They should prepare and submit the profit tax return to the Inland Revenue Department before the deadline when the tax return is received. Auditors and accounts Companies must keep necessary books of accounts to give a true and fair view of its affairs and transactions. The Hong Kong Inland Revenue Department requires all companies to submit audited accounts on a yearly basis. Hong Kong is a developed and open society. Many details about a company are publicly available although the accounts of a private company are not published or filed on any public record in Hong Kong. The accounts of a public company will however be filed at the companies registry for public access. In addition to the above requirements, private limited companies are also required to file an annual return. The annual return will show updated information on the company s authorized and issued share capital, shareholders, directors, as well as registered charges over assets and property. Legal treatment Branch offices are generally subject to the same legal and tax consequences as companies incorporated in Hong Kong. There is no distinction between the foreign corporation itself and its branch, and the branch is only an address at which the corporation itself carries on business. Office Each Hong Kong limited company must have a registered office address in Hong Kong. The office address serves as the company s legal address for notices and proceedings and can be different from the business address. Virtual offices also need to provide an address but companies may share the same registered office address. A partnership or sole proprietorship only needs a business address in Hong Kong. Directors One is sufficient and there is no legal maximum number. Corporations may be directors as long as the company is not part of a listed group. Individuals may be of any nationality, domicile and residence. The directors names, nationalities, including former nationalities, addresses and business titles must be filed on the public record at the companies registry. There are no restrictions as to the place at which the board meetings can be held. DEZAN SHIRA & ASSOCIATES 5

6 Company secretary This requirement only applies to limited companies. The secretary s role is to ensure compliance with ongoing legal returns, accounts, audit and other requirements. If an individual is appointed, he/she must be a resident of Hong Kong. In the case of appointing a corporation as the company secretary, it must have a registered office or place of business in Hong Kong. The company's secretary must be filed on public record at the companies registry. The company's secretary main function is to maintain the company s statutory books including registers of directors and shareholders, the minutes of directors and shareholders meetings, the share certificate book and prepare the documents which have to be filed on public record. Termination The business operation of a branch, representative office and partnerships/sole proprietorships can be terminated easily by notifying the companies registry. Private limited companies can only be terminated via liquidation or deregistration. They must also submit the necessary documents and pay the fee to the Registrar of Companies. Termination can end up becoming a lengthy process. The tax system Personal Taxation in Hong Kong There are two possibilities open to the taxpayer for calculating personal income tax (PIT): (1) progressive tax taken on a sliding scale against the taxpayer's net chargeable income (2) standard taxation at 15 percent, again, based on net chargeable income. The lower resulting tax liability is chosen as the final payable income tax. The maximum average tax rate in Hong Kong is thus 15 percent. PROGRESSIVE PIT RATES 0-40,000 HKD yearly 2 % 40k-80,000 7 % 80k-120, % above 120k 17 % Dividends received from any corporation enjoy a tax exemption. Tax rate Since Hong Kong follows the territorial tax principle, the tax system is considered favorable in an international context. This section will introduce an overview of the taxes facing most firms and briefly present the conditions for having to pay tax. The requirements for having to pay tax are also presented. Double taxation treaties are finally covered. An additional column box about personal income taxation is also provided. The territorial tax principle states that only profits derived from a business, profession or trade conducted in Hong Kong are to be taxed. Profits earned in any other country are exempt from taxation in Hong Kong, even if they are brought back to the jurisdiction. If the source of profits are unclear, one should pay careful attention to government guidelines and make sure to keep all necessary documentation. Tax rates often change from year to year in Hong Kong. For 2009, the standard corporate income tax rate is 16.5 percent. The profit tax rate for partnerships and sole traders is 15 percent for the 2008/2009 fiscal year and was previously 16 percent for the 2007/2008 fiscal year. Many items are tax deductible so the average tax rate on profits may actually be lower. A taxpayer is entitled to deduct all expenditures from his gross income to the extent to which it is incurred in the production of profits assessable. Such sums include most interest costs, rent in respect to business and factory premises, bad debts, and salaries and payments to approved pension schemes. Sums paid out on capital expenditures are however not tax deductible. In the case of losses, these can be carried forward without any limits. Value-added tax is non-existent. Interest earnings from deposits in authorized institutions are also exempt from profit tax. Most corporations are exempt from profit tax as income earned from any property occupied for the purpose of producing profits is not subject to property taxation. If this is not the case, the rate of property tax is 15 percent. The tax is based on the rent payable for similar land or buildings. Salaries are subject to social security contributions of 5 percent. Double taxation treaties Since Hong Kong is an SAR of China, it is prevented from using China s double taxation treaties. Hong Kong has a wide scope of double taxation agreements 6 DEZAN SHIRA & ASSOCIATES

7 from income coming from airline and shipping activities. For other income, mainland China, Belgium, Luxembourg, Thailand and Vietnam are the only countries that have double taxation relief agreements which are not restricted to airline and shipping incomes. This section will briefly present the highlights of these agreements. These agreements combined with the territorial tax principle make Hong Kong an attractive jurisdiction for holding companies. Mainland China This agreement is largely based on the Organization for Economic Co-operation and Development (OECD) model for double taxation treaties, and provides credits if profits are taxed in both jurisdictions. With the agreement, the rate for withholding tax for dividends transferred from China to a Hong Kong company is currently 5 percent, lower than the 10 percent in most other countries. Top rates for withholding tax for interest a Hong Kong company or resident receives has been lowered to 7 percent. The taxing right for gains a resident or business receives from the transfer of shares in a mainland enterprise is now to be allocated exclusively to Hong Kong. Income earned in China by a Hong Kong-based shipping, aviation or land transport company is exempt from tax on the mainland. A Hong Kong enterprise is only liable for taxes in China if they have a permanent establishment there. In addition to this, Hong Kong will also grant tax credits for all tax paid on the mainland. Other countries In recent years, Hong Kong has signed comprehensive double taxation agreements with Belgium, Luxembourg, Thailand and Vietnam. The intention of these is to make sure investors will not have to pay tax twice on a single source of income. The agreements either reduce or even eliminate taxes on profits, dividends, royalties, interest, to name a few. The agreement with Vietnam and Luxembourg has eliminated double taxation by granting full exemption to profits of Luxembourg and Vietnamese companies doing business in Hong Kong through a branch. The key feature of the double taxation agreement with Thailand is the exemption on capital gains from investments. The Thailand-China double taxation treaty does not contain this provision. Profits remitted by a branch office in Thailand to a Hong Kong head office will not be taxed by the Thai Government. Such remittances were previously subject to a 10 percent withholding tax. Luxembourg charges no tax on dividends paid by a Hong Kong parent company and Hong Kong does not withhold tax at source on dividends paid to the shareholders. The latter also is the case in the agreement with Vietnam. In case of the agreement with Belgium, dividends shall only by taxed in the recipient country. Due to the territorial tax principle, the main advantage of the agreement is that the Belgian withholding tax rate on dividends will be reduced to a maximum of 15 percent. The Closer Economic Partnership Arrangement (CEPA) The Closer Economic Partnership Arrangement is a free trade agreement between the People s Republic of China and Hong Kong. It grants easier access for Hong Kong-made products and services to the mainland market. A total of 1,407 categories of made in Hong Kong products are exempt from tariffs when exported from Hong Kong to the mainland. This tariff-free preference can help increase the competitiveness of Hong Kong goods in the mainland market, compared with goods imported from other countries. At the same time, businesses may take advantage of Hong Kong s legal system and intellectual property protection regime. The CEPA is particularly attractive for service sector firms because its liberalization measures go beyond the mainland s commitments to the WTO and give companies in Hong Kong a first-mover advantage. The lower entry threshold in some sectors have facilitated the entry of small and medium sized enterprises (SMEs) into the mainland market. The CEPA is an open platform and provides a mechanism for further liberalization when both parties agree. Since 2003, when the agreement was signed, several agreements on further liberalization of trade have been implemented. Generally speaking, new preferential treatments coming into effect will automatically benefit HKSS firms exporting relevant services. DEZAN SHIRA & ASSOCIATES 7

8 General requirements for CEPA treatment Except for representative offices, all vehicles mentioned in this guide will generally be able to enjoy preferential treatment granted under the arrangement. In fact, companies of any nationality can apply as long as they are: incorporated in Hong Kong; have been in operation for more than 35 years, depending on the sector; are liable to pay Hong Kong profits tax and employ at least 50 percent of its staff locally This is provided that they export products eligible for CEPA zero tariff treatment, or that they can fulfill the definition and related requirements for being a Hong Kong service provider. Resources General Dezan Shira & Associates Website: China Briefing Website: The Closer Economic Partnership Arrangement The Trade and Industry Department s CEPA website Website: Goods entitled to CEPA zero Tariff Preference - Mainland 2009 Tariff Codes, Product Description and Rules of Origin Website: trade_goods.html Hong Kong Trade Development Council CEPA Site Website: Contact us if you are interested in setting up a wholly foreign-owned enterprise at the following info@dezshira.com You can also call any of our offices at the numbers listed on the last page. Setting up in Hong Kong Invest in Hong Kong Website: The Companies Registry s Cyber Search Center Website: The Hong Kong Tax System The Hong Kong governments site on taxes & duties Website: Inland Revenue Department Website: 8 DEZAN SHIRA & ASSOCIATES

9 Dezan Shira & Associates Asia Regional Offices China Beijing Sabrina Zhang Regional Partner Suite 701, East Tower Twin Towers, B-12 Jianguomenwai Avenue Beijing, Ningbo Lily Wang Manager Room 505 Shiji Jinmao Mansion 158 Baizhang Dong Lu Ningbo, Dalian Adam Livermore Senior Associate Dalian Ascendas IT Park Room 304, 1 Hui Xian Yuan Dalian High- Tech Industrial Zone Dalian P.R. China Guangzhou Rosario DiMaggio Senior Associate guangzhou@dezshira.com Unit 1005, 10/F Tower B Center Plaza 161 Linhexi Lu Guangzhou, Shanghai Olaf Griese Regional Manager shanghai@dezshira.com Suite Tian An Centre 338 Nanjing Xi Lu Shanghai, Shenzhen Alberto Vettoretti Managing Partner shenzhen@dezshira.com Suite 6309 Diwang Commercial Bldg 5002 Shennan Dong Lu Shenzhen, Hangzhou Peter Thomsen Senior Associate hangzhou@dezshira.com Suite 1001 Xuefeng Mansion 346 Qingtai Lu Hanghzou, Delhi Chris Devonshire-Ellis Senior Partner delhi@dezshira.com Level 15 Eros Corporate Towers Nehru Place New Delhi, Bangalore bangalore@dezshira.com Level 9, Raheja Towers Mahatma Gandi Road Bangalore, Vietnam Hanoi Hoang Thu Huyen Country Manager vietnam@dezshira.com Room 1028, Pacific Place Bldg 83B Ly Thuong Kiet St. Hoan Kiem District Hanoi Vietnam Zhongshan Lisa Qian Manager zhongshan@dezshira.com Room 513, West Wing Yi Hua Commercial Center Section 3, Zhongshan Lu Zhongshan, Mumbai Vikas Srivastava Legal Associate mumbai@dezshira.com Suite 303 B wing Leo Bldg 24th Rd., Khar (w) Bandra Mumbai, Kolkata kolkata@dezshira.com Level 6, Constantia Dr. U. N. Brahmachari Marg Kolkata, Ho Chi Minh City vietnam@dezshira.com /F Saigon Tower 29 Le Duan St. District 1 Ho Chi Minh City Vietnam Hong Kong Hong Kong Joe Sze Manager hongkong@dezshira.com /F, Wharf T&T Centre Harbour City 7 Canton Road Tsimshatsui, Kowloon Hong Kong Chennai chennai@dezshira.com Regus CitiCentre, Level 6 10/11 Dr. Radhakrishnan Salai Chennai, For region specific inquires please call any of our listed offices or contact: info@dezshira.com