Doing business in Hong Kong

I. INTRODUCTION Doing business in Hong Kong Tim Drew Partner timdrew@robertwang.com Karen Yan Associate karenyan@robertwang.com Robert Wang Solicitors 1 On 1 July 1997, sovereignty over Hong Kong transferred to the People s Republic of China with Hong Kong designated the Hong Kong Special Administrative Region of the PRC. Upon resumption of sovereignty to China, Hong Kong became subject to the Basic Law, which is a mini-constitution applicable to Hong Kong for a period of 50 years following the handover date (i.e. until 30 June 2047). The Basic Law provides that during such time, Hong Kong s capitalist system and way of life will remain unchanged and Hong Kong will have a high degree of autonomy in its internal affairs. Since the handover, it is evident that the change of sovereignty has had little practical effect upon its business community, there being no significant changes in law or otherwise to adversely affect private contractual arrangements. The Hong Kong Government encourages free enterprise. The formalities and requirements for establishing a business are simple and straightforward. Generally there are no regulations concerning a company s minimum capital, the degree of local/overseas participation in the ownership or capital structure, or the relative proportion of local to overseas staff. There are no exchange control or money market restrictions inhibiting the free flow of capital into or out of Hong Kong, dealings in foreign exchange may be freely carried out and capital can be held in any currency. Efficient local banks and branches of most multi-national banks provide highly competitive banking services. 1 Robert Wang Solicitors is a full service Hong Kong based law firm, having its core practice areas in corporate & commercial, litigation and dispute resolution, intellectual property and real estate. The firm has associated offices in both Singapore and London and is the Hong Kong representative member of the World Law Group, a premier network of leading commercial law firms worldwide. For more information on the firm please visit www.robertwang.com. - 1 -

Every investor has a wide range of business vehicles to choose from when wishing to set up business in Hong Kong. All enterprises are subject to the same rules. The most common forms of business vehicles foreign investors choose are: Private limited companies Branch offices of overseas companies Representative offices Joint ventures II. PRIVATE LIMITED COMPANY Where the parent company does not necessarily wish to assume responsibility for the liabilities of the business in Hong Kong or where the Hong Kong organization should be monitored separately from the overseas operation, it is preferable to incorporate a new company in Hong Kong. Companies incorporated in Hong Kong may be public or private and may be limited by shares or by guarantee. The vast majority of companies in Hong Kong are private companies limited by shares. To establish a Hong Kong company, a minimum of one shareholder, one director and a secretary is all that is required. Neither the shareholder(s) nor the director(s) need to be resident in Hong Kong. Shareholders and directors can be either individuals or companies. There must not be more than 50 shareholders in a private company. The liability of each shareholder is limited to the share capital they have invested. The company secretary, who is responsible for ensuring compliance with ongoing legal returns, accounts, audit and other requirements, must be a resident in Hong Kong if an individual or must have its registered office in Hong Kong if a body corporate. There is no prescribed minimum amount for authorized share capital. A private limited company established and organized under the Companies Ordinance in Hong Kong is an independent legal entity liable for its own debts and obligations. If a limited liability company is required quickly, a company can be bought off-the-shelf i.e. a ready made company that is already incorporated but has never traded. Shelf companies provide an immediate solution although if the company name and specific provisions in its constitution are required to change, it will take longer. A limited liability company in Hong Kong is not required to file its accounts with the company s registry in Hong Kong (although it must do with the Inland Revenue Department for tax assessment purposes) and therefore such information remains confidential. - 2 -

III. BRANCH OFFICE Where a company incorporated outside Hong Kong establishes a place of business or branch office in Hong Kong as an extension of the investing company, it is referred to as an overseas company. Such branch offices are generally subject to the same legal and tax consequences as companies incorporated in Hong Kong. Overseas companies must register their branch with the Registrar of Companies within one month from commencement of business in Hong Kong. Branches are legally required to file returns and audited accounts, on an ongoing basis. Furthermore, the company must appoint a representative, ordinarily resident in Hong Kong, to accept service of official and/or court documents in Hong Kong, on behalf of the overseas company. The overseas company remains fully liable for all the obligations of the Hong Kong branch office. Business registration with the Inland Revenue Department is required for the branch office. IV. REPRESENTATIVE OFFICE Like a branch, this is a means by which a company incorporated outside Hong Kong establishes a place of business in Hong Kong. A representative office however can only fulfil a limited range of functions. Representative offices are particularly useful for foreign companies that wish to analyse the Hong Kong market prior to committing itself to making a bigger investment in the city. Whereas a branch and subsidiary can conduct full operations, a representative office may only collect information or maintain contacts with customers, so-called promotional and liaison work. A representative office cannot enter into contracts, except for employing staff and contracts necessary for running the office (for instance renting office space and for utilities). A representative office is prohibited from carrying on business in Hong Kong. If it does, it is required to register as a branch (see paragraph III above). Since a representative office cannot undertake business in Hong Kong, it should not generate any profits. Within one month of commencing business in Hong Kong, it is necessary to apply for a Business Registration Certificate. A business registration renewal fee is payable annually. - 3 -

V. JOINT VENTURES Joint ventures with local business interests are welcomed and have proved to be of great value in Hong Kong and in the PRC. The local partner can make a valuable contribution in terms of knowledge of local customs and practices as well as connections within the commercial and political communities. Joint ventures are created when two or more joint venture partners want to undertake business together. Each joint venture partner will contribute certain resources in return for shares and/or a percentage of profits. Normally a private limited liability company is established to conduct the joint venture business. Once the joint venture partners have established agreement on the terms of the joint venture setting out the contributions and rights, the company can be incorporated in the usual way. VI. TAXATION Hong Kong operates a territorial basis of taxation under which taxes are only imposed on profits or income with a Hong Kong source. Foreign-sourced income is not taxable even if remitted to Hong Kong. The Inland Revenue Department is responsible for tax matters in Hong Kong. Hong Kong has a different tax regime and is treated as completely separate to the PRC. The principal direct taxes are profits tax on business profits, salaries tax on salaries and property tax on income from property (apart from miscellaneous duties such as stamp duty). a) Profits tax persons and companies carrying on business in Hong Kong are liable to Profits Tax on profits arising in or derived from Hong Kong. Losses from a previous year for the same business can be carried forward. b) Salaries Tax is charged on all income arising in or derived from an office of employment in Hong Kong. c) Property Tax is charged on non-corporate owners at a standard rate on rent receivable from real property situated in Hong Kong. Hong Kong does not have any capital gains tax, withholding tax on dividends and interest, inheritance tax or GST. Few items attract stamp duty. - 4 -

VII. LEASING PREMISES Before commencing business in Hong Kong it will, in most cases, be necessary to rent premises from which the business will be operated. Leases are typically two or three years in duration with an option to renew. After agreeing with the landlord on the principal terms of the lease, the landlord will issue a Letter of Offer. This has to be counter-signed and returned by the tenant within a specified period with a security deposit (usually two to three months rental, plus management service charge and estimated rates). Apart from rent (plus the initial security deposit), office occupancy costs in Hong Kong may also include: One off payment to property agent (normally one month s rent) after receiving their services in finding the property Management service charges - normally paid in advance, this charge typically covers airconditioning, security, common areas cleaning, and other building services. Government rates at 5% of annual rental value, payable quarterly in advance Land rent VIII. EMPLOYEES Once a place of business has been established in Hong Kong it will often be necessary to engage employees for the business. The Employment Ordinance (Chapter 57 of the Laws of Hong Kong) sets the minimum entitlements for employees, such as statutory holidays, sick and maternity leave, severance and long-service payments. There is no legal minimum wage in Hong Kong. Wages can be calculated by the hour, day or month, or by piece meal rate. Benefits employers are required by law to provide: Statutory holidays statutory holidays are prescribed in law. Pension contributions to Hong Kong s Mandatory Provident Fund (MPF) Hong Kong s MPF is a privately managed fund designed to provide retirements benefits. In general, MPF applies to all members of the workforce between the ages of 18 and 65. Both employers and employees are required to contribute 5% of the employees monthly income into a registered MPF scheme, up to a maximum of HK$1,000 each per month. Employees may however choose to contribute more. - 5 -

Sick leave Employees are entitled to paid sick leave, for a period determined by the length of their employment. Maternity leave Subject to eligibility criteria being met, maternity leave is granted for a minimum of 10 weeks. Severance payments Employees who have been employed for at least two years are entitled to severance pay if he/she is dismissed by reason of redundancy or being laid off. Long-service payments Certain employees who have been employed under a continuous contract for no less than five years are entitled to a long service payment on dismissal. IX. IMMIGRATION People from more than 170 countries and territories may come to the city visa-free for visits ranging from seven to up to 180 days. In broad terms, short-term visitors may undertake business, such as conducting negotiations and signing contracts, while entering Hong Kong on a visitor visa or entry permit. Generally, foreign nationals must obtain a visa prior to coming to Hong Kong to work, invest or to remain in Hong Kong. A visa is granted on condition that the applicant keeps to the original purpose of the visa when it was issued. Application for an entry visa/permit to enter Hong Kong for employment/investment may be favourably considered to foreign nationals who possess special skills, knowledge or experience of value to and not readily available in Hong Kong, or who are in a position to make a substantial contribution to the Hong Kong economy. A prerequisite for a work/employment visa is a sponsor, namely the person or enterprise offering employment. It normally takes four to six weeks to process a work/employment visa application. Once individuals have resided in Hong Kong for a continuous period of not less than seven years and made Hong Kong their permanent residence, individuals may apply for their permanent residence, which once granted gives them the right of abode and right to work in Hong Kong without the need to have a work/employment visa. The information contained herein does not constitute legal advice and should not be relied upon as such. Special advice should always be sought to reflect your company s particular circumstances. - 6 -