Opening an office in Hong Kong
Why Open a China office in Hong Kong?
If you are thinking about opening an office in Hong Kong, it is consistently acknowledged as the single most competitive city for doing business in China. Hong Kong is the largest foreign investor in China, conveniently located within the Pearl River Delta economic zone which is China’s most dynamic and prosperous industrial hub. It accounts for a disproportionately high percentage of total national GDP. Hong Kong and the city of Shenzhen are looking for closer integration on a policy level and the Hong Kong–Zhuhai–Macau Bridge is linking Hong Kong physically to other economic neighbours.
Hong Kong is within a four-hour radius by air to most other major Asian cities and more than a quarter of the entire global population, making it an ideal location for regional headquarters. With 7.84 million overnight visitor from Mainland China in the first half of 2013 alone, opening an office in Hong Kong provides the ideal “shop-front” for Chinese customers/clients.
Opening an office in Hong Kong
Many foreign companies opening an office in Hong Kong use it as their management and operational centre for doing business in China. In particular, Hong Kong companies provide a virtual firewall to protect business from potential legal and financial risk exposure in China. The reasons below contributed the Bloomberg naming Hong Kong as the best Country for doing business globally (2014).
Major benefits of opening an office in Hong Kong include:
1. Hong Kong Legal Framework
Hong Kong’s case-based common law system is modeled on the British legal system and has remained largely unchanged since the handover to China in 1997. The system is guaranteed until 2047 under Hong Kong’s mini- constitution, the Basic Law.
In comparison with China’s developing, legal system, Hong Kong offers a familiar common law, legal environment that is characterized by a completely independent judiciary, stability and transparency. Conflict resolution rather than retribution is central to the Hong Kong legal model. It is supported by a strong legal profession, well-versed in local and international law. Unlike China, the legal system in Hong Kong is also entirely independent of the political system. In China, it is clearly used as one of many instruments of State policy. Such an environment not only helps mitigate risk exposure and protect contract terms, it also provides an effective firewall for foreign companies doing business in China.
In July 2006, China and Hong Kong signed a mutual legal assistance agreement to make civil and commercial judgments delivered in each other’s courts enforceable on both sides of the border. These moves continue to further enhance Hong Kong’s role as the gateway to China.
As an arbitration and dispute resolution centre, Hong Kong is unparalleled in terms of its infrastructure and corruption-free judiciary. The Hong Kong Arbitration Ordinance provides the legislative support to mediation and arbitration in Hong Kong. Hong Kong adopts the New York Convention on the Recognition and Enforcement of Foreign Arbitrary Awards. This lays down a detailed framework for the recognition and enforcement of arbitration awards with over 100 countries (including China) signatories to this Convention. Hong Kong courts recognize and enforce arbitration awards made in countries which are signatories to the New York Convention, in accordance with the terms of that Convention. There is also provision in the Arbitration Ordinance for Hong Kong courts to enforce domestic awards and awards made in non-Convention centers. Similarly Hong Kong awards can generally be enforced through the courts of other signatory countries. The Hong Kong system is so well recognized, that it is not uncommon for Mainland companies to use Hong Kong as a base to settle disputes rather than do so on the Mainland.
Hong Kong’s ICAC is a strong anti-corruption body.
2. Hong Kong Financial & Banking System
Opening an office in Hong Kong places an organisation in one of the largest international banking centres in the world. The territory is host to 70 of the world’s 100 largest banks, 156 licensed banks and 61 representative offices of foreign banks from 34 countries.
Due to the structure of the local economy, its banks have a strong international focus, with particular strengths in trade and project finance. Since there are no capital controls or restrictions on foreign exchange, managing a multi-currency trading business is straightforward and efficient. Hong Kong banks have real multi-currency accounts, transactions can be conducted in foreign currencies and telegraphic transfers can be executed overnight.
3. Hong Kong Tax System
Hong Kong operates a simple, business-friendly territorial basis of taxation, or what is called the ‘onshore/offshore system’. Hong Kong imposes tax on profits or income with a Hong Kong source. Unlike in the case of Singapore, foreign-sourced income even if remitted to Hong Kong is not liable to tax (on provision of clear evidence of the same).. This is a very beneficial system for international trade, where tax can be deferred and that money reinvested into the business until the profits are repatriated back to the investor’s home country.
By opening an office in Hong Kong transactions that originate in Hong Kong will only attract corporate tax of 16.5%. Salaries tax is a modified at tax rate of 15% of gross income. Hong Kong does not have any capital gains tax, withholding tax on dividends and interest, inheritance tax and value added tax.
4. Hong Kong & China Taxation Treaty
On 21 August 2006, China and Hong Kong signed an agreement for the avoidance of double taxation to replace a previous limited scope arrangement signed in 1998. The arrangement has been effective from 1 January 2007 in China and 1 April 2007 in Hong Kong.
The agreement reduces withholding tax on passive income such as, royalties and interest and offers tax exemption on certain capital gains. This again further enhances Hong Kong’s role as a base for foreign investors when doing business or investing in China.
|China’s non-treaty rate:||10% to 20%||10%||10%|
|HK’s non-treaty rate:||Nil||5.25%||Nil|
|Treaty rate:||5% to 10%||7%||0% to 7%|
5. China Withholding Tax
China imposes withholding tax on dividends at non-treaty rates of between 10-20%. The preferential rate of 5% withholding tax on dividends (as offered under the Hong Kong China Agreement) is therefore regarded as a low rate and helps to provide certainty for investors, subject to meeting a series of ownership and substance requirements that are in line with other OECD standard tax treaties . In general, the agreement offers the most favorable rates available amongst the double taxation treaties signed by China, and compares favorably to China’s domestic tax law.
6. Exchange of Information
The agreement also has an article on Exchange of Information that adopts a more restrictive standard for the exchange of information between Chinese and Hong Kong Tax authorities than the 2004 version adopted by most countries in their double taxation avoidance treaties. The article provides that only information on those taxes covered by the new double avoidance tax treaty can be exchanged.
7. Local Talent Pool
Hong Kong possess a multi-cultural, skilled (highly rated in IT) and intelligent talent pool Moderate Proficiency in English (usually fluent in certain sectors) and employer-friendly labour Ordinance (laws).
How to open a Hong Kong office
Just as individuals need an ID card to enter into any contract and to access services, don’t think about opening an office in Hong Kong without a Company and/or Business Registration Certificate, a company chop (stamp) and seal. If your registered office is not your place of business operations, the latter will need a Branch Registration Certificate. When opening an office in Hong Kong, obtain these from the company handling your Hong Kong incorporation. Using these documents and chop you will need to set up a bank account, insurances (mandatory employees compensation insurance, public liability etc.), licenses (if applicable) and MPF, if you are running a payroll.
If you are looking for an interim solution when opening an office in Hong Kong, see our Classifieds. If you are opening a Hong Kong office, you or your staff may benefit from using a Hong Kong Orientation service.
- Hong Kong Government
- HK Government Support & Consultation Services for SMEs
- General Chamber of Commerce
- Invest Hong Kong
- HK Trade Development Council
- HK Consulates
Please note that no liability is accepted for inaccuracies or omissions when opening an office in Hong Kong, pursuant to our terms.