An Overview

Hong Kong is a significant trading economy and a major domicile for both multinational and local companies operating in Asia. Although not commonly regarded as a tax haven, Hong Kong offers significant tax advantages including low rates of taxation and the ability to legally earn profits tax-free under certain conditions - see 'Profits Tax' below.

Hong Kong is ideally located for companies carrying out business in the Peoples Republic of China and throughout Asia. Hong Kong incorporated companies are increasingly becoming the chosen entities for conducting trading activities in Asia as they benefit from a tax friendly environment but do not share the same profile of a company incorporated in some of the popular offshore jurisdictions.

The following is a brief guide to the Hong Kong taxation system and the legislation relevant to the incorporation and operation of a company in Hong Kong. ACS will be happy to discuss client's individual circumstances and tailor the incorporation and operation of a Hong Kong incorporated company as required.

Taxation in Hong Kong

Taxation in Hong Kong is based on a territorial source principle rather than based on residency. This results in individuals and companies incorporated in Hong Kong paying tax only on income or profits earned from activities actually taking place in Hong Kong. If there are no activities in Hong Kong then there is no liability to tax in Hong Kong.

The taxation system is relatively straightforward with the following major categories

Profits Tax - based on a companies trading profit
Salaries Tax - based on an individuals income

There are no taxes on capital gains, no withholding taxes on dividends or interest and no sales taxes.

Profits Tax

Profits tax is levied at the rate of 16.5% on taxable profits arising from activities taking place in Hong Kong. Deductions are given for business expenses that are incurred in earning the assessable profits.

The location of where a company's activities take place is the key to whether a company's profits are taxable in Hong Kong. If profits are earned from activities that take place entirely outside of Hong Kong then these profits would not be taxable even if the company's transactions are carried out thru the company's Hong Kong bank account.

As an example a Hong Kong trading company with a bank account in Hong Kong would not be subject to Hong Kong taxes if

(a) The company has no physical office in Hong Kong and uses our address for receipt of mail

(b) The company has no staff in Hong Kong and its staff rarely visit Hong Kong (eg total visits are less than 60 days a year)

(c) The company has an overseas office in which the company's staff are working

(d) The company negotiates and signs contracts with its customers and suppliers outside of Hong Kong

(e) The company has no customers based in Hong Kong and does not receive payments from customers Hong Kong bank accounts

(f) The company has no suppliers based in Hong Kong and does not make payment to suppliers Hong Kong bank accounts

(g) The company's products do not enter Hong Kong

It should be noted the question of whether a company has an activity taking place in Hong Kong is a question of fact (and not a question of law). It should also be noted that the Hong Kong tax authorities may check a company's claim that it has no activities taking place in Hong Kong by reviewing a randomly selected transaction and checking where the various activities involved in this transaction took place. It is therefore advisable to keep complete records to illustrate the fact that all activities take place outside of Hong Kong including emails, faxes, itemised telephone bills (showing to which numbers calls are made), memos of meetings with customers and suppliers, travel receipts, passport copies, purchase orders, sales orders, shipping documents etc.

ACS has assisted numerous overseas clients to benefit from Hong Kong's favourable tax environment including initial planning of the corporate structure and on-going monitoring of the structure and business activities to ensure the continuing ability to operate in a tax-free environment

Salaries Tax

Salaries tax is levied on the income of individuals arising from employment within Hong Kong. There is a sliding tax scale with a ceiling of 15% of taxable income. Various allowances and reliefs are available. Apportionments may be used for individuals based in Hong Kong if part of their duties are performed outside Hong Kong. Professional tax planning is often beneficial to ensure the maximization of allowances and the minimization of income subject to tax.

Incorporating a Company in Hong Kong

Company Names

The Registrar of Companies approves all new company names and name change applications in Hong Kong. To be approved, a company name must be unique and deemed not to be in conflict to other companies. Restrictions apply to the use of certain words in a company name, for example "bank" or "trust". Company names may be in English or in English with Chinese characters and must include the description "limited".

The use of trading names is permissible but care must be taken to avoid conflict with an existing company or trading name. The trading name should be displayed on company letterhead, promotional material and all other material made available to the public.

ACS can make applications on behalf of clients for a chosen company name or can apply to change an existing name.

Shareholders

The Hong Kong Companies Ordinance stipulates there must be a minimum of one shareholder in each company. A shareholder need not be resident in Hong Kong and can be an individual or a corporate body.

The identities of shareholders are public record and can be determined by undertaking a company search. ACS can undertake searches on behalf of clients.

A common practice in Hong Kong is the use of nominee shareholders in order to maintain complete confidentiality of ownership. The name of the nominee shareholder will appear as a public record. The name of the beneficial owner is not documented as a public record. A simple declaration of trust is executed between the nominee shareholder and the beneficial owner to protect the interest of the beneficial owner. The declaration of trust is stamped and delivered to the beneficial owner together with a blank share transfer document signed by the nominee. The beneficial owner can therefore take control of the company at any time. ACS has offered a nominee shareholder service to a range of clients and through consultation can advise and set up an effective nominee structure for most beneficial owners.

Share Capital

An authorized share capital is established upon incorporation. The standard authorized share capital for companies incorporated in Hong Kong is HK$ 10,000 represented by 10,000 ordinary shares of HK$ 1.00 each. The authorized share capital can be increased at any time by the passing of an ordinary resolution by the shareholders.

A minimum of one share is required to be issued. Shares can be issued for cash or other consideration. Shares are freely transferable but any transfer will be subject to stamp duty at the rate of 0.2% of the consideration.

ACS would recommend the drafting of a shareholders agreement where there are a number of shareholders. A shareholders agreement typically covers matters such as the requirement to offer shares to the existing shareholders in the event of a disposal of shares, dividend policy etc

Administration

Each company registered in Hong Kong is required to have a Memorandum and Articles of Association which govern the operation of the company through the provision of basic rules and procedures. The Hong Kong Companies Ordinance includes a standard Memorandum and Articles of Association. Generally most private companies will adopt the standard but ACS can advise upon amendment to ensure maximum flexibility in the day to day operation of the company.

Directors

The companies' legislation in Hong Kong requires a private limited company to appoint a minimum of one director but companies other than private companies shall have at least two directors. Where a private company has only one member and that member is the sole director of the company, the company may in general meeting, notwithstanding anything in its articles, nominate a person (other than a body corporate) who has attained the age of 18 years as a reserve director of the company to act in the place of the sole director in the event of his death. Directors may be non-residents of Hong Kong and can be either individuals or a corporate body. The identities of directors are again public record.

The duties of directors are laid down in the company's Memorandum and Articles of Association. The statutory obligations of directors and their potential liabilities are documented in the Companies Ordinance. Well-established case law also exists. ACS can advise upon the extent of director's responsibilities.

It is common practice for nominee directors to be appointed, especially by overseas principals, as directors of private companies. In addition to the obvious efficiency of having directors located in Hong Kong, the use of nominee directors protects the confidentiality of the principal as only the identity of the nominee director is listed as a public record. ACS will provide corporate directors who will act upon the lawful instruction of the principal whilst ensuring all local obligations are satisfied.

Secretary

Each company must appoint a company secretary who must be resident in Hong Kong. Amongst other duties, the company secretary holds responsibility for ensuring that the company is compliant with the requirements of the Hong Kong Companies Ordinance and must maintain the statutory books and records of the company. A company secretary can be either an individual or a corporate body. A sole director cannot also act as secretary of a company.

ACS provides company secretarial services ensuring full compliance with the local statutory requirements in Hong Kong.

Registered Office

Each company is required to have a registered address in Hong Kong. The registered address must be advised to the Registrar of Companies for the purpose of serving statutory notices. It is normal practice for the statutory books to be kept at the registered address.

ACS provides clients with a registered office and will provide facilities to safeguard the company's statutory records.

Correspondence Address and Virtual Office

Often clients do not operate a dedicated office in Hong Kong but need more than a registered address. ACS can provide clients with the ability to retain a presence in Hong Kong without the need to open a physical office. The service can be tailored to the clients need and can range from the straightforward provision of a correspondence address and forwarding of mail to dedicated telephone lines, faxes, message taking services, use of office space and provision of staff on a temporary basis.

Audit and Accountancy

The Companies Ordinance requires every Hong Kong company to maintain proper books of accounts and prepare annual accounts which must include a directors report on the results of the company. The annual accounts must be produced within six months of the year-end and must be produced in accordance with acceptable accounting principles in Hong Kong. The accounts must be audited by Hong Kong registered certified public accountants. ACS can prepare company accounts ensuring their compliance with local requirements and can also arrange local audits.