Hong Kong is a Special Administrative Region of the People's Republic of China and a cosmopolitan international city. It is centrally located in Asia, with other major cities such as Beijing, Singapore and Tokyo all within four-hour flight. Due to its strategic location, Hong Kong has become not only an important crossroads of the Asia-Pacific region, but also the gateway to Mainland China.
The region has a total land area of 1100 square kilometres, which is made up of the Hong Kong Island, the Kowloon Peninsula, the New Territories and a number of outlying islands. Its climate is sub-tropical with a mild winter and a hot and humid summer. Mean temperatures range from 15°C to 18°C during the winter months of December, January and February while mean temperatures are from 27 °C to 31°C during the summer months of June through September. Average annual rainfall is about 2,200 millimetres of which 80% falls between May and September.
The total population is approximately 7.4 million of which 92% is of Chinese origin. Both English and Chinese are official languages of the Government. English is commonly used in business while Cantonese is spoken by most people. Hong Kong possesses a versatile and industrious workforce of around three and a half million, of whom 59% are male and 41% female.
Hong Kong ceased to be a colony on 30 June 1997 after 156 years of British rule and its sovereignty reverted to the People's Republic of China (PRC). It is now established as a Special Administrative Region (SAR) and in accordance with the Constitution of the PRC, the Basic Law was enacted assuring that the capitalist system and way of life in Hong Kong shall remain unchanged for 50 years.
Under the Provisions of the Basic Law, the Hong Kong SAR enjoys a high degree of autonomy. It maintains the same judicial system as previously practised, enacts laws on its own and has established its Court of Final Appeal which has the power of final adjudication. In relation to economy and monetary affairs, the SAR has independent finances, formulates its own monetary and financial policies, safeguards free operations of business and markets, and maintains the status as an international financial centre. The SAR practices an independent taxation system and continues to pursue a low tax policy. The Central Government of the PRC shall not levy any tax in Hong Kong.
The head of government of the Hong Kong SAR is the Chief Executive. He is advised by the Executive Council on the development and control of government policies and operations. Legislation is enacted by the Legislative Council, the members of which also debate policy and question the Administration. At the lower level, there is a number of District Councils responsible for various functions in the districts.
Hong Kong is a major international financial centre. It is also a leading international trading and services hub as well as a high value-added manufacturing control centre. Government economic policies are stable and are based upon a philosophy of minimum interference. Free enterprise and free trade are consistently and faithfully adhered to.
Hong Kong is widely recognised as one of the freest economics in the world. Its attractiveness as a place to do business is reflected by the continuing inflow of foreign direct investment and the increasing number of foreign-owned regional headquarters and regional offices.
While there are no special incentives for foreign investors, there are no special conditions imposed on investment from overseas. There are no exchange controls of any kind and funds can therefore be moved freely into and out of Hong Kong.
Hong Kong's largest trading partner is Mainland China, followed by the United States and Japan. Hong Kong is almost entirely dependent on imported resources to meet the needs of its people and its diverse industries. Re-exports play a very prominent role in Hong Kong's external trade reflecting its continued importance as an entreport for China.
There are no controls on imports, exports and re-exports other than those arising from international obligations and those exercised for health, safety or security. Import and export licensing formalities are kept to a minimum and are not required at all for most products. No duty is levied on exports. Only tobacco, alcohol and hydrocarbon oil are subject to excise duty.
Hong Kong has grown to be one of the most service-oriented economies in the world as a result of the demand for producer services by its globalised production network and the trend to source goods and services globally. In addition to trading in goods, Hong Kong also serves as an important services centre for Mainland China generally and South China in particular, including the provision of infrastructural facilities such as the container port and the airport, and institutional support such as financial and business services.
Besides visible and invisible trade, Hong Kong is also the most important source or conduit of external investment in Mainland China. Hong Kong's direct investments in Mainland China concentrate mainly in light manufacturing industries, hotels and tourist-related facilities, property, infrastructure and the growing information technology and communication businesses.
Concurrently, Mainland China has also invested heavily in Hong Kong. Its investment ranges from traditional activities such as banking, importing and exporting, wholesaling and retailing, and transportation and warehousing, to other areas such as property development, financial services, manufacturing and infrastructural projects.
With the relocation of lower value-added operations to Mainland China, Hong Kong is shifting towards knowledge-based and higher value-added manufacturing. In spite of the structural change, Hong Kong's industries remain export-oriented, with light manufacturing industries producing consumer goods predominating.
The major industries which have contributed significantly to Hong Kong's economy include textiles and clothing, electronics, toys, watches and clocks, jewellery, plastic products, metal products, printing and publishing.
Hong Kong always welcomes overseas industrial investment; not as a source of capital but for the inflow of technology, expertise and established markets that overseas investors bring. Apart from ensuring the provision of the infrastructure, either through direct service or by co-operating with public utility companies and autonomous bodies, the Government's principal role is to provide a stable framework in which industry can function efficiently and profitably with minimum interference.
The favourable geographical position of Hong Kong, which provides a bridge in the time gap between North America and Europe, together with strong links with Mainland China and other economies in the South-east Asian region and excellent communications with the rest of the world, have helped Hong Kong develop into an important international inancial centre. The absence of any restrictions on capital flows in and out of the territory is also an important factor.
Hong Kong's financial markets are operated under effective and transparent regulations which meet international standards. Its three-tier system of authorised financial institutions, licensed banks, restricted licence banks and deposit-taking companies, is regulated by the Hong Kong Monetary Authority, while prudential supervision over the securities, financial investment and commodities futures industry is exercised by the Securities and Futures Commission.
Hong Kong is among the world's largest banking centres in terms of the value of external banking transactions, and also one of the largest foreign exchange markets in terms of turnover. Its stock market is the seventh largest in the world in terms of market capitalisation and its derivatives market is also among Asia's largest, reflecting the increased sophistication of its financial markets.
Hong Kong has a very strong presence of international financial institutions and most of the top 100 banks in the world have operations in the territory. In addition, many merchant banks or investment banks of world standing operate in Hong Kong. The financial markets, particularly in foreign exchange and gold, form an integral part of the corresponding global markets. Moreover, Hong Kong serves as an important centre for the intermediation of international flows of savings and investments, particularly through the syndication of loans and international fund management.
Hong Kong is also a major funding centre for Mainland China. It serves as a window through which Mainland China can gain access to external borrowing. Direct investment in both directions and cross-border fund flows among financial institutions have grown rapidly.
There are three types of establishments that a foreign company can set up and maintain in Hong Kong, namely: Representative Office, Branch Office, and Incorporated Company.
Provided that a foreign company does not carry on any business in Hong Kong, it can station an individual or a group of persons in the territory and operate a representative office for the purpose of exploring business potentials, studying investment opportunities and the like.
To establish a representative office, the only legal requirement is to apply for a Business Registration Certificate from the Business Registration Office of the Inland Revenue Department by producing a certified copy of the certificate of incorporation or equivalent document of the foreign company and a certified copy of the English or Chinese translation thereof if the original is not in English or Chinese. Such registration is renewable annually.
A representative office of a foreign company is not required to file any financial or other statutory returns with any government authorities in Hong Kong. The same applies to the foreign company itself.
Any company incorporated outside Hong Kong which carries on business in Hong Kong must register as a branch in accordance with Part XI of the Companies Ordinance within one month of the establishment of the place of business.
The following documents are required to be delivered to the Registrar of Companies for registration:
Where the branch so registered carries on business in Hong Kong under its corporate name and the Registrar of Companies is of the opinion that such name is identical with the name of an existing company, or gives so misleading an indication of the nature of its activities in Hong Kong as to be likely to cause harm to the public, he may require the branch to change its name into an acceptable trading name.
A foreign company with a registered branch in Hong Kong is required to file returns of any changes in the matters referred to under "Registration Procedures" above.
It must also file a return to the Companies Registry within 42 days after each anniversary of the date of registration under Part XI giving details of the share capital, directors and shareholders, together with a certified copy of the foreign company's audited financial statements for the last financial year if it is a public company and is required by the law of the place of its incorporation to publish its accounts.
If the Registrar of Companies considers that the documents filed do not sufficiently disclose the foreign company's financial position, or if there is no equivalent requirement in the jurisdiction of the company's country of incorporation, the Registrar may require the company to file further documents and information.
The foreign company is legally represented by the authorized person or persons appointed (referred to "Registration Procedures" above), who must be resident in Hong Kong, to accept service of process and notices for the company. These persons are responsible for ensuring that the company complies with the requirements of the Companies Ordinance applicable to a branch registered in Hong Kong.
The foreign company is also obliged to display conspicuously outside its registered office and every place of business in Hong Kong its name and country of incorporation. These particulars must also be stated on all its bills, letterheads, notices and other official documents.
The Companies Ordinance governs all matters on companies, either public or private, incorporated in Hong Kong. Companies conducting such business as banking, deposit taking, money lending, insurance, share broking and commodities trading are also governed by separate relevant legislations.
The following notes are meant to cover some salient features of a private company limited by shares.
The first step in forming a company is to choose a company name which should not closely resemble an existing name. A registered company name is subject to objections by any person on the ground that such name is "too like" that of a previously registered company, which could result in the company being directed to change its name within 12 months of its registration.
A copy of the memorandum and articles of association together with a statement of compliance must be filed with the Registrar of Companies for registration. An initial registration fee and a capital fee based on the amount of registered capital are payable upon registration. The Registrar of Companies usually takes a week to process the application and issue the certificate of incorporation.
There is no minimum capital requirement for a private company. With effect from 13 February 2004, a private company must have at least one shareholder and one director who need not be citizen or resident of Hong Kong. Corporate director is permissible for a private company which is not a member of a group of companies of which one is a listed company.
A secretary, who may also be a director and is ordinarily residing in Hong Kong, must be appointed. A body corporate, having its registered office or place of business in Hong Kong, can be appointed as a secretary.
A company must have a registered office in Hong Kong, which may be different from the place of business, to which official communications and notices may be addressed.
A company has to comply with certain filing and disclosure requirements as stated in the Companies Ordinance, including:
A private company is not required to file its accounts with the Registrar of Companies for public inspection. However, audited accounts may have to be prepared and submitted to the Inland Revenue Department, if required, to support the profits tax return of the company.
A company is required to maintain proper accounting records sufficient to explain its transactions and financial position for at least 7 years. It is also required to maintain certain statutory records such as minutes of shareholders and directors, registers of shareholders, directors, charges and transfers. Audit is mandatory for both public and private companies.
An annual general meeting must be held within 18 months of its incorporation and thereafter once in every year at interval of not more than 15 months. Audited accounts together with the directors' report are to be laid before the members at the annual general meeting within 9 months after the financial year end.
The following three separate direct taxes (for a year of assessment which ends on 31 March) are levied under the Inland Revenue Ordinance: Profits Tax, Salaries Tax, and Property Tax.
Persons, including corporations, partnerships, trustees and bodies of persons carrying on any trade, profession or business in Hong Kong are chargeable to tax on all profits arising in or derived from Hong Kong from such trade, profession or business (See Appendix I for tax rates).
There is no capital gains tax in Hong Kong. However, profits tax will be charged on the profits of speculative transactions if they constitute a venture in the nature of trade.
Dividends received from a corporation which is subject to Hong Kong profits tax or otherwise exempted are excluded from the assessable profits of the recipient; ccordingly there is no withholding tax on dividends.
No distinction is made between residents and non-residents. As long as the profits are arising in or derived from Hong Kong, such profits are taxable, irrespective of whether the recipient is resident or non-resident. On the other hand, if the income is not arising in or derived from Hong Kong, (e.g. off-shore trading), no tax is payable.
Hong Kong has made arrangements with Mainland China and several other countries for the avoidance of double taxation on income from cross-border activities. Also double taxation relief arrangements have been made with the governments of a number of other countries in relation to tax on income derived from the international operation of ships by resident taxpayers and international air traffic by airlines of the countries involved on a reciprocal basis.
As incentives to encourage businesses, interest received and gains on disposal of certain qualified debt instruments and profits derived from the business of reinsuring offshore risks as a professional reinsurer are taxed at one-half of the normal tax rate. Also is interest income on bank deposits in any currency earned by a person carrying on a business or profession in Hong Kong exempted from profits tax.
Tax is charged on the assessable profits for a year of assessment. The assessable profits for the business which makes up annual accounts are calculated on the profits of the year of account ending in the year of assessment. For the newly commenced business, for which accounts are consistently made up to the same day in each year, assessments will equal in total the profits, as adjusted for tax, earned during the life of the business. In the year of assessment itself a provisional charge to tax is to be paid based on the profits assessed for the preceding year.
The provisional payment is applied in the first instance against profits tax payable on assessable profits for that year of assessment when agreed in the following year, any excess is then applied against the provisional profits tax payable for that succeeding year. Application may be made to holdover the provisional tax payment if the current year's assessable profit is less.
Generally, all expenses, to the extent that they have been incurred by the business in the production of chargeable profits, are allowed as deductions in arriving at the assessable profits. Likewise, expenses relating to non-Hong Kong source income will not be admitted as tax deductions.
The following is a list of specifically allowable expenses:
Certain allowable head office administrative expenses charged to a local branch or subsidiary in Hong Kong would be allowed as a deduction for Hong Kong tax purposes, to the extent to which they were incurred during the basis period for the year of assessment in the production of profits chargeable to tax.
Losses made in an accounting year can be carried forward indefinitely and set off against future profits of that business. A corporation carrying on more than one trade may have losses in one trade offset against profits of the other. However, there is no group relief of corporate losses in Hong Kong.
Allowances on capital expenditure incurred for the purpose of producing chargeable profits are deducted at specified rates in arriving at the assessable profits. Special allowances are given in respect of capital expenditure incurred in the construction of industrial and commercial buildings or structures and building refurbishment expenditure. Full allowance is given for capital expenditure on certain prescribed fixed assets, such as manufacturing plant and computer systems.
This tax is imposed on all income arising in or derived from Hong Kong from any office or employment or any pension. Income from any office or employment includes wages, salary ,leave pay, fees, commission, bonus, gratutity, perquisite and allowances whether derived from the employer or others. Income also includes, inter alia, the value of quarters provided rent free by an employer.
In general terms, 10% on the total income from the employer is to be included in the assessment as the value of quarters provided. Special provisions apply to seamen, airmen and other persons who visit Hong Kong for short periods and also to those who have paid tax of substantially the same nature as Hong Kong salaries tax in any territory outside Hong Kong.
Husband and wife are individually responsible for all aspects of his or her own salaries tax affairs including lodgement of returns and payment of tax assessed. However, if the overall tax liability of any married couple is greater than it would have otherwise been under the aggregation system, they may elect to be jointly assessed.
Liability to salaries tax is based on the actual income of the year of assessment, a charge being made for provisional salaries tax to be paid in the year of assessment itself. Provisional tax paid in respect of a year of assessment is applied firstly against the salaries tax payable on the income of that year of assessment when assessed in the following year. Any excess is then applied against the provisional tax liability for that following year.
The Ordinance provides a number of specific instances that are not subject to salaries tax. Some of these are:
In addition to the deduction of expenses wholly, exclusively and necessarily incurred in the production of income, not being expenses of a private or domestic nature, a deduction may be claimed up to 35% of the income less allowable expenses for donations paid to approved charities.
An individual is also entitled to various allowances in computing his/her net income chargeable to tax (See Appendix I for concessional allowances).
Salaries tax is charged at a progressive scale. There is, however, an overriding limit which prevents the salaries tax of any person from exceeding the standard rate of the total income without any deduction for allowances (See Appendix I for tax rates).
Property tax is charged on the owner of land and/or buildings in Hong Kong at the standard rate (See Appendix II) on the actual rent received less a deduction of 20% to cover repairs and maintenance.
If the income from property chargeable to property tax is included in the taxpayer's profits for profits tax purposes, or if the property is occupied by the taxpayer for business purposes, the amount of property tax paid can be deducted from the amount of profits tax assessed. Corporations carrying on a trade, profession or business in Hong Kong are exempted from paying the property tax which would otherwise be set off against their profits tax.
Any resident of Hong Kong aged 18 and above may obtain relief from the standard rate of tax (See Appendix I) on his/her profits and income by electing to be assessed under Personal Assessment. If required, both husband and wife must elect to be personally assessed separately. Under Personal Assessment, the total profits and losses from unincorporated businesses, salary income and property income are aggregated; interest payments and approved charitable donations are deducted; the appropriate concessional allowances are granted; the tax is then calculated on the balance in the same manner as Salaries Tax.
Other Charges administered by the Inland Revenue Department are as follows:
With certain exceptions, every business carried on in Hong Kong must be registered and pay an annual registration fee including a levy to the protection of wages on insolvency Fund (See Appendix II). Every company incorporated in Hong Kong under the Companies Ordinance is deemed to be carrying on business and is liable to be registered, as is every overseas company which has established a place of business in Hong Kong.
Stamp duty is charged on Hong Kong share transactions and conveyance of real property (See Appendix II for rate of duty).
Tax or duty is charged at varying rates on horse racing, betting on lotteries and hotel accommodation.
This section is compiled with a view to assisting our clients and prospective clients who are contemplating to establish a business in Hong Kong.
The material contained in this section is for general information only. As changes do occur from time to time, readers are requested to seek appropriate advice from us on specific matters before any action is taken.