HONG KONG COMPANY FORMATION

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Hong Kong is a distinctive location for the incorporation of companies and for international business due to its simplified taxation system, low taxation rate, lavish infrastructure and communication facilities, and high quality professionals.

Hong Kong offers limitless business opportunities, and serves as a platform to global economy and commerce, the Hong Kong company formation advantages are many, therefore thousands of international businesses benefit from establishing Hong Kong Companies as far as a Hong Kong company does not provide any business in Hong Kong, and does not produce any incomes from Hong Kong sources, the company will not be taxable in Hong Kong.

Hong Kong has many licensed banks, a skilled corporate service industry and, being a common law jurisdiction, it has its own corporate and trust law. Its proximity to China, India and the other developing Asian economies provides Hong Kong with additional and exclusive market access benefits not granted to other jurisdictions.

 

KEY BENEFITS

Hong Kong Company Formation and Its Advantages

  • Well-established legal system. Based on English common law and equity that applied in UK and other Commonwealth countries. Hong Kong’s legal system is separate from China;
  • The economy system in Hong Kong is free and there are no restrictions on inward and outward investments. All currencies are settled freely between Hong Kong and other countries;
  • Hong Kong is one of the world’s primary financial centres with a world class banking system;
  • Hong Kong companies pay tax on a regional basis, income received from outside of Hong Kong is not subject to local tax;
  • Low tax rate. Only 16.5% of net profits. There are no other tax systems such as VAT, business tax, capital gains tax etc;
  • Cost of incorporation of companies and administration is competitive with other similar corporate domiciles;
  • Hong Kong has agreements with China which make the jurisdiction tax efficient for structuring investment into and trade with China;
  • An increasing number of double taxation treaties have been signed;
  • No capital investment is required. The shareholder is only obliged to sign the M & A to declare that he will contribute capital to the company, and he does not require to pay money to the company;
  • No foreign ownership restrictions.

 

HONG KONG TAXES

 

Territorial Corporate Tax System

Hong Kong is one of the few countries in the world that tax on a territorial basis. Many countries levy tax on a different basis and they tax the world-wide profits of a business, including profits derived from an offshore source. Hong Kong profits tax is ONLY charged on profits derived from a trade, profession or business carried on in Hong Kong. Consequently, this means that a company which carries on a business in Hong Kong, but derives profits from another place, is not required to pay tax in Hong Kong on those profits. Hong Kong sourced income is currently subject to a rate of taxation of 16.5%. There is no tax in Hong Kong on capital gains, dividends and interest earned.

A number of taxes that exist in most onshore jurisdictions do not exist in Hong Kong, namely:

  • Capital gains taxes
  • Withholding taxes*
  • Sales taxes or VAT
  • Annual wealth taxes
  • Accumulated earnings taxes on companies that retain earnings rather than distribute them
  • Capital duty on authorised shares.

*Royalties and fees paid to non-resident entertainers or sportsmen for their performances in Hong Kong are subject to withholding tax on their assessable profits.

Tax Rates for Companies

 
 

Income

Tax Rate

Tax rate for corporations

16.5%

Tax rate on capital gains

0%

Tax rate on shareholder dividends

0%

Tax rate on foreign-sourced income

0%

Tax Rates for Individuals

Income (in HKD currency)

Tax rate

1 – 40,000 HKD

2%

40,001 – 80,000 HKD

7%

80,001 – 120,000 HKD

12%

Above 120,000 HKD

17%

Tax rate on capital gains

0%

Tax rate on income earned overseas

0%

Tax rate on dividends from a Hong Kong company

0%

 

The principle of Hong Kong profits tax is that it is a tax on profits that has its source in Hong Kong rather than a tax based on residence. Income sourced elsewhere, even remitted to Hong Kong, is not subject to Hong Kong profits tax at all. Consequently, if a Hong Kong company’s trading or business activities are based outside Hong Kong no taxation will be levied.

A factor that determines the locality of profits from trading in goods and commodities is generally the place where the contracts for purchase and sale are affected. ‘Effected’ does not only mean that the contracts are legally executed. It also covers the negotiation, conclusion and execution of the terms of the contracts.

If a business earns commission by securing buyers for products or by securing suppliers of products required by customers, the activity which gives rise to the commission income is the arrangement of the business to be transacted between the principals. The source of the income is the place where the activities of the commission agent are performed. If such activities are performed through an office in Hong Kong, the income has a source in Hong Kong.

Certain sums, like royalties, paid or payable to non-resident persons for use of or right to use certain intellectual property are subject to withholding tax. The payer who claims deduction for the use of the intellectual property against its assessable income is required to withhold a prescribed percentage from the payment while that recipient is not subject to Hong Kong profits tax. The prescribed percentage is 4.95% on the gross payment if the payer and the recipient are not related, but 16.5% if the payer and recipient are related. The recipients of the royalties may enjoy different treaty rates under double taxation agreements.

Hong Kong follows a single-tier tax system (sometime called the “STS”) because profits earned by companies are only taxed once, i.e. on the company that gained those profits. When that company declares dividends, the profits thus distributed are no longer taxable on the shareholders of the company.

VAT Tax: Also known as Goods and Services Tax (GST tax) in some countries, there is no VAT or Sales tax imposed in Hong Kong.

Accounting Standards: Since 1st January 2005, Hong Kong has adapted a Financial Reporting Standards (FRS) framework that has been modelled on International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB).

Tax Year: The tax year in Hong Kong is 1 April – 31 March. Profits earned during an accounting year ending within the tax year will be deemed to be the profits for that tax year.

Property Tax: Property tax is charged on the owners of land and/or buildings in Hong Kong and is computed at the standard rate of 15% on the net assessable value of the property (i.e. property’s rental income).

Estate Duty: Also known as death tax or inheritance tax in some countries, estate duty has been abolished since February 10, 2006.

Stamp Duty: Stamp duty is chargeable on certain documents (relating to stock & shares and immovable property) specified in the First Schedule to the Stamp Duty Ordinance, which imposes fixed duty on some documents and an ad valorem duty on others. Fixed duties vary from HKD 3.00 to HKD 100 whereas ad valorem duties range from 0.1% to 4.25%

Customs and Excise Duty: Hong Kong is a free port. There is no tariff on general imports. However, there is duty on liquors, tobacco, hydrocarbon oil and methyl alcohol. For tobacco, hydrocarbon oil and methyl alcohol, duties are charged at specific rates per unit quantity. For liquors, duty is assessed at different percentages of their values on the basis of three different categories defined broadly according to alcoholic strength. There is no tax or excise duty on exports from Hong Kong.

Hong Kong has arrangement with a number of jurisdictions for double taxation relief of shipping or airline income. It has also comprehensive double tax agreements with a number of jurisdictions to relieve taxation on income, for instance dividends, interest and royalties. The Hong Kong Inland Revenue Department allows a deduction for foreign tax paid on a turnover basis in respect of income which is also subject to tax in Hong Kong. Therefore, businesses operating in Hong Kong do not generally have problems with double taxation of income.

The Inland Revenue Department (IRD) of Hong Kong generally issues the corporate profits tax returns on the 1st of April every year. Normally, businesses should file the profits tax return within 1 month from the date of issue. In the case of newly registered businesses, the Inland Revenue Department will issue the profits tax return 18 months after the date of commencement of business or the date of incorporation.

The company has to file a complete set of returns which includes the following:

  • The specific profits tax return form as issued by the Inland Revenue Department
  • A supplementary form as issued by the Inland Revenue Department for your tax data and financial data etc.
  • A certified copy of the Balance Sheet, Auditor’s Report and Profit & Loss Account pertaining to the basis period
  • A tax computation showing how the amount of Assessable Profits (or Adjusted Loss) has been arrived at.

Small corporations (defined as those corporations whose total gross income does not exceed HKD 500,000 for the basis period) only need to file their respective profits tax return form and supplementary form. It is not mandatory to submit the other supporting documents mentioned above.

Provisional Profits Tax: Profits tax is payable on the assessable profits for a particular Year of Assessment. However, since it is possible to arrive at the assessable profits only at the end of the year concerned, an estimated tax based on the previous year’s figures will be issued. This estimated figure is the provisional profits tax, which is to be paid in two installments – the first installment is 75% of the liability and the remaining 25% is payable after three months. Once the final assessment based on the actual assessable profits is made, credit is given for the provisional tax paid. If any excess payment has been made or if there are any outstanding payments to be made, they will be subtracted or added from the first installment of the provisional profits tax for the following year.

Late or not filing a tax return is a serious offense leading to penalties and even prosecution.

Income Tax Basis Period: Corporate income tax in Hong Kong is assessed in relation to a Year of Assessment (YA). The Year of Assessment is the year ended 31st March (i.e 1st April – 31st March). Hence the year ended 31st March 2009 is known as Year of Assessment 2008-09. Generally, the assessable profits for a YA is based on the accounting period ending within that year of assessment.

Income Tax Audit Exemption:The following companies are exempt from submitting audited accounts together with their profits tax return:

  • Small corporations (defined as those corporations whose total gross income does not exceed HKD 500,000 for the basis period)
  • Dormant companies as per the Companies Ordinance definition (defined as having “no relevant accounting transactions” during a financial year)
  • Companies incorporated in a jurisdiction whose laws do not require accounts to be audited
  • Hong Kong branch of a foreign company, provided that the following information is supplied together with the return

– the place of incorporation of the foreign company

– whether the laws of that country require a statutory audit of the world-wide accounts of the company

– whether that audit has been conducted and

– a brief summary of the financial and accounting records maintained by the Hong Kong branch.

Tax Treatment of Losses: Losses made in an accounting year can be carried forward indefinitely and set off against future profits of that trade. A corporation carrying on more than one trade may have losses in one trade offset against profits of the other. Hong Kong does not allow for group relief of losses i.e transfer of losses between companies in the same corporate group. Losses cannot be carried back. Capital loss expenses are not allowed as deductions.

Net Income Vs Taxable Income: A Hong Kong company is taxed on its assessable profits. The taxable income of a company is arrived at after making certain adjustments to the company’s net profit/loss data such as, deducting business expenses incurred in the production of profits, deducting capital allowances, deducting unutilised losses etc.

 

HONG KONG COMPANY CORPORATE AND LEGAL FEATURES

COMPANY NAME

Company names can be in English, in Chinese or in both English and Chinese. The company name must end with the word “Limited” or its equivalent in Chinese characters. The name of the company must be stated in the Memorandum of Association. A company name cannot be the same or similar with that of an existing company.

The proposed name will likely be rejected if the name:

  • Is the same as or similar to a name appearing in the Companies Registry’s ‘Index of Company Names’
  • Infringes on trademarks
  • Is considered offensive or otherwise contrary to public interest

Company names containing words or expressions such as ‘Trust’, ‘Chamber of Commerce’, ‘Bureau’, ‘Cooperative’, ‘Government’ etc. will require prior approval from the Chief Executive. In some cases, the use of certain words and expressions in company names is covered by other legislation. For example, use of expressions like ‘Bank’, ‘Stock Exchange’ etc. should not contravene the related legislation and approval from the relevant body/authority is required prior to usage.

MEMORANDUM AND ARTICLES

Every company must have a constitution consisting of a “Memorandum of Association” and “Articles of Association”. The memorandum states the company’s name that its registered office will be in Hong Kong. It also states the initial authorised share capital and that the liability of its shareholders is limited. The Articles set out the principles governing the administration of the company including the procedures of the shareholder and directors meetings and any restrictions on the issue and transfer of shares.

SHARE CAPITAL

There is no limitation on amount of authorised or issued share capital. Capital duty at the rate of 0.1% of the authorised capital is payable to the Government on incorporation and successive increase of any amount of the authorised capital. Shares must be stated in fixed amount. Par value shares are not permitted. While it is usual for the share capital to be expressed in Hong Kong dollars, shares may be stated in other currencies. A multiple currency share capital is also permitted.

DIRECTOR

There shall be at least one director over 18 years old. A sole director of the company may not be the secretary of that company. A corporate company cannot serve as the secretary if the sole director is the only director of that corporate company. Details of directors of Hong Kong companies are available to the public.

Foreigners are free to be the sole directors of a Hong Kong company. There are no local resident requirements.
Where a private company has only one member who is also the sole director of the company, the company may nominate a person as a reserve director of the company, in the event of the sole directors’ death or incapacity.
Senior staff at Oxford are often prepared to stand as directors of companies either when Oxford provides other services to the company or to bring their knowledge and expertise as independent non-executive directors to other companies, subject to the successful completion of due diligence before any appointment.

SECRETARY

There shall be at least one Hong Kong permanent resident or authorized Hong Kong company taking the position of legal secretary of the company.

SHAREHOLDER

There shall be at least one registered shareholder. There are no restrictions on the nationality or residence of the shareholder and shareholder meetings may be held in or outside Hong Kong. Bearer shares are not permitted. At least one share must 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.

REGISTERED ADDRESS

There shall be one registered address in Hong Kong. A PO BOX is not permitted.

BUSINESS REGISTRATION

All companies are required to obtain a registration certificate by applying to the Commissioner of Inland Revenue. The certificate is valid for a twelve month period and must be renewed annually.

ANNUAL MEETINGS

A general meeting of shareholders must be held at least once a year. At the meeting the Profit and Loss account and Balance sheet of the company are laid before the shareholders together with the directors and auditors reports.

PUBLIC FILINGS

Upon incorporation, the names and personal particulars of the director and secretary must be filed with the Companies Registry. If shares other than subscriber shares are issued, a Return of Allotment must be filed with the Registrar, revealing the identities of the members and their shareholdings. However, where nominee shareholders and directors are used, the beneficial owners need not be disclosed. Registers of the company’s members, director and secretaries, mortgages and charges (if any) together with its minutes and accounts must also be kept by the company but may only be inspected by shareholders.

A company is obligated to file an annual return each year within forty-two days of the company’s anniversary date of incorporation.

ACCOUNTS & AUDIT

Every company is required by law to appoint an auditor or audit firm. An auditor must be qualified by virtue of the Hong Kong professional Accountants Ordinance and be completely independent of the company.

Oxford can prepare company accounts ensuring their compliance with local requirements and can also arrange local audits.

Corporate migration: Hong Kong does not permit the migration and re-domiciliation of corporate entities to or from a foreign jurisdiction.

Business registration: Regardless of whether the company is doing business in Hong Kong or not, within one month of incorporation of a company an application must be made for a business registration certificate and the prescribed fee paid.

Ongoing administration: The ongoing requirements and obligations for company are detailed below:

On an annual basis:

  • Completion and submission of Annual Return Form AR1
  • Profit tax returns
  • Employer’s tax return
  • Holding an annual general meeting
  • Financial statements and audit
  • Payment of business registration fee
  • On an arising Basis
  • Filing any changes of shareholders, issued and withdrawn shares, and changes to directors or their particulars, the company secretary, and the registered office
  • Filing of employment notification
  • Filing of sponsorship of foreign employees
  • Filing termination of employment
  • Provident fund establishment payment and reporting

CONFIDENTIALITY

Information about company officers viz. directors, shareholders and company secretary is public information as per Hong Kong Company Laws. It is mandatory to file details of the company officers with the Hong Kong Company Registrar. If you wish to maintain confidentiality you can appoint a nominee shareholder and nominee director by utilizing the services of a professional services firm.

There is a high level of anonymity and privacy. No disclosure of beneficial ownership to authorities.