Hong Kong is a jurisdiction recognised as an international finance hub of Asia, and for good reason.
Ranked as one of the freest economies in the world, Hong Kong boasts a business friendly regulatory regime, an excellent legal system and a competitive tax environment.
Located at the heart of Asia and the favoured gateway to China, Hong Kong is in pole position to profit from the growing Markets in Asia. It also has no exchange controls, no restrictions over inward or outward investment and no foreign ownership rules.
Hong Kong is also an attractive proposition to international investors with English as one of its two official languages. There is also a large English speaking professional services sector that is familiar with international requirements, which making getting started in Hong Kong relatively straightforward.
Hong Kong companies can be incorporated quickly and offer a great deal of flexibility. They:
Hong Kong is a Special Administrative Region within the People’s Republic of China. The legal system of Hong Kong is independent to that of Mainland China and based on British Common Law. An independent judiciary support the familiar common law system and laws are in English alongside Chinese with the ability to hear court cases in English upon request.
The legal and structural framework in Hong Kong is recognisable to many overseas investors; particularly as a Hong Kong Company has limited liability and an independent personality and is governed by a Company Law that is familiar to most.
The Common Law legal system is also a familiar framework for arbitration and contract law.
Hong Kong has a simple and low tax regime and enjoys a growing list of over 50 tax treaties with other jurisdictions.
Profits Tax – The authorities take a jurisdictional approach to taxation and the principal corporate tax is Profits Tax. Generally, a Company is only subject to Profits Tax if it has profits derived from a trade, profession or business in Hong Kong.
Broadly, a Company will be charged Profits Tax at one of 2 rates; 8.25% for the first HKD2 million of profits and applicable profits thereafter at 16.5%.
It is therefore important for a Company to consider how profits will be treated, i.e. sourced in or outside of Hong Kong.
Stamp Duty – The transfer of Hong Kong shares are subject to a Stamp Duty. The Transferor and the Transferee are each subject to a 0.01% charge on the value of the shares or consideration, whichever is the higher.
Other taxes – Hong Kong does not levy a tax on Capital Gains, dividend income, charge a sales tax or apply VAT. Nor does it levy a Withholding Tax on dividends or interest paid to non-residents. However, a Withholding Tax is chargeable on royalties paid to non-residents.
Hong Kong follows the OECD’s BEPS guidelines on transfer pricing (‘TP’) rules.
Alongside other jurisdictions, the Inland Revenue Department has introduced measures to meet the OECD‘s ‘Action Plan on Base Erosion and Profit Shifting’. The plan seeks to deal with inherent tensions involved with international profits and international corporate structures. These measures include a recent BEPS and TP Bill; ‘the Inland Revenue (Amendment) (No. 6) 2018 (the BEPS and TP Ordinance); as well as measures to limit the issuance of tax residency certificates to companies that can demonstrate that they are ordinarily managed and controlled in Hong Kong.
In summary, the authorities expect transactions between related parties be conducted on an arms-length basis and related party affairs not conducted in a way that give a tax advantage with the authorities having the right to investigate the basis of any such charges made.
Hong Kong is not a jurisdiction that is subject to the recent Economic Substance Regulations introduced by many other International Finance Centres, which came about following the European Union’s concern to match Economic Substance with Profit.
Hong Kong enjoys a unique status though the SAR’s relationship with Mainland China and is overwhelmingly the most popular route for foreign investment into the area.
A Hong Kong company with sufficient substance in Hong Kong can be eligible to take advantage of the well-established Double Taxation Agreement (‘DTA’) with China. Its use can reduce the Mainland Withholding Taxes levied on certain transactions and Withholding Tax on dividends paid from a Chinese Company to foreign investors, can be reduced from 10% to 5% with the maximum rate of Withholding Tax on interest and royalties reduced from 10% to 7%.
A popular arrangement for Mainland investment is the use of a Hong Kong company to act as a holding company for the Chinese investment. This arrangement arguably offers more protection as well as the flexibility to restructure in Hong Kong, compared to the alternative of a direct holding in a Mainland investment or Joint Venture arrangement with a local partner.
For all of the above reasons, Hong Kong remains an efficient and effective jurisdiction that is easily understandable to overseas investors and a good choice as an introduction to Asia. If you would like more information on how to set up a company in Hong Kong, or how the use of one could benefit your corporate structuring, please contact firstname.lastname@example.org.