Foreign investors can carry on business in Hong Kong through multiple business vehicles, including:
- A company incorporated in Hong Kong
- A branch office registered in Hong Kong of the foreign corporation
- A representative office established in Hong Kong
- Sole proprietorship
While some options are more commonly adopted than others, investors are advised to choose the most appropriate business structure based on the pros and cons of each option.
Hong Kong companies
Foreign investors can establish their presence in Hong Kong by setting up a Hong Kong company. Companies incorporated in Hong Kong can be limited or unlimited and can be public or private. To be more detailed, there are five types of companies that may be formed under the Companies Ordinance (Cap. 622):
- Private companies limited by shares (private limited company)
- Public companies limited by shares (public limited company)
- Companies limited by guarantee without a share capital
- Private unlimited companies with a share capital (private unlimited company)
- Public unlimited companies with a share capital (public unlimited company)
A company limited by guarantee does not have share capital, but the liability of its members is limited by the amount of assets they contributed. This is the type of company that is most suitable for nonprofit activities, such as operating a nonprofit research institute. It is not a suitable structure for a business undertaken for profit making purposes.
A company limited by shares has a share capital that is divided into a number of shares of certain value each. The shares are issued to shareholders and the liability of its shareholders will be limited to the unpaid subscription price for the shares. This is most suitable for a company that carries on a business for profit making purposes.
A private limited company is a company limited by shares which:
- restricts the ability of its members to transfer shares;
- limits the number of members to 50 (not including employees or former employees); and
- does not issue invitations to the public to subscribe for shares or debentures of the company.
[tips title="Did You Know"]Private limited companies are the most dominate type of business entity in Hong Kong, accounting for 99 percent of all companies incorporated in Hong Kong.[/tips]
Most small to medium sized companies are set up as private limited companies due to its many advantages, such as its separate legal entity, its limited liability, its positive image among banks and investors, and the convenience of ownership transfer.
A public limited company is a company whose shares and debentures are offered to the public. If a company is a limited liability company but does not fall into the scope of a private limited company or a company limited by guarantee, then it is a public limited company. Many public companies are listed on the Stock Exchange of Hong Kong Limited and the statutory requirement for a public company is much stricter as it raises capital from the public. A medium to large private limited company may decide to transfer the company structure to that of a public limited company (and thereby expanding its share base) – when they achieve significant growth in the industry.
An unlimited company is one where the liability of its members is not limited. This business structure is rarely adopted by investors.
A branch office has no separate legal identity and is treated as an extension of the overseas parent company in Hong Kong. As such, the overseas parent company is liable for all the debts and liabilities of the branch office.
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A foreign corporation wishing to establish a Hong Kong branch office must register with the Companies Registry as a non-Hong Kong company and obtain a Business Registration Certificate.
In general, branch offices of foreign companies registered in Hong Kong are subject to similar legal and tax requirements and consequences as companies incorporated in Hong Kong. The business activities that can be carried on in Hong Kong and the profit tax rate are the same for branch offices of foreign companies and locally incorporated companies.
While this option is generally not recommended for that parent company assumes larger liability for branch offices, foreign investors may prefer a branch over a subsidiary considering:
- A branch office might be more tax efficient for the parent company under certain circumstances, such as when losses incur in the Hong Kong branch.
- Generally, the transfer of the shares of a foreign company operating a branch in Hong Kong are not subject to stamp duty.
- A branch office is subject to limited compliance requirements under the Companies Ordinance.
- A branch office is not required to conduct separate audit.
- A branch office can be terminated easily by notifying the Company Registry.
Like a branch office, a representative office also has no separate legal identity, and the overseas parent company shall bear full responsibility for its debts and liabilities. Nevertheless, a representative office is not allowed to conduct any profit generating business activities (or else it is required to register as a branch office). It can only engage in promotion, liaison, and market research activities.
Representative offices need not be registered with the Companies Registry but are required to file for a Business Registration Certificate with the Inland Revenue Department.
Foreign investors who seek to study the market in Hong Kong may prefer representative offices over branches considering representative offices are exempted from filing profit tax returns if it does not conduct profit-generating businesses in Hong Kong.
A sole proprietorship is the easiest and simplest form of business that is owned and operated by a sole person. It has no separate legal identity, and the sole proprietor is entitled to all the profits from the business and is personally responsibly for all the liabilities. The only procedural step in establishing a sole proprietorship is to obtain a Business Registration Certificate.
In addition to easy setup, the sole proprietorship has certain tax advantages. The sole proprietor can elect for “Personal Assessment” in their tax return filed for the tax year, so that the profits from the sole proprietorship will be assessed under the salaries tax scheme, which are subject to generous allowance and deductions and the progressive rate of which may be lower than the corporate tax rate. Moreover, the business losses of the sole proprietorship can be offset against other income of the proprietor.
On the other hand, sole proprietorship is considered to be the riskiest business form as the sole proprietor shall bear joint liability for the debt that the business incurs. There is no protection of their personal assets. Thus, sole proprietorship is generally not recommended for investors.
Partnership is a form of business where two or more people carry on business in common with a view of sharing profits. There are two types of partnerships in Hong Kong—general partnership and limited partnership.
In a general partnership, the partners enjoy all the property rights and are personally liable to other partners’ debts and obligations of the partnership. The only procedural step in establishing a partnership is to obtain a Business Registration Certificate.
In a limited partnership, there should be one or more general partners, who are responsible for the management of the partnership and liable for all its debt, and one or more limited partners, who are liable for the debts of the partnership within the amount they contribute to the capital of the partnership. A limited partner is not allowed to manage or control the partnership. A limited partnership is required to be registered with the Companies Registry and obtain a Business Registration Certificate.
Partnerships are generally easier to set up, maintain, and dissolve as compared to companies. There are fewer compliance requirements imposed on partnerships. Besides, partnerships might be more efficient in attracting talents as employees with skills, knowledges, and expertise have the chance to be promoted to partners.
Restrictions on foreign investment
Hong Kong does not subject foreign investments to special regulatory regimes or requirements per se. However, on the basis of public interest, there are restrictions on voting control by non-Hong Kong residents and corporations in the broadcasting sector. Such restrictions are set out in the Broadcasting Ordinance (Cap. 562) and the Telecommunications Ordinance (Cap. 106). The government’s special industrial-land policy features somewhat more complex rules, but it is still less demanding than the policies of many other Asian investment centers.
The Broadcasting Ordinance states that foreign ownership of a Hong Kong company with a license to broadcast domestic free television requires written consent from the Broadcasting Authority at three thresholds:
- Shareholding of 5-10 percent;
- Shareholding of 10-15 percent; or
- Shareholding of over 15 percent.
In addition, if foreign entities in aggregate hold over 49 percent of voting control in such a company, their votes shall be subject to a formula as outlined in the Broadcasting Ordinance.
[tips title="Did You Know"]Companies with a license to broadcast domestic free television must be Hong Kong companies, and may not be the subsidiary of another company.[/tips]
These restrictions do not apply to paid television, or non-domestic television.
Foreign shareholding in a company with a sound-broadcasting license may not exceed 49 percent. Sound-broadcasting licenses can only be given to Hong Kong companies. Such companies may not be the subsidiary of another company.