Doing Business in Hong Kong Special Administrative Region
Establishing an entity
There are 3 basic ways of establishing a business in the Hong Kong Special Administrative Region (HKSAR):
- Sole proprietorship or partnership
- Limited liability companies
- Branch office or representative office of a foreign company incorporated outside of HKSAR
A. Sole Proprietorship
Other than ensuring that business registration requirements are complied with, there are no statutory restrictions on the way in which an owner runs the business (provided it is legal). However, a sole proprietorship gives rise to unlimited liability for the owner, and therefore it is not normally recommended.
B. Partnership
General and unlimited partnerships are formed under the Partnership Ordinance.
In a general partnership, all partners are jointly and individually liable without limit for the debts and obligations of the partnership. Each partner is also personally liable, without limitation, for all the debts and obligations of the partnership not satisfied by the partnership assets.
It is possible to register, with the Registrar of Companies, a limited partnership, which is governed by the Limited Partnership Ordinance, under which the liability of at least one of the partners must remain unlimited.
C. Limited Companies
Limited companies may be either private or public companies limited by shares or a guarantee company without share capital and the operation of which is mainly subject to the provisions of the Companies Ordinance. The liability of members of a company for the company’s debts is limited to the issued share capital, or in the case of a company limited by guarantee, to the amount of the guarantee.
Most business operations in the HKSAR are private companies limited by shares whose articles of association: (a) restrict the right to transfer the company’s shares, (b) limit the number of members to 50, and (c) prohibit any invitation to the public to subscribe for shares or debentures.
Any company whose articles of association do not contain the three restrictions specified above is a public company.
D. Branch or Representative Office
Any overseas company that establishes a place of business in the HKSAR is required to register pursuant to the Companies Ordinance. A place of business includes a share transfer or share registration office, any place used for the manufacture or warehousing of goods, and/or a place used by the company to transact any business, which creates legal obligations.
If the office in the HKSAR has a liaison function and no business is conducted in the HKSAR that creates legal obligations, then the only action that must be taken is for the company to register a representative office under the Business Registration Ordinance.
Foreign business restrictions
Essentially, there is no restriction on a foreign business setting up in Hong Kong nor is there any foreign exchange control. There is also no Hong Kong residential requirement for shareholders and directors of an entity in the HKSAR.
Investment incentives
While Hong Kong only offers a few special business incentives, its low tax rates, excellent financial infrastructure and freedom of information are enough to establish itself as a leading global business centre.
There are certain tax incentives provided to specific industries such as offshore funds, reinsurance companies and captive insurance companies, corporate treasury centres and aircraft leasing.
Expenditure on plant and machinery directly related to manufacturing and computers may be written off in the year of purchase. For other plant and machinery, depreciation allowance is in the form of initial allowance and annual allowance. Deduction of initial allowance of 60% of the capital expenditure incurred is allowed in the year of purchase. Annual allowance is calculated on the remaining balance at a certain rate (usually 20%) per annum.
Work permits and visas
Other than those who have the Right of Abode or Right to Land in the HKSAR, all foreigners require a visa to live and work in Hong Kong.
As a general rule, any person who wishes to study, enter into employment, invest in Hong Kong, settle in Hong Kong for permanent residence, or stay as a visitor longer than the allowed visa-free period, must obtain a proper visa before coming to the HKSAR via a Chinese Consulate or Visa Office in his/her country of residence or citizenship.
People who take up residence in Hong Kong are required to register for an identity card by law. After living in Hong Kong for 7 years, one can apply for a permanent identity card. If successful, there will be no subsequent requirement for a visa or a work permit.
Foreign currency control
There are no exchange controls or restrictions on capital flows in and out of Hong Kong. The local currency is the Hong Kong Dollar (HKD).
Since 1983, the HKD has been officially pegged at HKD 7.80 = USD 1.00. Accordingly, the exchange rate of HKD to other currencies and Hong Kong interest rates typically follow US fluctuations.
Taxation
There is no value-added tax, sales tax or capital gains tax in Hong Kong.
Profits Tax
Profits tax is imposed for each tax year on Hong Kong-sourced profits derived from a trade, profession or business carried on in Hong Kong. There is no distinction between residents and non-residents. The source of profits is determined by an “operations test” (i.e. identifying the activities which directly produce the relevant profits and the place where these activities are carried out). Expenses are generally deductible to the extent that they are incurred in the production of assessable profits.
A tax year covers a period of 12 months commencing on 1st April and concluding on 31st March of the following year. Profits earned by a business during an accounting year ending within a tax year will be deemed to be its profits for that tax year.
Tax losses incurred cannot be carried back but can be carried forward indefinitely to offset against any future assessable profits. Anti-avoidance provisions restrict the use of tax losses where a change in shareholding was undertaken solely or dominantly for the purpose of utilising the losses to obtain a tax benefit.
The prevailing profits tax rate is 16.5% for corporations and 15% for unincorporated businesses. The Inland revenue (Amendment) (No. 7) Bill 2017 has been gazetted on 29 December 2017. After the bill becomes law, a two-tier profits tax system of a concessionary rate at 50% of the normal profit tax rate will be applied to the first HKD 2 million annual taxable business profits of the taxpayer with effect from the year 2018/2019.
Salaries Tax
Salaries tax is imposed for each tax year on an individual’s income arising in or derived from Hong Kong from any office, employment or any pension. For Hong Kong employment, all income derived will normally be subject to salaries tax; even if some services are performed outside of Hong Kong. Income from non-Hong Kong employment is only taxed to the extent that is derived from services rendered in Hong Kong. In determining whether an employment is a Hong Kong employment or a non-Hong Kong employment, the practice of the Inland Revenue Department is to take into account all of the relevant facts with particular emphasis on where the employment contract was negotiated, entered into and where it is enforceable, where the employer is resident and where the employee’s remuneration is paid to him/her. Income from services rendered during visits to Hong Kong by a person not exceeding 60 days in a tax year is exempted.
Salaries tax is charged at progressive rates from 2% to 17% on a taxpayer’s net chargeable income (i.e. income after deduction of expenses and personal allowances) with the maximum amount of tax limited to the standard rate of 15% on the taxpayer’s net assessable income (i.e. income after deduction of expenses but with no personal allowances granted).
Employment
Tax and Legal
The Employment Ordinance serves as the law governing employment practice and labour relations in Hong Kong.
Types of employment
All employees in Hong Kong (except seamen, apprentices, and family members living in the same dwelling) are entitled to wage protection and statutory holidays. After 4 weeks of employment with at least 18 hours of work per week, an employee automatically falls under a continuous contract and can receive other benefits.
An employment contract must stipulate the wage, wage period, notice requirements, and bonus calculations if applicable. If a contract is in writing, the employee must receive a copy; and if the contract is made verbally, the employee is entitled to a copy if he/she requests one.
Additionally, the employer must keep records of the employee’s name, identity card number, job title, wage, wage period, notice requirement, leave entitlement and record, as well as payments made during leave. If applicable, the employer must also keep a record of the number of hours in a wage period, bonus calculations and date of termination.
Working hours and compensation
Wages must be paid out within 7 days after the wage period. There is no statutory provision on regular working hours and overtime hours in Hong Kong, which must be specified in the employment contract. Employees are entitled to not less than 1 rest day in every week. Employers are only required to provide 1 rest day every week. The average full-time employee in Hong Kong works 49 hours a week and over half of employees receive no remuneration for overtime.
Source: “A Concise Guide to the Employment Ordinance” published by the Labour Department of the HKSAR Government
Wages and benefits
A. Minimum hourly wage
Since 2011, Hong Kong has enforced a statutory minimum wage. The current level of minimum wage is HKD 34.50 per hour.
B. Paid Leave
Each full time employee is entitled to 12 days of statutory holidays.
Moreover, an employee who has rendered 1 year of service is entitled to a minimum of 7 days of paid leave annually. After the third year of service, the minimum number of paid leave days increases by 1 every year, up to a cap of 14 days.
C. Mandatory Provident Fund
The Mandatory Provident Fund (MPF) is designed to provide a formal, compulsory system of retirement protection by way of a privately managed contribution scheme. Generally, all benefits derived from mandatory contributions must be preserved until the contributor reaches the prescribed retirement age of 65. Early withdrawal of benefits may be allowed when a person: (a) retires between ages 60 and 65, (b) has departed or will depart from Hong Kong permanently, (c) has become totally incapacitated or (d) has died before the age of 65. The benefits accrued from mandatory contributions to MPF schemes are withdrawn in a lump sum upon retirement rather than as an annuity.
Certain categories of employees are not required to join an MPF scheme including employees who are covered by overseas retirement schemes, and foreigners who enter Hong Kong for employment with a working visa for a validity period that does not exceed 13 months.
Under the MPF system, the employee is required to contribute 5% of his/her monthly income (capped at HKD 18,000 p.a.) and the employer has to match this amount. Each employee and employer may make voluntary contributions in addition to the mandatory contributions.
Termination of employment
An employee may be eligible for severance payment or long service payment under certain conditions. An employee, who has been employed for not less than 24 months, is entitled to severance payment if the employee was laid off or dismissed by reason of redundancy. Certain employees who have been employed under a continuous contract for not less than 5 years are entitled to a long service payment. The amount payable is the lower of 2/3 of the previous month’s salary or 2/3 of HKD 22,500, multiplied by the recognizable years of service. The payment is capped at HKD 390,000.
The service of an employee can be terminated and the employer/the employee should be notified according to the employment contract. If it is not specified in the employment contract, at least 1 month notice should be given before the date of termination.
Summary dismissal is allowed only if the employee has committed serious misconduct or habitually neglects his/her duties and fails to improve after repeated warning. The employee may disagree and file a case with the Labour Tribunal.
An employee can terminate the employment without notice if he/she is reasonably threatened by violence or disease, subjected to ill-treatment by the employer, or certified permanently unfit for the work by a registered medical practitioner after 5 years of service.
Audit and accounting
All companies incorporated under the Companies Ordinance, regardless of size, must have their (annual) financial statements audited by a practising Certified Public Accountant registered with the Hong Kong Institute of Certified Public Accountants (HKICPA).
Hong Kong GAAP is commonly adopted for the preparation of financial statements though it is not mandatory by law. Hong Kong GAAP, also generally referred to as Hong Kong Financial Reporting Standards (HKFRS) issued by the HKICPA, is almost fully converged with International Financial Reporting Standards (IFRS).
Hong Kong also adopts the Hong Kong variation of IFRS for SMEs, which is known as HKFRS for Private Entities, for companies that do not have public accountability. SMEs that meet certain criteria, including a size test and shareholders’ approval, can also choose to apply the Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standards (SME-FRF & SME-FRS).
Country quirks
- Legal system: originated and based on English Common Law, unlike that of Mainland China.
- There is no restriction on foreign business nor is there any foreign exchange control.
- The HKD has been pegged to the USD since 1984 at a fixed rate of HKD 7.8 = USD 1.
- Official languages: English and Chinese.