Over the last 50 years, Hong Kong has turned into one of the most important financial centers in the Asia-Pacific region. It is rightfully referred to as an ‘Asian tiger’. Even when the jurisdiction rejoined China in 1997, it did not cease to play an important role in the financial and corporate sectors. Hong Kong is a special administrative district of China with a spotless reputation in the business world.
At the same time, the global business landscape is changing as new security standards are introduced. The changes affect Hong Kong too and you have to weigh all pros and cons if you are considering establishing a business company in the jurisdiction.
Hong Kong as a financial center
Hong Kong is located in the center of the Asia-Pacific region and its population exceeds 70 million people. Unlike Macao, Hong Kong has an international airport and it is one of the largest airports in the region. Besides, there is a free seaport in Hong Kong that is the 10th largest seaport in the world for cargo turnover. The advanced infrastructure has turned Hong Kong into one of the key transportation hubs in Asia and its special legal and administrative status allows it to act as a bridge between the global community and mainland China. Unlike in mainland China, currency control is not applied in Hong Kong. Besides, opportunities for international investments are much more limited in mainland China in comparison to Hong Kong.
The Hong Kong stock exchange is the 7th largest stock exchange in the world for the capitalization of the companies listed there. Hong Kong has managed to become a global financial center because the authorities do not interfere in business matters and the legislation of Hong Kong is based on British Common Law.
Hong Kong is habitually at the top of various ratings compiled by international organizations. For example, it ranks 3rd for the ease of doing business and it ranks 7th for global competitiveness.
Conditions for doing business in Hong Kong
Hong Kong offers a highly comfortable business environment. The following factors contribute to the comfort of doing business in Hong Kong:
- Precise timeframes of company registration and the availability of multiple forms of company ownership. This is a legacy of British rule.
- The corporate tax rates are currently 8.25% or 16.5% depending on the amount of profit that the company makes. The tax rates are low in comparison to other well-developed jurisdictions.
- Unlike in Singapore, the territorial taxation system is applied in Hong Kong: if a company does not perform any business operations in Hong Kong and derives all profits from foreign sources, it is not taxable in Hong Kong. Please check here to find out about other differences between incorporating a company in Hong Kong and in Singapore, one more ‘Asian tiger’.
- No withholding tax is charged on dividends and royalties (with some exceptions).
- No controlled foreign corporation rules, no currency control, nor any other restrictions on the movement of capital.
- An economic substance test is applied in Hong Kong but it serves the purpose to decide if the company is eligible for tax exemptions. This makes Hong Kong substantially different from such jurisdictions as Seychelles, Caymans, the BVI, the UAE, and so on where economic substance is a necessary condition for incorporating a company.
- Even though Hong Kong is part of China, it is an independent member of some international organizations such as the WTO, FATF, and ASEAN. In addition, it has been a signer of the Hague Convention since 1961 so foreign documents don’t have to be legalized in Hong Kong. The jurisdiction also has more than 40 bilateral agreements on avoiding double taxation.
- Hong Kong automatically exchanges financial information with other countries in accordance with the CRS requirements. This fact makes it unjustified to refer to Hong Kong as an offshore jurisdiction.
Who would benefit from registering a company in Hong Kong?
As we have noted above, Hong Kong has an advanced infrastructure and a free port, which makes it an ideal jurisdiction for setting up a trading company to trade with mainland China and other countries. Thanks to its beneficial tax regime, Hong Kong is a home for multiple holding companies that own legal entities in other countries as well as various financial instruments at the Hong Kong stock exchange and stock exchanges in other jurisdictions.
An IT company would also benefit from incorporating in Hong Kong. The jurisdiction demonstrates a stable interest in developing information and communication technologies giving preferences and subsidies to startups in such spheres as AI, biotechnologies, cloud solution, SaaS, and so on. Besides, blockchain and cryptocurrency projects are actively developing in Hong Kong.
Hong Kong has many competitors in the region as far as corporate and financial services are concerned. These include Japan, mainland China, and Macao. However, Singapore is the main competitor of Hong Kong. The two city-states are similar in many respects but Hong Kong offers some advantages:
- There is no requirement to hire a local company director in Hong Kong;
- If a Hong Kong-based company opens an account with a local bank, it does not automatically become taxable in Hong Kong, while this is the case in Singapore.
In general, it would be just to characterize Hong Kong as one of the most comfortable jurisdictions in the world for incorporating a company and doing business. However, there are certain factors that might make you think twice before registering a company in Hong Kong.
Nuances of the taxation system in Hong Kong
The territorial taxation principle does not apply to companies by default. A company has to put an ‘offshore tax claim’ to become exempted from taxes on foreign profits. The company has to prove that all profits have been derived from outside Hong Kong.
Banking in Hong Kong
Hong Kong banks welcome companies that perform business operations in the Asia Pacific region. If this is not the case with your company, opening a bank account in Hong Kong can be extremely difficult. You may want to consider the opportunity of setting up an account with a payment system or banking in another jurisdiction.
Maintaining a company in Hong Kong
Every Hong Kong-based company has to have a local Secretary (a natural or a legal person). Moreover, any company has to have an office in the jurisdiction where the corporate documents have to be kept. Given the small size of the jurisdiction and the vast number of people that live there, office rent is going to cost you a pretty penny.
Should you establish a company in Hong Kong?
Registering a company in Hong Kong can bring you many benefits if you are planning to do business in the Asia-Pacific region. The city-state offers a wonderful infrastructure, almost total economic freedom, and transparent corporate rules. But you’d have to pay for these opportunities. Hong Kong is an expensive jurisdiction and the main reason for that is the fact that it is extremely small. Thus, there are both pros and cons when it comes to incorporating a company in Hong Kong.
