formation Hong Kong: Setting Up a Company in Hong Kong
BRIEF OUTLINE OF HOW TO SET UP A COMPANY IN Hongkong:
Hong Kong only has a
double-taxation agreement with Belgium and Luxembourg, that is, as a
rule the shielding effect of a DTA is not present.
Legal form: limited company
Bearer shares: No, only registered shares (and these are published)
Trade register open to public inspection: Yes
Taxes:17.5%. Exempt companies (companies that only operate with
foreign-based businesses) remain totally exempt from taxation. Income
from abraod likewise remains exempt from tax.
Turnover tax: No
Setting Up a Company in Kong Kong and
the Services of Our Legal Firm
-tax advice on setting up a company in Hong Kong and associated companies
-setting up a company in Hong Kong, entry in the register, translation of
the registration documents into the language where the client is domiciled,
-registered office in Hong Kong, head office (proper place of business) up
to and including an office.
-bookkeeping and annual accounts on behalf of the limited company in Hong
-on request and insofar as required:
-appointment of a trust director or full-time director in Hong Kong (cf.
“Location of the senior management of the business” as the location of the
business premises, provided there is no production facility, no facility for
the exploitation of mineral resources or any construction work being carried
out in Hong Kong for longer than
6-9 months, in which case the business premises are always in Hong Kong,
irrespective of the location of the senior management of the business)
-opening of an account on behalf of the limited company
in Hong Kong, including online banking, cheques and credit card. In the case
of a trust director the beneficiary/client will obtain sole authority over
Further services for medium-sized enterprises:
-search for suitable offices, storage depots or
-staff in Hong Kong: visa matters,registration for tax
purposes, wage accounts.
-Setting Up a Company Hong
Kong and Legal Form
The private limited company, that is, a limited
company that is not listed on the stock exchange, is the most popular form
of company in
Hong Kong and is also, almost without exception, the one chosen by all
foreign companies that have set up in business here.
The statutory minimum requirements are:
to 2 Hong Kong dollars (approx. 0.20 euros). The liability of the partners
is limited to the amount of the share capital.
as well as two directors; the shareholders and directors can be one
and the same (this is also often the case with small companies) and may be
both legal and natural persons who do not have to be resident in Hong Kong.
a company secretary (clerk). He must be resident in Hong Kong and is
responsible inter alia for sending
reports to the trade register (e.g. on the re-appointment of directors
a head office in Hong Kong.
A set of articles of association for the company
which are, in most cases, couched
in very broad terms and regulate the powers of the directors as well as the
purpose of the business. The object of the business may be production
and distribution, trading (locally or in the import/export business) as well
as the most widely varying services. Particular conditions for admission
(similar to those in Germany) only exist in some sectors, such as in the
case of banks, the stock exchange, finance and insurance.
The share capital, the head office of the company, the above-mentioned
persons as well as the articles of association are noted in the Hong Kong
trade register which can be inspected by everyone. By contrast, in the case
of the balance sheet and the profit & loss account, which must be produced
(and certified) annually, there is no obligation to publish them.
-Setting Up a Company in Hong Kong and General Advice
In view of the ease with which companies can be set up in Hong Kong for not
a lot of money, it is hardly surprising that many foreigners want to have a
piece of the cake. However, anyone who thinks that the requirements for
doing so are met with the purchase of a Hong Kong letter-box company
will quickly have his eyes opened:
Admittedly, the authorities on both sides of the border have some
flexibility in all issues relating to this. However, it is essential that it
actually involves a company actively engaged in business in Hong Kong with
its own management that was neither set up only on the day before the
concession applications were submitted nor one which, in comparison with the
ostensible scope of the business has a ridiculously low level of
capitalisation and/or has its address (together with a hundred
others) under the bell push of a local lawyer, an auditor etc..
On the other hand, with a little sense of proportion the requirements can,
in most cases, be fulfilled really easily : huge offices and business
premises are not expected. Rather, as opposed to this, it is about having a
telephone of one’s own that is also answered when people ring. The
manager should, in this case, reside locally (a wish that can be fulfilled
by means of trust solutions) and should also be credibly shown in the profit
& loss account of the company under the item "salaries".
This definition can be departed from if a production
facility is set up in Hong Kong, a facility for the exploitation of mineral
resources or construction work which will go on for more than 12 months. In
that case the business premises are always in Hong Kong (in the same way as
the 5 OECD agreement), irrespective of the "location of the senior
management of the business".
However, anyone who purchases his company from one of the many discounters,
who often do not even ask about the intended use, must subsequently have the
situation put right with a great deal of effort and expense with
formation Hong Kong: Professional
Incorporation of Hong Kong
- Memorandum & Articles of Association
- Statutory Register
- Share Certificate
- First Board Minute
- Metal Common Seal
- Rubber Stamp
Secretarial & Compliance
- Acting as Company Secretary
- Annual Return
- General Meeting
- Board Meeting
- Increase of Capital
- Transfer of Shares
- Allotment of Shares
- Appointment of Directors
- Resignation of Directors
- Change of Company Name
- Change of Registered Address
Presence in HK without actual Office
- Mail Forwarding
- Fax Forwarding
- Office Space Sourcing
- Accounting & Book-keeping
- Year end Auditing
- Tax Computation and Return
- Profit Tax Return
- Taxation and Accounting Issues
Scope of Profits Tax
Profits tax is levied under
the Inland Revenue Ordinance on the "assessable profits" of
corporate entities, partnerships, trusts and sole proprietorships. It is
levied according to the "territorial principle" meaning that it is the
source of the income rather than the residential or non-residential status
of the entity that determines whether or not trading income is or is not
subject to Hong Kong profits tax.
The territorial principle
means that only income which meets the following 3 preconditions is
subject to Hong Kong profits tax:
- The entity must trade in
- The income must arise
from such a trade
- The income must arise in
or be derived from Hong Kong
The residential or
non-residential status of the entity is irrelevant as is the fact that the
income is or is not exempt from tax in a foreign jurisdiction. Advance tax
rulings are available in the SAR and are particularly favored and
recommended on the question of whether or not for profits tax purposes
trading income is deemed onshore and taxable or offshore and tax exempt.
"Source of income" for
profits tax purposes has been defined as the geographical location of the
operation which substantially gave rise to the income, but the Inland
Revenue's Practice Note No 21 adds more precise criteria:
The establishment of an
office in Hong Kong: does not of itself render a company liable to
profits tax where that office is not generating profits from within the
Place where the contract
was negotiated and executed: A key criterion is the place where the
contract was negotiated and signed. Income relating to a sale contract
negotiated by the seller from the territory by way of facsimile or
telephone where the negotiation did not require travel outside the
territory is deemed Hong Kong source income for profit tax purposes.
Likewise if the contract is negotiated and signed outside the territory
and the goods sold are not sourced from within the territory then any
income arising is not deemed Hong Kong source income for profits tax
purposes. This is often achieved by utilizing an offshore company which
re-registers in the territory as a foreign company but whose directors
both remain non resident and negotiate and execute the contract from the
Where the Hong Kong entity is merely a booking center in the sense that it
does not negotiate or draft the sale agreement (which is carried out
abroad) but merely issues an invoice on instructions, operates a bank
account and maintains accounting records covering the transaction then the
income from such a transaction is not deemed Hong Kong source income for
profits tax purposes.
Shares & Securities :
Gains from shares and securities purchased and sold on the territory's
stock exchange are deemed Hong Kong source income for profit tax purposes
(assuming the entity is subject to profit tax on such an activity).
Cross Border Land Transportation: Income
from cross-border land transportation is deemed Hong Kong source income if
the passengers or goods are normally uplifted in Hong Kong.
Loans : Loan
interest on a loan made available to the borrower within the jurisdiction
of Hong Kong is deemed to be Hong Kong source income for profits tax
purposes and taxable in the hands of the Hong Kong lender whereas loan
interest on a loan made available to the borrower in a foreign
jurisdiction is not deemed Hong Kong source income and is therefore not
Hong Kong Profits Tax Rates
A number of
- Companies pay a standard
rate of 17.5% on assessable profits.
- Businesses other than
corporate entities pay a rate of 16% on assessable profits.
- Special concessionary
rates of profits tax which are substantially less than the standard
rates apply to the following businesses or sources of income:
- Interest or capital
gains made on qualifying maturity debt instruments are taxed at 8%.
- The re-insurance of
offshore risks is taxed at 8% of assessable profits.
- Life insurance
businesses are assessed at 5% of the value of the premiums arising
in Hong Kong.
- An entity whose
business is to grant rights to use a trademark, copyright, patent or
know how pays a flat profit tax of 1.75% (or 17.5% on 10%) of the
payment received with all related expenses being non tax deductible.
If the recipient of the payment is a related offshore licensing
company the Hong Kong company must withhold and hand over 1.75% of
the fee paid over.
- Income from the
international operations of shipping companies is exempt from tax
unless the ships are operating in Hong Kong waters or proximate to
the same in which case only that proportion of income earned in Hong
Kong is subject to local tax of 17.5%. Shipping profits meeting the
conditions of the double taxation agreement with the USA are exempt
from profits tax in Hong Kong.
- Irrespective of
whether or not the company is managed and controlled from Hong Kong
assessable profits are the proportion of income arising within Hong
Kong (from the uplift of passengers and freight locally) to the
proportion of worldwide income. Under a number of international
aircraft double taxation agreements the government has agreed to
include income arising abroad for taxation in Hong Kong where that
income is exempted abroad under the agreement. Likewise profits
meeting the conditions of the double taxation agreements are exempt
from profits tax locally. The rate is 16% of assessable profits.
- The sale of goods on
consignment from Hong Kong on behalf of a non resident is subject to
a tax of 1% of the turnover without any deductions unless the non
resident can produce accounts to show that he would have paid less
profit tax than consignment tax in which case a normal rate of tax
will apply .The selling of goods on consignment is deemed to be the
equivalent of creating a permanent establishment.
- An entity whose
business is to rent out a film, tape or sound recording for use in
any cinema or television program pays a profit tax of 1.75% (or
17.5% on 10%) of the payment received with all related expenses
being non tax deductible.
Hong Kong Calculation of Taxable Base
A number of
factors including the territorial principle have created an extremely
attractive fiscal regime exempting categories of income which in most
other jurisdictions would normally be subject to a profits tax:
- Dividend income received
by a Hong Kong parent company from either a resident or foreign
subsidiary is not deemed income in the holding company's hands and is
thus not subject to an assessment to profits tax.
- There is no separate
schedule of capital gains tax in Hong Kong. Nor does the territory
follow the practice of other jurisdictions and tax capital gains as
trading income which is subject to profits tax. However by way of
exception a business whose activities is to trade in capital assets is
assessed to profits tax on any profits made on the sales of those
capital assets as if these gains were trading income. Likewise if the
asset is deemed a revenue asset as opposed to a capital asset then any
profits made on its disposal are deemed trading income and assessed to
profits tax. The absence of capital gains tax (often together with other
factors) has had a number of fiscal consequences:
- Profits remitted to a
Hong Kong parent which represent the profitable disposal of its
shareholding in a resident or non resident subsidiary are not
assessed to tax in the territory both because the gains are capital
gains and because (in the case of a non resident company) income
arising outside jurisdiction is exempt from tax under the principle of
- The profitable
disposal by a Hong Kong entity of foreign real estate is not assessed
to tax in the territory both because the gains are capital gains and
because of the principle of territoriality. This includes a disposal
effected by means of the Hong Kong entity selling 100% of the shares
in a company whose sole asset is the foreign real estate.
- Since currency gains
and losses are considered to have a capital nature they are neither
taxable profits nor deductible losses.
- The transfer by a Hong
Kong entity of capital assets to a foreign or resident subsidiary or
branch at market value and at a profit is considered a capital gain
and thus does not attract tax in Hong Kong (unless the assets are
classified as revenue assets).
- Rental income from
foreign real estate is not assessable income in Hong Kong for profit tax
purposes. (However depreciation & interest payments on loans made to
finance the real estate tax are non deductible in the territory).
- The profits and losses
of the foreign branch or subsidiary of a Hong Kong company are neither
taxable profits nor deductible losses in Hong Kong owing to the
- Interest income received
by a resident or non resident business entity on deposits lodged with a
financial institution are exempt from profits tax (By way of exception
if the deposit was made by a "financial institution" then any interest
received by the financial institution is deemed trading income for
profits tax purposes and taxed accordingly).
- The tax treatment of
loan interest payments and receipts requires a special mention. 3
- Loan interest
repayments made by a Hong Kong borrower to a foreign lender are
only tax deductible in Hong Kong if the foreign lender is a "financial
institution". If the foreign lender is not a financial institution but
is the parent or subsidiary of the Hong Kong borrower the interest
payments are not tax deductible in the territory unless the parent or
subsidiary is a connected company and is subject to Hong Kong profits
tax on the loan interest receipts.
- Loan interest
repayments received by a Hong Kong company on a loan made to a
3rd party are not taxable income in the hands of the Hong Kong lender
if the loan was advanced to the borrower from a foreign jurisdiction
such as Gibraltar. If the loan was advanced to the borrower from Hong
Kong then the loan interest repayments are taxable in the territory.
- A Hong Kong parent
company which borrows money to set up a subsidiary or a branch in a
foreign country cannot deduct the cost of the loan for profit tax
purposes since the income earned by the borrower has a foreign source.
Therefore the loan should always be sourced by the foreign subsidiary
or the foreign branch in the foreign jurisdiction in which it will be
- Owing to the principle
of territoriality there is no controlled foreign company
legislation under which the profits and capital gains of non resident
subsidiaries can be taxed as if they were the profits of a resident
parent company.(The converse applies in both the United States and the
- Consolidated group
accounting under which the profits of one company in the group can be
set off against the losses of another company in the group so as to
reduce the over all profit subject to profits tax does not exist
in Hong Kong.
- Losses can be carried
forward indefinitely. This compares favorably with other jurisdictions
which only allow losses to be carried forward for a fixed period of time
(usually 5 years).
- Since there are no debt/equity
thin capitalization rules in Hong Kong a foreign parent can set up a
resident subsidiary with a minimum of share capital and a maximum of
loan capital and thereby reduce taxable profits arising in Hong Kong
through excessive interest payments.
- The repayment by a
foreign subsidiary to its Hong Kong parent of the principal of loan
capital or share capital is free of tax in the territory including where
the repayment is by way of a capital reduction or a final dividend
distribution in a liquidation.
- The following sources of
trading income are exempted from profits tax:
- Interest received or
capital gains made on the purchase, retention or sale of a Government
bond issued under the Loans (Government Bonds) Ordinance;
- Exchange fund debt
- Hong Kong dollar
denominated multi – agency debt instruments;
- Specified investment
schemes which comply with the requirements of a government supervisory
authority are exempt from tax. Specified investment schemes include
investments in unit trusts and mutual funds.
Profits Tax Deductible
The following allowances
are deductible from assessable profits for profits tax purposes.
- A deduction is allowed
for a contribution (or provision for a contribution) by an employer
amounting to not more than 15% of the employee's annual salary into a
recognized retirement scheme registered under the Occupational
Retirement Schemes Ordinance. (It is in any event an offence for an
employer to operate a pension scheme that is not registered under this
Ordinance). Since the Mandatory Provident Fund Scheme came into
effect on 1st December 2000 allowable deductions are either 5% of an
employee's gross salary or a maximum of US$2,560 per month.
- Full deduction is
allowed for charitable donations not exceeding 10% of annual assessable
profits after deduction of depreciation allowances but prior to losses
carried forward being added in.
- Hong Kong tax paid on
foreign income which by law is chargeable to profits tax in Hong Kong is
an allowable deduction for profits tax purposes. (N.B. foreign source
income is not normally subject to tax in the territory).
- Any property tax already
paid is deductible from income for profits tax purposes;
- Depreciation allowances
for capital equipment are as follows:
- 100% first year
allowances for manufacturing plant and machinery;
- 100% first year
allowances for computer equipment;
- 60% of the cost of all
other plant and machinery can be written off in the first year with a
rate of 10-30% written off thereafter.
- 20% of the cost of
construction of an industrial building can be written off in the 1st
year with 4% per annum thereafter.
- Expenditure incurred
refurbishing or renovating business premises can be written off in 5
- In May, 2004, LEGCO
expanded the scope of deduction for research and development expenses
under profits tax to cover design-related expenses.
Hong Kong Property Tax
is levied annually on the owner or occupier of real estate located in Hong
Kong. Since ownership may be split (eg an entity with a 100 year lease may
grant a 50 year sublease to a 3rd party) separate assessments may be made
on the same parcel of land. Property tax which is governed by the
provisions of the Inland Revenue Ordinance has the following
- The annual assessment to
property tax is based on 100% of the annual rental income of the
property less any rates paid, any bad debts, a repairs and outgoings
allowance constituting a maximum of 20% of the annual rental income (irrespective
of whether or not more was actually spent) and other allowable
deductions. In determining "rental income" the Inland Revenue will
include any premiums, service charges, management fees, rates, repairs
and outgoings paid by the tenant either to the owner or on behalf of the
owner under the terms of the lease. In order to assist the inland
revenue to assess the rental income the owner is obliged to keep records
for up to 7 years and inform the tax authorities of the actual sums
- Property tax is based on
the territorial principle and is levied on buildings, parts of buildings,
wharves, piers and other structures located in Hong Kong. The fact that
the owner is non resident, non domiciled or a national of a foreign
country is completely irrelevant and does not exempt him from having to
pay this tax.
- The tax rate is 15% of
the assessed annual rental income .
- Property tax is levied
on a provisional assessment basis which takes into account the previous
year's rental income with a tax credit being granted where the previous
year's rental income exceeds the current year's rental income. Relief is
also given where part of the assessed rental income is a bad debt.
- The following types of
property are exempted from this tax:
- The properties of
- Charitable bodies
exempted from taxation;
- Business entities who
derive profits from and pay profits tax on rental income derived from
ownership of real estate are entitled to a set-off of property tax
against profits tax with a tax credit being granted where the property
tax exceeds the profits tax;
- A corporation which
purchases a property for its own occupation does not pay property tax
on the deemed rental income which it could have earned if it had
rented out the building.
- It is advisable for
properties to be owned by Hong Kong corporate entities since property
tax does not make allowances for either depreciation or interest costs
on a loan to finance the purchase, while such costs are deductible for
corporate profits tax purposes. A foreign company cannot own real estate
in Hong Kong unless it is registered as a foreign company under the
provisions of the Companies Ordinance.
Hong Kong Stamp Duty
The laws on
stamp duty are set out in the Stamp Duty Ordinance. Stamp duty is
either a fixed fee or is calculated ad valorem depending on the nature of
the transaction. It is payable on:
- Leases, assignments and
conveyances of immovable property.
- The transfer of shares
or marketable securities
- The transfer of bearer
instruments (being instruments under which ownership is transferred
through physical delivery).
Immovable Property Stamp
2 separate rates of stamp
duty are payable on immovable property:
The Conveyance of a
Freehold or the Assignment of a Leasehold: The rate of stamp duty is
progressive and varies from US$13 if value of the transferred interest
is less than US$128,000 to a maximum rate of 2.75% where the property is
valued at more than US$565,875 .
The Granting of a
Short-Term Lease: The stamp duty rate is progressive and varies
between .25% and 1% of the annual rental value depending on whether the
lease is for less than one year or more than 3 years. Any agreement
which increases the rent reserved by a chargeable stamped lease is
itself chargeable to stamp duty in respect of the additional rent which
it makes payable.
Transactions Exempted from Stamp Duty:
The following immovable
property transactions are exempt from stamp duty:
Property: Instruments transferring "non residential property" are
exempt from stamp duty. Non-residential property is defined as property
which may not by law be used at any time for residential purposes.
Gifts to Charitable
Institutions or Public Trusts: Instruments transferring immovable
property by way of gift to a charitable institution or public trust are
exempt from stamp duty.
- Approved conveyances
on sale to diplomatic or consular bodies.
conveying an interest in immovable property between "associated
corporate bodies". Entities are defined as associated corporate
bodies when one entity holds over 90% of the share capital of the other
or when a 3rd entity holds over 90% of the share capital of both
entities. The association must remain for 2 years after the transfer in
default of which the full level of stamp duty must be paid over
retrospectively. The financing of the transaction cannot come from an
Mortgages are free of stamp duty.
Stamp Duty Anti-Avoidance Provisions
There are elaborate anti
avoidance provisions in place aimed at deterring speculation. Thus where
the beneficial owner of real estate executes an instrument in favor of a
third party under which he undertakes to hold the real estate on trust for
the third party duty is payable on this instrument as if a conveyance had
taken place. Likewise stamp duty is payable where under an uncompleted
contract of sale the vendor is deemed by law to hold on trust for the
Stamp Duty Payable on
Shares & Marketable Securities
Stamp duty of .225% is
payable on the transfer of shares or marketable securities whereas .1%
stamp duty is payable on the issued share capital of a company up to a
maximum stamp duty fee of HK$30,000. In the long-term stamp duty on shares
and securities is to be phased out completely.
Exempted from Stamp Duty
The following transactions
are exempt from stamp duty:
- Loan capital
transactions, bills of exchange, promissory notes, certificates of
deposit, exchange fund debt instruments and Hong Kong multilateral
agency debt instruments.
- Transactions involving
debentures, loan stocks, funds bonds or notes that are not denominated
in Hong Kong currency except to the extent that they are redeemable in
- Stock donated to
charitable bodies or public trusts which are exempt from taxation in
- A transaction conveying
stock between "associated corporate bodies". Entities are defined as
associated corporate bodies when one entity holds over 90% of the share
capital of the other entity or when a 3rd entity holds over 90% of the
share capital of both entities. The association must remain for 2 years
after the transfer, in default of which the full level of stamp duty
must be paid over retrospectively. The financing of the transaction
cannot come from an unassociated body.
Stamp Duty Payable on
The amount of stamp duty
payable is 3% of the value of the instrument transferred.
Hong Kong Filing Requirements and Payment of Tax
The tax year
starts on 1st April. The assessment to profits tax is provisional and is
based on the previous year's assessable profits with 75% of the assessment
being due by the 3rd quarter and the final 25% being due at the year-end.
Tax payments delayed less than 6 months are subject to a 5% non-deductible
surcharge whereas payments overdue by more than 6 months are subject to a
10% non-deductible surcharge. A tax credit is granted where the previous
year's assessment exceeds the currents year's assessable profits.
Hong Kong Withholding Tax
There are no
withholding taxes in Hong Kong as such, but there are certain
circumstances in which a company making a payment to a foreign associate (subsidiary
or holding company) which is deemed to be Hong Kong source income needs to
needs to withhold the tax.
For instance, when a Hong
Kong entity pays royalties for the use of intellectual property to its own
offshore licensing affiliate, then tax is due of 10% of 16% = 1.6% and
this must be withheld by the Hong Kong paying company.