Hong Kong - Trade, Investment and Business Hub in Asia
By Klaus Koehler, Managing Director, Klako Group

Located in the heart of East Asia on China's southern coast, Hong Kong offers many benefits: a low tax regime; state-of-the-art infrastructure; a transparent legal system and impartial judiciary; free flow of information; an entrepreneurial spirit; and a truly international lifestyle. With an excellent range of professional services available, Hong Kong serves as the major business hub for the whole of the Far East. The Hong Kong Dollar is freely interchangeable, but has a pegged exchange rate against the US Dollar. There are no exchange controls.

On 1st July 1997, Hong Kong became a Special Administrative Region (HKSAR) of the People's Republic of China. Under the so-called "One Country, Two Systems" concept, Hong Kong and the PRC are to be maintained as separate governmental, legal and economic systems.

Legal system

Hong Kong's legal system is based on English common law. The Basic Law, approved in March 1990 by China's National People's Congress, is Hong Kong's "mini-constitution". It provides specific guarantees not only on human rights and freedoms, but also on continuance of the legal system and maintenance of an independent judiciary.

Taxes

Hong Kong is well known for its simple and low tax system. Taxes are levied on three types of income: profits, salaries and property. The profits tax rate is 17.5% for corporations and businesses. There is no goods and services tax and only profits that arise in or are derived from Hong Kong are taxable. Profits sourced elsewhere are not subject to Hong Kong Profits Tax.

Doing Business in Hong Kong

Establishing a Business

Establishing a business is a straightforward process in Hong Kong. There are a number of different business entities that can be set up, but the most common form is the private limited company, which limits the liability of the shareholders to the capital subscribed. Every Hong Kong company must have at least two shareholders and two directors, neither of which needs to be Hong Kong resident and can be either individuals or corporations. Where the actual beneficial owners do not wish their interests to be on record, nominee shareholder services can be used. There is no specific requirement on the debt to equity ratio and the company can carry on business with as little as HK$2 in issued capital.

The company must have a company secretary who is either an individual residing in Hong Kong, or a body corporate, which has its registered office or a place of business in Hong Kong. The company must keep its normal statutory books together with minute books of the meetings of its directors and shareholders. Also, each year, it must minute its annual general meeting (AGM) at which the audited accounts are presented, the directors re-elected and the auditors re-appointed. The company must file a return with the Company Registry of its present company structure at the anniversary date of its incorporation. Every company must register with the Business Registration Office and pay the Business Registration Fee annually on its anniversary of the date of incorporation, irrespective of whether the company is dormant or in business.

Benefits of having a Hong Kong company

Re-Invoicing

Re-Invoicing is a fast, effective and inexpensive method of reducing profits tax liabilities in international trading. By using re-invoicing structures, trading companies can legally maximize their profits and reduce the overall costs of operating as an international business. International trade transactions are processed through a middleman based in a jurisdiction that does not levy taxes on import/export processing, such as Hong Kong. In addition to tax advantages, the client may be able to hide the supplier source and the initial buying price.

Usually, the buyer or seller of the goods sets up their own limited company in Hong Kong, specifically for this purpose. The Hong Kong entity re-invoices the foreign buyer or seller at a higher rate than the original cost of the goods and re-issues the bills of lading for the shipment routed to its destination, in order to show the shipper as the Hong Kong entity as well as the port of origin being Hong Kong. The Hong Kong company retains tax free an amount equivalent to the cost of the goods plus a mark up for profits.

Asia buying and re-invoicing office

Asia sales and re-invoicing office

Holding company for China investment

When structuring an investment into China, investors may use their existing company or set up a separate holding company to apply for the China business registration on behalf of the parent company. Many foreign investors use offshore companies for this purpose in order to add an additional layer of limited liability and remove the risk from the valuable parent company. Offshore holding corporations may also be used for tax planning, trading and re-invoicing.

Hong Kong is a popular jurisdiction among China investors for many reasons. The region's proximity to China, both geographically and politically, facilitates administration and management of a China investment. Legal documents are bi-lingual, which saves cost and time for translations. Whereas the Chinese authorities are familiar with Hong Kong corporations, they are increasingly reluctant to approve registration for traditional offshore holding companies.

A bank account in Hong Kong is usually convenient for daily operations. Tax haven companies, however, experience growing difficulties in opening bank accounts in Hong Kong due to strict money laundering laws.

There are no restrictions in regards to the nationality of shareholders and directors of a Hong Kong company and the cost of maintaining a Hong Kong company is comparatively low.

Recent Developments: Closer Economic Partnership Arrangement CEPA

On 29 June 2003, Hong Kong and China signed the Closer Economic Partnership
Arrangement (CEPA), a bilateral free-trade agreement covering goods, services, and trade facilitation. The signing of the CEPA marks a new level of domestic economic cooperation and coordination, offering Hong Kong-based businesses quicker access and reduced tariffs to the mainland market.

Tariffs on 273 types of Hong Kong-made goods are to be eliminated from 1 January 2004, including electrical and electronics products, textiles, clothing, and jewellery. Over the next two years, the number of products enjoying this beneficial treatment will increase to cover around 90% of Hong Kong's exports, with all such goods to be duty-free from 2006. Under the terms of its WTO membership, China is required to implement trade liberalization measures. Hong Kong businesses, however, will be given an early opportunity to establish a foot-hold in the market.

China is also liberalizing various service sectors, including accounting, advertising, construction, real-estate, freight-forwarding, management consultancy, and logistics and distribution. Here, Hong Kong will enjoy some special benefits since these advantages are not provided for in the long term by WTO provisions.

In the mid to long term, Hong Kong expects 9,000 new jobs and an increase in inward investment as manufacturers take advantage of its zero-tariff status with China. Especially high-quality non-labour-intensive production firms (in the fashion industry, for example) might relocate manufacturing back to Hong Kong.

One important aspect of the agreement is that foreign companies operating in Hong Kong may benefit from the CEPA, if they also provide services in the territory. Investment in company headquarters in Hong Kong, offering a services sector almost unrivalled anywhere on the mainland, could therefore be a beneficial side-effect.

If you require assistance with the above subject, please contact us at info@klako.com with your detailed questions.

All information in this report is verified to the best of our ability and is assumed to be correct at time of release; however, Klako Group does not accept responsibility for any losses arising from reliance on the information provided within.