The most frequently used types of business vehicle for foreign companies wishing to carry on business in Hong Kong are:
- Hong Kong-incorporated Subsidiary Company
- Branch Office of a Foreign Company
- Representative Office
Every business in Hong Kong is required under the Hong Kong Business Registration Ordinance to obtain a Business Registration Certificate within one month of commencing business for its principal office address and also for any other business address in Hong Kong. This serves to notify the Hong Kong Inland Revenue Department of the establishment of a business in Hong Kong that may be subject to the payment of profits tax. If a company carries on a business using one or more business or trade names, a Business Registration Certificate is required for each such name.
The business activities that can be carried on in Hong Kong are not dependent upon whether the company is locally incorporated or whether it is a branch of a foreign company. The tax rate applied to profits is the same for local and foreign companies.
Hong Kong-incorporated Subsidiary Company
A subsidiary is a private limited company incorporated in Hong Kong that is established as an asset of a foreign company. It has a separate legal entity from its parent and is therefore liable for its own debts and liabilities. Hong Kong permits 100% foreign ownership of companies. The time taken for incorporating a Hong Kong subsidiary is generally less than for registering a Branch Office and a subsidiary accounts are not published or filed on any public record in Hong Kong.
A Hong Kong company must keep proper books of accounts and the financial statements must give a true and fair view of the financial position and financial performance of the company unless the company is entitled to reporting exemption. Its accounts must be audited every year and submitted to the Hong Kong Inland Revenue Department. Stamp duty is payable on any transfer of shares in a Hong Kong subsidiary company. A Hong Kong subsidiary company can only be terminated by way of liquidation or deregistration.
Multinationals that are investing into China often use Hong Kong private limited companies to act as an intermediary between the foreign parent company and its Chinese operating entity. This can serve to protect IP and assets that are to be used in China, while also taking advantage of Hong Kong’s free trade agreements and double tax treaties.
Branch Office of a Foreign Company in Hong Kong
A Branch Office is not a separate legal entity and is regarded as an extension of the parent company. The parent company is therefore fully liable for the debts and liabilities of a Hong Kong branch and, generally, a branch office is subject to the same legal and tax consequences as a company incorporated in Hong Kong.
A foreign corporation that wishes to establish a branch office in Hong Kong must register with the Hong Kong Companies Registry as a non-Hong Kong company. However a branch is only required to comply with limited provisions under the Hong Kong Companies Ordinance.
No stamp duty is payable in Hong Kong on the transfer of shares held in the foreign company which operates a branch in Hong Kong. There is no requirement for a separate audit and the business operation of a branch can be terminated easily by notifying the Hong Kong Companies Registry that it has ceased to have a place of business in Hong Kong.
Representative Office in Hong Kong
A Representative Office does not have independent legal standing in Hong Kong, so the foreign parent company remains fully responsible for its debts and liabilities. Unlike a Branch Office, there is no requirement for a Representative Office to register at the Hong Kong Companies Registry but it must obtain a Business Registration Certificate under the Business Registration Ordinance.
A Representative Office is not permitted to enter into legal contracts on its own, nor can it negotiate on behalf of the parent company, sign deals, raise invoices or be involved in trading activities. On the basis that it will not conduct any business in Hong Kong, a Representative Office should not generate any profits within the scope of Hong Kong taxation and it may apply to the Inland Revenue Department for an exemption from filing profit tax returns on the basis that it does not carry on business in Hong Kong; otherwise it may file annual profit tax returns on a “NIL” basis.