Hong Kong’s extensive tax, trade and legal benefits, have made it a popular business choice for foreign investors who want to set up a local company. As a Special Administrative Region of China, Hong Kong is also the best gateway for doing business in Mainland China. Thanks to its territorial tax system, “offshore profits” derived by locally incorporated companies are tax exempted.
Incorporating a new company in Hong Kong is done under the Companies Ordinance, and the most common type is a private company limited by shares. Formalities for company incorporation are kept to a minimum in Hong Kong, the incorporating process can be completed within one working day as long as all required documentation is in place.
A. Key requirements to set up a Private Limited Company
Company name: A company must be incorporated with a name in English, in Chinese or in both languages. The company name must end with the word “Limited”.
Share capital: Min. issued / paid-up capital is 1 in any currency. The concept of authorised capital and nominal or par value has been abolished. Shares can be freely transferred but bearer shares are not permitted.
Articles of Association: The Articles of Association are the governing documents of the company and set out what the company can and cannot do. They are usually very widely drawn and enable the company to carry out virtually any form of business activity.
Directors: Min. 1 director (individual) of any nationality. No limit on the number of additional local or foreign directors.
Shareholders: Min. 1 – Max. 50 shareholders (individual or corporation). 100% local or foreign shareholding is allowed. Shareholder and director can be the same person.
Company secretary: It is mandatory to have a local resident company secretary (individual or corporation).
Registered address: A company must have a physical registered office in Hong Kong
Significant Controllers Register: The Companies Ordinance has been amended to require a company incorporated in Hong Kong to identify persons and legal entities who/which have significant control over the company (“significant controllers”) and to maintain a significant controllers register (“SCR”) to be accessible by law enforcement officers upon demand. The SCR must be kept either in the registered office or a prescribed place in Hong Kong. Hong Kong companies are also required to designate, at least one representative* to assist law enforcement officers in relation to the SCR.
*The designated representative must be i) a natural person resident in Hong Kong and a director, employee or member of the company, or ii) a Trust or Company Services Provider Licensee (TCSP), an accounting professional or a legal professional as defined in the Anti-Money Laundering and Counter Terrorist Financing Ordinance.
Accounting Reference Date: In Hong Kong companies are given freedom to choose their financial year-end date, though they would usually align it with the government’s fiscal year that runs from 1 April to 31 March.
Public information: Records of directors and shareholders are publicly accessible and available by downloading the annual return. The SCR is not publicly available.
Filing Compliance: Accounts must be audited annually by Certified Public Accountants in Hong Kong. The audited accounts together with the tax return must be filed annually with the Inland Revenue Department. But if the company is defined as small company with less than HKD2M turnover, filed audited accounts are exempted – Annual Return must be filed with the Companies Registry – An Annual General Meeting (AGM) should be held annually.
B. Corporate taxes
|Corporate on assessable profits||8.25% (up to HK$2 million)
16.5% (above HK$2 million)
|Capital gains by company||0%|
|Dividends to shareholders||0%|
|Foreign sourced income||0%|
|Withholding tax**||0% to 4.95%|
|Goods & Services Tax (GST)||0%|
** For certain types of payments made to non-resident companies/individuals. But no withholding taxes on dividends.
C. Tax incentives & exemptions – Offshore profits
Pursuant the territorial concept, only those profits which arise in or are derived from Hong Kong are liable to profits tax in Hong Kong. Therefore if a company’s business activities take place entirely outside of Hong Kong (i.e. the decision maker is located outside of Hong Kong, the contracts are signed out of Hong Kong, and there is no virtual business office in Hong Kong) the company’s profits may be treated as offshore sourced income and thus qualified for application of offshore tax claim. A claim for offshore tax exemption needs to be lodged for approval with the submission of the tax return to the Inland Revenue Department.
Broad guiding principle in determining the source of profits
The question of ‘source of profit’ is a practical hard matter of fact. In determining whether profits are arising in, or derived from Hong Kong, the broad guiding principle is that ‘one must look to see what the taxpayer has done to earn the profit in question and where he has done it’.
- The operations test: The proper approach is to ascertain what the operationswhich produced the relevant profits and ascertain where those operations took place.
- Antecedent or incidental activities: The relevant operations do not comprise the whole of the taxpayer’s activities. The focus is on establishing the geographical location of the taxpayer’s profit-producing transactions as distinct from activities antecedent or incidental to those transactions.
- Place where decision is made: The place where the day-to-day investment / business decisions take place is only one of many factors which must be considered in determining the source of profits.
- Gross profits from transactions: The distinction between Hong Kong profits and offshore profits is made by reference to the gross profits arising from individual transactions.
- Business presence overseas: A business may maintain a presence overseas earning profits outside Hong Kong but the absence of a business presence overseas does not, of itself, mean that all the profits of a Hong Kong business invariably arise in or are derived from Hong Kong. However, in the vast majority of cases where the principal place of business is located in Hong Kong and there is no business presence overseas, profits earned by that business are likely to be chargeable to profits tax in Hong Kong.
Query Letter issued by Inland Revenue Department (IRD)
It is a standard procedure of the IRD to issue a query letter to the companies lodging offshore claims by which the IRD investigates if companies really fulfill the conditions for the offshore claim.
|Frequency of query letter||· the IRD revisits the offshore claims every 3 to 4 years
· the IRD is empowered to revisit a year of assessment within 6 years after the end of such year of assessment
· the IRD is empowered to issue any follow-up query letters if necessary
|Due date for submission of answers||· generally within one month from the issue date of the query letter
· extensions can be granted upon request in written form
|Format of answer to questionnaire||formal written reply with a full set of indexed supporting documentation prepared and submitted to the IRD by the company / tax representative
Disclaimer: This memo should be used as a source of general information only. It is not intended to give a definitive statement of the law and it should not be construed as legal or other advice. Furthermore, it is based on information and legislation currently available to us which may be subject to further changes by the regulators.
Further information and advice on specific matters can be provided upon request.