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 taxes	Rate
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%

 

Other taxes	Rate
Withholding tax**	0% to 4.95%
Goods & Services Tax (GST)	0%
Property tax	15%

 

** 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.

Contact information: Tel:+35722418200; Email: info@fiduserve.com