Archive 25 November 2016

Hong-Kong: All about corporate legal requirements

Since 1995, Hong Kong has emerged the freest economy according to Wall Street Journal’s Index of Economic Freedom and Heritage Foundation.

Besides, its tax rates are among the lowest in the world according to World Bank and PricewaterhouseCoopers. In addition to this, it is ideally located close to the mainland China which makes it very attractive for traders who want to do business with mainland China.

The Companies Ordinance is the Hong Kong legislation that governs the formation of companies. In this post, Hong Kong: All about corporate legal requirements, there is everything you need to know about operating in Hong Kong.

Operations that are permitted by Companies Ordinance

Depending on the type of operations, foreign companies that want to establish their presence in Hong Kong have three main alternatives.

  • Representative office: This is intended for foreign companies and businesses that want only to have very minimal operations. The office is not incorporated and is, therefore, not liable to file returns or tax obligations. It is only limited to marketing and liaison for the overseas company. Notably, the representative office cannot engage in any profitable activity such signing contracts or enter into deals.
  • Hong Kong Branch Office: A branch office is considered as a place of business and must be registered as an offshore company under the Companies Ordinance. This makes it a legal place to transact business and, therefore, will have to meet other legal obligations as a business entity. The branch office will need to pay taxes for profits made in Hong Kong.
  • Hong Kong Subsidiary: Because the branch office and representative office have a lot of limitations; many foreign companies prefer opening subsidiary offices. A foreign company incorporates a company in Hong Kong to run as a subsidiary. The foreign subsidiary is a fully fledged company and can carry all the licensed operations. The incorporated company is responsible for meeting tax obligation for profit made in the country.

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Company Classification

The Companies Ordinance indicates that a private corporation is restricted from transferring its shares, subscription of debentures, and the number of shareholders is capped at 50. A company that fails to meet the three requirements is considered a public company which means it can be listed on the stock exchange.

The company can also be categorized on whether it is limited by guarantee, shares, or is an unlimited company. The commonest company type is the limited liability company which we give extra focus in this discussion.

Types of companies recognized in the Companies Ordinance;

(i) Public company limited by the number of shares.

(ii) Private company limited by shares.

(iii) Unlimited public company with share capital.

(iv) Unlimited private company with share capital.

(v) Company limited by guarantee but without share capital.

Requirements for establishment of a Hong Kong Private company

At the minimum, the Hong Kong private company must have the following;

(i) 1 shareholder

(ii) 1 director

(iii) Company Secretary

(iv) A Hong Kong-registered office

(v) An Auditor

(vi) A business registration certificate

Director: Must be more than 18 years, comply with share qualification capital, must not be bankrupt, and not subject to the disqualification order. The nationality of the director is not restricted. The company must have at least one director.

Company secretary: This must be a Hong Kong resident, a place of business, or company with a registered office.

Business Registration Certificate: Unlike in the past when incorporation of the company had to precede business registration, they can now be done simultaneously. Remember that depending on the nature of your business, an additional registration might be required. For example, companies offering regulated financial services activities like asset management, or securities need get a license from the Securities and Futures Commission.

Remember that there is no minimum capital outlined in Companies Ordinances. However, the articles of the company have to include a statement of capital with some prescribed information and initial shareholdings. Notably, the same individual can be the company’s secretary, director, and shareholder of the company.

Establishing a Private Company

You can establish a private company in two ways; buying a shelf company or creating an entirely new one.

Incorporating a new company involves applying at the Companies Registry that reviews requests and issues a Certificate of Incorporation. This takes about four working days. The incorporated company needs to activate the certificate by holding the first board meeting and a shareholders meeting if necessary.

Buying a shelf company is a good option when the amount of time you have is limited. To complete the process, you have to change the shareholders as well as directors and hold the first board meeting.

Other compliance requirements

Every year, a company should hold an AGM (annual general meeting) and no more than 15 months from the previous AGM. However, you do not need holding an AGM if everything has been done via a resolution and documents availed to all members. The following are the main issues that AGMs deal with:

  1. Adopting audited accounts that comprise of balance sheets, directors’ report, and auditors’ report.
  2. Declaration of dividends.
  3. Election of directors.
  4. Appointment of auditors.

If the new company only has one member, there is no need to hold an AGM. The AGM is dispensed with unanimous consent.
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Hong-Kong representative office: Pros and Cons

If you have a foreign company and want to get extra market insight, greater exposure, and holistic understanding of the business environment in Hong Kong before opening a full-fledged office, it is advisable to establish a representative office.

This is only an extension office of your overseas company. The office does not have independent accounting books but will offer support services. A representative office is ideal for small and medium startups that need a lot of support for their target clients. Keep reading to learn more about Hong-Kong representative office: pros and cons.

Key requirements to set up a representative office

(i) A certified copy of the CI (Certificate of Incorporation) or other authenticating documents.

(ii) A certified copy of Chinese or English translation if the original was not done in English or Chinese.

It will take only two working days to process the documents.

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Hong Kong Representative Office Setup Procedures

  • Consult and evaluate your company design and prepare all the requisite documents for establishment of a representative office.
  • Sign the engagement letter to confirm proceeding with the representative office establishment.
  • Prepare the documents for the formation of the representative office. While the representative office is not required to register with the Hong Kong Companies Registry, it is required to register with IRD (Inland Revenue Department) and get a Business Registration Certificate.
  • Submit the duly signed company documents to IRA and clear the requisite fee on behalf of the client. Remember that the representative office has no legal standing and all the activities are pegged to the main overseas company.
  • Monitor the registration process office and keep the client updated. This will help the company management to maintain pace or intensify additional preparations on the tasks that the representative office will be required to do.
  • Pick the registration certificate, prepare additional requirements, and submit to clients. Once the office has been registered, it can only operate as a liaison unit to carry promotional work and market research as opposed to profit generating activities.

Benefits of opening a representative office in Hong Kong

  • It does not have registration requirements at the Companies Registry or minimum capital demands. Accordingly, there are no requirements for maintaining accounts or even filing tax returns. The sole requirement is registration with IRD.
  • Because the Hong Kong representative office is not incorporated, just like the foreign company, it is not required by Hong Kong authorities to maintain filing records or even comply with other statutory requirements.
    If you want to change the status of the office to become your Main operational unit, it can be transformed into a branch office.

Cons of having a representative office

  • The office cannot be used for profit-making activities. Because it is not a legal entity, it cannot be used to sign contracts or enter into deals on behalf of the foreign company.
  • The representative office can only carry liaison or promotion activities such as market research and liaison on behalf of the foreign subsidiary.

A good investor looks at the market and evaluates its viability to craft a winning strategy before venturing into it. While Hong Kong is a ripe market for investors to take advantage of, understanding it more and specific needs of target clients using a representative office will be the best option before taking the next step.
Remember that you can even convert the representative office into the branch office after getting satisfied that Hong Kong is the right market for your company.

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