Archive 22 January 2021

Picking the right company type in Hong Kong

company type in Hong Kong

Being one of the largest financial centers in the world, Hong Kong is chosen by entrepreneurs and global companies worldwide due to its flexible type of companies to choose from when you opt to incorporate a company there. There are several company type to choose from, ranging from:

  • private or public companies,
  • limited by shares or guarantees,
  • sole proprietorship,
  • partnership,
  • branch, or a representative office/liaison office.

All of which has pros and cons depending on the purpose and usage of the company itself. Although there are many kinds of company types in Hong Kong, this article will focus directly on the most attractable, popular and pragmatic companies to choose from.

Hong Kong limited liability companies (LLC)

An LLC in Hong Kong can either be a private or a public company that is limited by shares. To give you an exact account on their unique potentials, these are their respective characteristics:

Private company limited by shares

  • Mostly aligned with SME’s who are engaged in the business of trade and commerce.
  • Corporate substance dictates that it requires at least one (1) shareholder (maximum of 50 shareholders), a Hong Kong based Company Secretary and Director, with a registered office in Hong Kong as well.
  • No minimum share capital is required.
  • No bearer of share / shares has no par value.
  • Shares are deemed transferable.
  • Profits in the company can be proportionately distributed to the shareholders.

Public company limited by shares

  • Applicable at best with large multinational companies.
  • In terms of corporate substance, at least two (2) directors, one (1) member and a Hong Kong based Company Secretary is required, along with a registered office in Hong Kong.
  • No corporate directorship is permitted.
  • Shareholders can be over 50 in number.
  • No minimum share capital is required.
  • No bearer of share / shares has no par value.
  • Shares are traded with no restrictions with regards to transfers.
  • Options are available to list the shares of the company in the Hong Kong Stock Exchange or not.
  • Profits in the company can be proportionately distributed to the shareholders.

Pros

  • Hong Kong companies has an innately lawful nature of being a separate juridical entity. Thus, having the right to acquire tangible assets, enter into legal contracts/agreements, as well as having the capacity to sue or be sued under its own pretenses, and otherwise having a separate legal capacity apart from its shareholders, which makes their shareholders not personally and legally liable on debts incurred by the company.
  • Shareholders has a proportionate limited that is based on their shares on the company.
  • Shares has a free flow of transfers without any restrictions. Shareholders can also completely or partially sell their shares.
  • To increase its cash flow and overall wealth, private companies can issue additional shares to other members in order to bring in more investments to them.
  • Private companies benefit from a two-tier tax scheme in Hong Kong, which means that profits tax is at 8.25% for the first HKD 2,000,000, meanwhile revenues generated outside of Hong Kong are exempted from profits tax.

Cons

  • Private companies are required to maintain a good compliance practice in terms of its tax and company obligations with the Hong Kong Companies Registry as well as the Hong Kong Inland Revenue Department (IRD).
  • Not too much privacy protections, oftentimes in just a few hundred HKD, the identity of the shareholders and directors of a private company can be purchased from the Companies registry itself, since under the law, these kinds of data pertaining to this type of companies must be publish.
  • Cost can sometimes be an issue since it’s not the same with the actual cost to put up a sole proprietorship or partnership in Hong Kong.
  • Company closure can be costly and oftentimes a very long process.

Private companies are generally encouraged if you

  1. want to run a company which has a separate legal capacity when entering into contracts,
  2. increase your financing capabilities by utilizing the assets of the company to enter into loans with banks or other financial institutions, and
  3. allow other shareholders to partake in your capacity as a shareholder or director of the company in representing you in entering into contracts or agreements.

    Sole proprietorship in Hong Kong

    This type of business model is registered under the Business Registration Office. Every so often, the process of registration is quick, fast and not too costly. In nature, it is ran and operated by a single person who acts and assumes the sole role of being the owner of the business. Thus, tax coverage on this kind of business is lulled at 7.5% to 15%, heaving depending upon the income bracket of the sole proprietor.

    Pros

    • Registration process and maintenance thereafter is a lax process.
    • Audit task is not required on its annual tax filing.
    • You can register as a sole proprietor only after one month from when you started operating your business.
    • Profits on this kind of business is enjoyed solely the owner alone.
    • The sole business owner can exercise an independent decision making process without the need to consult other stakeholders.

    Cons

    • Sole proprietorship are not capable in raising large amounts of financing or capital related injections from banking institutions.
    • Capital injection in the business solely relies on the personal assets and wealth of the business owner.
    • Does not have a separate juridical entity. In other words, if sued or goes into a bad debt, the personal assets and wealth of the sole proprietor is covered under those liabilities. In fact, the chances of going bankrupt is so high that even the court can hold the business owner personally liable on debts.
    • Sole proprietors are independently reliant unto themselves to solve business problems and keep the business afloat without the help of other investors.

    Sole proprietorship is beneficial if you are looking for a quick fix in establishing a legit business that can be registered easily with low cost, simple compliance and maintenance.


      Partnerships in Hong Kong

      Requiring at least two members, a partnership business in Hong Kong is regulated by the Partnership Ordinance. Said firm needs to secure its Business Registration Certificate within one month from starting the business. In view of tax obligations, partnerships are required to pay 7.5% rate. There are two kinds of partnership that you can register in Hong Kong, it can either be a Limited or a General Partnership.

      Pros

      • Partnerships are a collaboration between two or more people that intends to build and develop their business. Each and every partner in the business can contribute on their professional backgrounds and personal aptitudes since they would differ in some way in order to build a stable business portfolio.
      • Registration processes can be smooth, and maintenance can be inexpensive at times.
      • Partnerships can expand exponentially if they want to increase their pool of partners to develop the business and grow capital.

      Cons

      • All members of the partnership assume a group type hold on liability and that no one is left out, and everyone are personally responsible at their own capacities.
      • Partnerships are prone to disagreements with the other partners since they differ from standpoints due to personal capacities. These kinds of disagreements can result to legal problems if unresolved.

      A partnership type is advisable for people who wants to establish a partnership with similar mindsets and goals. It can even be suited if you want to diversify the risk associated in a business.


        Representative or liaison office

        A Representative or Liaison Office is a legal entity that is an extension of a parent company with a jurisdiction separate from Hong Kong. It is required also to utilized the same company name as that of its parent company counterpart. However, annual tax return with NIL is mandatory to be submitted.

        Pros

        • This type of business benefits from an already registered parent company, without the need to operate under a separate entity.
        • The government agency tasked to regulate this kinds of businesses are confined within the powers of the Inland Revenue Department (IRD) of Hong Kong.
        • It is very easy to establish and register.

        Cons

        • Are not allowed to conduct businesses in Hong Kong.
        • Its operational and business conducts or pursuits are very limited and well regulated.
        • Funding are only allowed through the parent company that owns the Representative/Liaison Office.
        • During the registration process, Hong Kong requires that a local representative, that can either be a Hong Kong resident or a solicitor who will be representing the business entity in the process.

        Our thoughts

        All companies or businesses, regardless of jurisdictions are regulated in some way, with their own inherent risks, similarities, disadvantages or advantages. One thing is certain, ensuring that what you choose to register must meet your requirements and setup as an entrepreneur.

        If you are planning to choose the best business type in Hong Kong, you can talk to us, so you can make an informed decision


          Offshore tax exemptions in Hong Kong

          tax exemption offshore

          Contrary to popular beliefs that are villain oriented, just like in the movies that portrays the antagonist characters hiding their money in offshore accounts, it is however different in reality. Offshore companies are merely juridical entities that conducts business outside of their original jurisdiction where they are incorporated. Also in reality, offshore entities are tax havens since most jurisdictions that regulates these companies have lenient tax laws or tax exemptions that does not eat away your corporate profits.

          Hong Kong provides a venue for offshore companies and businesses to thrive on. Some people may not have known that Hong Kong itself is considerably an offshore jurisdiction, but instead of a tax exemption, it provides low tax regulations. One perfect example of such is that in Hong Kong, profits emanating outside of the jurisdiction of Hong Kong are not subject to taxation.

          Local companies in Hong Kong can file for an offshore status by way of offshore claim. Although the process is rigorous and requires a specific skill-set in terms of the application process in general, the goal though is beneficial in the long term scale.

          Applications for offshore status by local companies can be availed and granted by the HK Inland Revenue Department (IRD). All applications for offshore claim is diligently screened and vetted through a complicated process. Upon approval, the validity usually range up to 5 years. It is important to remember that offshore status in Hong Kong is not retroactive, and any corporate tax payments made before gaining the status is not covered. Hence, the absence of an offshore claim can result to a company paying the actual applicable tax on profits that is required by law, regardless if those profits are derived from sources outside of HK.

          Before filing for an offshore status, you should first evaluate whether or not you are qualified to avail of this privilege. Since the said status is granted by law, the applicant must ensure that they are covered under the realms of the law allowing the status to be given to companies. Otherwise, your application for offshore status will definitely be rejected on valid causes, and it boils down to the matter of not being eligible.

          To give you an actual insight on what you should consider before filing for an offshore status. There are several tests that are conducted to determine if your company’s request can be granted by the IRD. These tests are conducted based on the nature of business of the applicant.

          Contract Effected Test

          This test is utilized in order to ascertain the taxability of the income accruing to the taxpayer engaged in a trading business. This phase is design to also gauge whether or not the purchase or sale contracts are executed in Hong Kong. Moreover, the IRD will look into the execution of the contracts by the company, particularly on how the goods are shipped, how sales are solicited, how orders are processed, how goods are procured and stored, and how payments are made.

          Operations Test

          If you are not engaged in the trading business or money lending, you will then be subjected to this test. For commission income, the test will scrutinize the origin cause of the income. If indeed the income emanated and took place in Hong Kong, and what has been executed to earn those profits and where was it rendered. Furthermore, enterprises are subjected to a different set of test, and they would normally gauge if you have no operational office in HK, no workforce are hired or employed in HK, no clienteles in Hong Kong, no suppliers in Hong Kong, contracts are not negotiated and executed in HK, goods should not be entering HK, service agreements or sales/purchase invoices must not involve any Hong Kong based entities, and the actual operation of the business is conducted outside of Hong Kong. If you meet these criteria, you have a chance in being granted with an offshore status.

          Final thoughts

          It is very important to know and to understand, that even if you meet the necessary requirements for an offshore status, it does not guarantee an approval from the IRD, since a thorough evaluation will be made to validate and verify all submitted documentations in the application process. Aside from this, there are several requirements that are mandatory to be submitted by the company itself which would involve the actual operation and conduct of business. Hence, all must be evidenced by irrefutable and valid documentations.


            Confidentiality under attack by bank compliance, is this justified?

            bank compliance

            Because of Anti-Money Laundering laws and regulations, the confidentiality is under attack by bank compliance departments, onboarding clients with privacy shields is becoming difficult.

            Guidelines of OECD and FATF as well as regulators in many countries are prompt to consider business confidentiality practices as UNUSUAL, the services providers are therefore hesitating before providing such services, often to decrease difficulties for bank account opening and maintenance.

            In fact, financial institutions should consider clients using privacy tools as more attractive than fully transparent clients, the concept could be surprising but is quite logical.

            The services provider’s compliance process will be more stringent for clients using nominee services (and/or more complex business and privacy confidentiality systems), their responsibilities as gatekeepers being engaged.

            The client’s onboarding

            The services providers will obviously question the reasons behind the needs for privacy and business confidentiality, the risk of seeing their services misused for various reasons is high. The providers will also automatically question the status of the ultimate beneficial owners, making sure that they are the real ones.

            The level of scrutiny will be higher, the process longer, the questioning pretty intensive and a compliance report with documents and proofs demonstrating the effectiveness of the controls will definitively engage the responsibility of the services provider.

            Monitoring, maintenance and client’s activities

            A nominee director has very important responsibilities, a lack of attention and improper monitoring could easily be interpreted as wilful blindness.

            A nominee director will not be able to retrench behind a letter of indemnify, he will stand in front of the potential issues and will have to deal with it, one way or another.

            In consequences, the individual and entities protecting privacy and business confidentiality are erected as SUPER compliance officers, they will work along the bank compliance department for the onboarding and monitoring of their client.

            Clients using privacy and confidentiality tools are the best prospects for financial institutions.

            As anyway the bank is fully informed about the ultimate beneficial owners, as register of controllers are accessible to law enforcements and tax authorities, as onboarding and monitoring has been conducted twice by separate and unbiased compliance teams, risks are well mitigated.

            Behind privacy shield are standing clients with a fear to lose something, usually a nice wealth position, and so whom have something to protect … as a result such clients are very often more successful than “transparent” clients.

            Criminals are facing difficulties with nominee services

            1. Multiplication of KYC procedures and enhanced compliance render the misuse of services difficult and costly.
            2. Follow the money systematic approach by law enforcement will track the funds to the individual criminal, except if a compensation with a cross border operation is performed.
            3. It’s a long process to raise the company turnover slowly in order to avoid detection by monitoring software and compliance team.
            4. Punishments are high for the nominee directors and shareholders wrongly implicated, renting a name only is a thing from the past.

            But the professional training of compliance officers on the topic of criminals using nominee services is misleading, the same when the Counter-Financing of terrorism is explained, saying that terrorists are using banks is at best misinformation.

            Privacy and confidentiality, legitimate needs?

            1. The (young?) compliance officers are sharing their life events on Facebook and Instagram, understanding the simple fact that someone is uneasy to share publicly about his private and professional activities is difficult, nevertheless not wanting to share with the public should be respected as this was the norm for decades.
            2. Security concerns are legitimate, especially with the COVID situation and the fact that business owners are more captive than ever, a busy travelling schedule was it itself a protection.
            3. Banks are monitoring their clients, business owners are monitoring their competition and in an era of transparency being discreet, being secret could be a definitive competitive advantage.
            4. Bloggers and badly informed (or corrupted) journalists are destroying careers and companies on the first page of a publication, to often retract themselves few months ago in 3 lines on the fifth page.
            5. Governments and businesses are not all benevolent and pro-business, some are using publicly obtainable information to target opponents.
            6. Ultimate beneficial owners are known from the banks and law enforcement agencies, the right of the PUBLIC to access information is questionable, why should we know about the activities of our neighbor?   

            Where to obtain nominee services and other services to protect privacy and confidentiality?

            Basically, everywhere but not in Europe, with the notable exception of Switzerland. The services should be provided by professionals with a long and costly compliance process. The harder the better as this will guarantee that the services are not provided lightly and that your service provider is not hosting criminals. You don’t want to be client in a company servicing criminals.

            Hong Kong is a good location as the absence of public register of controllers and a long practice of nominee directors, nominee shareholders, trust and other structures is part of its history and surely still part of its future.

            Why Hong Kong is a perfect location for TECH Companies?

            Hong Kong TECH companies

            What are the best options?

            Tech companies are often fast growing, so their legal and business environment should facilitate their development. Hong Kong’s economy was rated the freest in the world from 1995 through 2019.

            The overall tax burden equals 14.1 percent of total domestic income. Government spending has amounted to 18.0 percent of the country’s output (GDP) over the past three years, and budget surpluses have averaged 4.0 percent of GDP. Public debt is equivalent to 0.1 percent of GDP.

            So, your Hong Kong Company will benefit from a steady environment with little to no changes in taxation when in the same time other countries will surely have to raise taxes after months “printing money” to support their economies.

            No sales tax or VAT -No withholding tax -No capital gains tax-No tax on dividends-No estate tax

            If your Tech Company should enter into a merger, an acquisition, being sold or combine forces with other markets players under any circumstances, Hong Kong will remain the best possible location.

            Option A – Zero Tax

            • Claim of offshore profits is prepared when (maximum 18 months after inception) audit and tax declaration are submitted. Pre-ruling is possible but expensive (circa USD 30K) and often useless as if the below rules are respected there are no issues
            • NO Hong Kong Director, employees, office warehousing, transit of goods, clients and suppliers. the main rule being:
            • No profits should derive from activities conducted, managed, controlled in Hong Kong.
            • Records keeping of proofs and demonstrations that the business is managed outside of Hong Kong, if we are in charge of a XERO accounting, instead of the client doing so, we could better follow-up the company activities.

            The advantage of this option is in the title, the risk is to see the shareholder’s country of tax residence claiming that the Company profits derives from an activity conducted in the shareholder/director country of residence and enforcing taxes.


            Tech Company

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            Option B – Light Substance

            • Company is subject to profit tax (8.25 % the first USD 250,000 then 16.5 %)
            • Hong Kong Director with bank access (view or dual signatory)
            • Office located within the Director business environment/activities and not at a Corporate Services Provider address

            This option allows the shareholders to claim that all activities were conducted in Hong Kong, the HK tax authorities (Inland Revenue Department) will be happy to tax the company.

            But paying taxes in Hong Kong, or simply said in any country, doesn’t means that the Company has substance in the jurisdiction where profit taxes are paid. If the shareholder wish to benefit from a Double Tax Treaty Agreement then the Hong Kong Company would have to obtain a Tax Residence Certificate.

            In order to obtain the Tax Residence Certificate, the Hong Kong Company will have to demonstrate the below;

            1. Local resident Director with the abilities to 1. Formulate strategic policies 2. Determinate business directions 3. Organize the work plan 4. Decide on the mode of business financing 5. Implement management policies, work plan etc. 6. Evaluate the business performance
            2. The Director will organize the meetings in Hong Kong for the directors/partners to make resolutions with a description of the subject matters discussed.
            3. The company should hire employees besides administrative officers; this could be “solved” with an employment contract for the local resident Director.
            4. The fix place of business should be in Hong Kong, an office lease (sublet) would suffice
            5. The main banker should be in Hong Kong.

            The Option B – with a light substance, could then suffice when the shareholders are not residents in a country with a double tax treaty agreement with Hong Kong or simply said when the risks of being taxed (in their country of residence) on the Hong Kong Company profits, are considered as too low to implement a more sophisticated solution.


              Option C – Hong Kong Substance

              • Experienced Hong Kong Director
              • Employment contract for the Director paying retirement taxes and insurances
              • Bank signatory power, individual with main bank in Hong Kong
              • Lease agreement in Director’s office or at a separate fully dedicated to the company location.
              • Multiples substance related actions, including meeting with clients/suppliers.

              This option could/will match the requirements to obtain the Hong Kong Tax Residence Certificate and has the advantage of a public exposure in accordance with what are expecting banks and business partners.  

              Agreements impacting the Hong Kong Company profits

              Tech companies are facing specific issues, the companies are working “in the cloud” and ends up having their substance spread into different continents.

              Employees are often very talented freelancers working from home, instructions and meetings are taking place online, administration is often weak in term of demonstration/proofs of activities.

              A Hong Kong company could have from inception a profit-sharing agreement with another company which will provide the skills, knowledge, human resources, network and potentially a loan to the company and in exchange of part of the profits.

              Correctly worded, with a calculation based on the profits calculated quarterly. The agreement is to be stamp duty for date validation.


              Tech Company

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