Hong Kong economic freedom attracting actors of the digital economy

digital economy

The Economic Freedom of Hong Kong is attracting several actors from the Digital Economy. Digital entrepreneurs are crossing borders, they can leave anywhere and run their companies from various tax friendly countries, but the tax environment isn’t by far their main interest.

In most countries operating a SME is complicated, digital entrepreneurs will have to dedicate a lot of time filling paperwork for many government agencies.

Everything is time-consuming but this is considered normal in absence of comparison, so instead of focusing energy on sales and marketing a bright individual will end up spending hours on laws and regulation for its activities.

Hiring a new team member, understanding a complicated tax system, reporting VAT, managing accounting and audit, filling payroll…. each topic is a waste of energy, so the impact of bureaucracy is crucial for a company development and ease of operation.

Digital Economy

The Frasier Institute publish every year an index of economic freedom and basically ranks the countries for their ease of operation for a business in digital economy to operate in a simple and efficient environment. Hong Kong is number one since 1970, out of 165 ranked countries.

Let’s compare the 2020 ranking of few countries attracting digital entrepreneurs:

  • 1st Hong Kong
  • 2nd Singapore,
  • 4th Switzerland
  • 11th Mauritius
  • 25th Spain
  • 33rd Portugal
  • 40th Costa Rica
  • 47th Italy
  • 53rd France
  • 55th Malaysia
  • 58th Philippines
  • 68th UAE
  • 70th Indonesia
  • 89th Thailand
  • 126th Vietnam
digital economy

Operating a Hong Kong company in the digital economy is allowing digital entrepreneurs to focus on their company development without distraction, surviving a heavy competition and benefiting from a low tax environment, with pro-business attitude from multi-lingual team, purchasing at better costs to the world factory next door.

Living in Hong Kong remains attractive, despite the high costs of living, as the proximity with Mainland China offers access to better sourcing and cooperation with business partners. The current quarantine requirement makes it impossible to start the immigration process but this would change soon or later.

Covid situation

China economic dominance is a fact, this is creating political tensions and adverse medias but as a matter of fact this has no bad influence on a SME operation. The only issue faced by Hong Kong is the 21 days or 14 days strict quarantine at hotel requirement which is impacting negatively the businesses.

This quarantine requirement is similar to the ones in:

  • Australia,
  • New-Zealand,
  • Japan,
  • Singapore,
  • Indonesia,
  • Philippines,
  • Vietnam,
  • Thailand,
  • Laos, etc…

so we are all facing a divided world with totally different approaches on health management.

As you don’t need to be present to setup a Hong Kong company the digital entrepreneurs are benefiting from the world freest economy and could decide to leave in a low costs’ country (under the sun) such as Thailand and others.

Reference: Interactive map - See how countries position goes up or down from 1970 till 2020

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