Five reasons for setting up a company in Hong Kong.

Located on the southeast coast of China, Hong Kong is the country’s Special Administrative Regions (SAR) with one of the most successful economies in the world.

An increasing number of foreign business and professionals are seeking to set up a presence in Hong Kong. Listed below are some main reasons for setting up a company in Hong Kong.

Reason 1: Free economy and free trade

As Hong Kong has one of the world’s most dynamic economies, Hong Kong has become the financial hub for many corporations. The economy is pushed by the principles of free markets, free trade and free enterprises which is open to both Hong Kong residents and non-residents.

There is no limitation on inward and outward investments, foreign ownership and foreign exchange controls when setting up a business entity in Hong Kong. Other factors such as the strict anti-corruption regime, legal system and sizeable foreign exchange reserves also enhance Hong Kong as a business-friendly jurisdiction.

Imports to Hong Kong are cheaper than transporting directly to China, and products can be imported to China with zero tariffs if your business complies with the China-Hong Kong Closer Economic Partnership Arrangement (CEPA) regulations.

Reason 2: Ease of doing business

Compared to other countries, it is relatively easier to set up a business in Hong Kong. If you are not sure about how to register or what documents you need, Acclime is more than willing to help you set up a business entity.

The registration process is nearly the same for all entities, but there could be some differences. Another reason why you should consider setting up a business in Hong Kong is because it grants foreigners 100% ownership. There is also no restriction on nationalities of directors or shareholders.

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Reason 3: Access to the Chinese market

If you want to enter the Chinese market, going through Hong Kong would be a good choice. You can either set up a Wholly Foreign Owned Enterprise (WFOE), joint venture (JV) or export products to China under CEPA.

WFOE

To sell goods and products to China, you can set up a Wholly Foreign Owned Enterprise (WFOE). A WFOE is an investment entity owned by foreign natural and legal persons.

Advantages of establishing this entity include:

• Procedure: The procedure of setting up a WFOE is faster with a Hong Kong parent company since all documents are already in Chinese, and the China Appointed Attesting Officers (CAAO) in Hong Kong can notarise the documents within five working days. The Chinese local authorities are also more familiar with the Hong Kong system than the systems of other jurisdictions.
• Restructuring: Corporate changes such as the appointment of new directors, share capital increases or transfer of shares can be registered in a couple of days, while in China, it may take up to a few months for the change to be registered.
• Dispute resolution: If you need to settle a conflict with a Chinese third party, Hong Kong allows you to use the local courts and obtain judgements that can be enforced in China. The Hong Kong International Arbitration Centre is also available if you choose arbitration.

Joint Venture

A joint venture (JV) is a foreign investment enterprise that is established through a partnership between Chinese and foreign investors.

Partners will share profits, expenses, losses, responsibilities and together manage the JV. This entity allows foreign investors to enjoy low labour costs, low production costs and a possible large Chinese market share.

There are two types of joint ventures to choose:

1. Equity joint venture (EJV)
2. Cooperative joint venture (CJV)

An equity joint venture (EJV) is a common method used to enter the Chinese market. This type of joint venture is a limited liability company in which the profits and losses are distributed to the partners based on the ratio of their contribution.

A minimum of 25% of the capital must be paid by the foreign partners, while there is no minimum for the Chinese partners. Once the joint venture is registered, it will be considered as a Chinese legal entity and must follow the Chinese laws.

A cooperative joint venture (CJV) can be either a limited liability company or a non-legal entity. The profits and losses are not distributed according to the contribution proportion but can be negotiated in the contract. There is no minimum share for the foreign partners.

Some benefits of a joint venture are:

• Access to the Chinese workforce, facilities, sales and distribution channels.
• Can potentially avoid or reduce bureaucratic or red tape hassles.
• The Chinese partner can address the registration matters of the JV.
• The Chinese partner will possibly have the experience of conducting business in China and knowledge of the local market.
• Access to the Chinese market.

CEPA

Hong Kong and China have entered a Closer Economic Partnership Agreement (CEPA), which is a free trade agreement enhancing mutual market access, facilitation of measures for bilateral trade and investment between China and Hong Kong.

The CEPA covers four areas, including:

• Trade in goods: Hong Kong products that satisfy the CEPA rules of origin (ROO) may enjoy zero-tariff treatment of imports into China.
• Trade in services: Enterprises and individuals who are in the services industry in Hong Kong can carry out and expand most business sectors to Mainland China.
• Investment: Hong Kong investors and investments are subject to investment protection and facilitation in China.
• Economic and technical cooperation: China and Hong Kong have agreed to improve the economy and technology in various areas.

Who can benefit from the CEPA?

• Manufacturers in Hong Kong: Goods and products manufactured in Hong Kong that fulfil requirements of the CEPA ROO can benefit from zero-tariffs on importing to China.
• Service suppliers in Hong Kong (enterprises and individuals): Hong Kong service suppliers can provide their services to most areas in China.
• Professionals in Hong Kong: Professionals may take advantage of the measures to enter the Chinese market.
• Investors in Hong Kong: Hong Kong investors can enjoy facilitation measures in investing in China and investment protection.
• Investors outside of Hong Kong: For trade in goods, investors outside Hong Kong can produce goods to satisfy the CEPA ROO and enjoy zero tariff on importation to China. For trade in services, investors outside China who have set up companies in Hong Kong can use CEPA measures to start a business in China given that they meet the eligibility criteria of the Hong Kong Service Supplier (HKSS) under the CEPA.
• The business community of Hong Kong

The benefit of the CEPA is that it gives opportunities for Hong Kong’s goods and services to be sold and traded in the China market. For services, HKSS can enjoy relaxed market access and preferential treatment in the Mainland. The advantages are particularly beneficial to small and medium enterprises.

Reason 4: Tax incentives

Hong Kong has many tax incentives which attract many investors to set up a company in Hong Kong. Hong Kong has a two-tier profits tax regime in which corporations are taxed at 8.25% for the first HKD 2 million, and unincorporated businesses will be taxed at 7.5%.

For the remaining profits, after the first HKD 2 million, corporations are taxed at a rate of 16.5% and unincorporated businesses are taxed at 15%. Additionally, Hong Kong does not impose VAT, GST, export taxes, or taxes on capital gains and dividends.

Reason 5: Strategic location

Hong Kong is in the heart of Asia and is a gateway to the country with the second-largest GDP in the world, China. Hong Kong is also a few hours away from other significant markets in the Asia-Pacific region. Hong Kong has a great economy, high living standards and health facilities, superb infrastructures and is home to one of the busiest international passenger airports.

If the reasons for setting up a company in Hong Kong are appealing to you, do not hesitate to contact Acclime if you want to set up a Hong Kong company.