Hong Kong Business Registration: What You Need To Know
Registering a foreign company in Hong Kong is attractive given the appealing tax rate, government incentives, proximity to China, and free market. When looking to incorporate in Hong Kong, you will need to consider the type of business to register. The company type (also referred to as the structure, entity, or registration) depends on the nature of the business and its activities in Hong Kong.
Most small to medium-sized companies entering Hong Kong will elect for a ‘limited company’ setup, but it’s important to be aware of the alternatives. In this article, we will explore the company structures, in particular for well-funded startups and scale-ups from overseas, as well as what a business should consider before incorporating.
The most common business registration types for foreign SMEs in Hong Kong
All registration options are relatively simple, fast, and low-cost to set up. A local bank account can be set up in the business name in all cases. Where they vary is in the scope of operations allowed and liability to the individual or parent company. Most regulations around setting up a company are set out in the Companies Ordinance (Cap. 622)
Let’s dive into key facts about the most popular company structures in Hong Kong.
Limited Liability Company
A private or public company which allows for shares to be issued. It is the company type that most foreign entities will use when looking to form a company in Hong Kong.
Key Facts:
A Limited Liability Company (the name must include ‘Limited’, or ‘Ltd’) is also referred to as a subsidiary. It is roughly the equivalent of a ‘GmBH’ (Germany), ‘Ltd’ (UK) or ‘LLC’ (US).
Must register with the Hong Kong Companies Registry, including payment of a standard fee.
Many investors in Hong Kong choose to start a private limited company to protect their personal assets from business risks and liabilities. This type of company limits their responsibility to the amount of shares they own.
A local company secretary is required to stay on top of the company’s obligations. A professional service firm, such as Shepherd Asia, will usually provide this.
Advantages:
Provides a separate legal entity where the parent company and owners are not held accountable for the debts and obligations of the Hong Kong company, including its assets, liabilities, and agreements.
Hong Kong offers tax benefits to limited companies, whereby only the profits from the Hong Kong business are subject to tax. There is no capital gains tax, sales tax, and VAT.
Can be fully foreign-owned and have all foreign directors, and these directors or shareholders can change over time, selling shares or issuing new shares without affecting the existence of the limited company.
Raising capital and securing loans from banks is a more simple process compared to other entities.
Cost-effective and low maintenance when compared internationally, especially relative to Europe or Southeast Asia.
Representative Office
The Hong Kong representation of an overseas company is a cost-effective way to test the waters in the Hong Kong market without making a significant investment.
Key Facts:
The overseas ‘Parent’ entity is responsible for all obligations entered into by the Hong Kong office.
Limited to non-profit-generating activities, such as liaison, promotional and market research, providing greater flexibility and less regulatory burden compared to other forms of entities.
Advantages:
No Tax Liabilities, as no profit can be generated. This reduced the administrative and compliance burden for the parent company.
Simple to maintain. There are few requirements, only a Business Registration Certificate is required.
A representative office can help facilitate business relationships with clients and partners in Hong Kong.
A low-cost and low-barrier way of exploring the local market.
Branch Office
A Hong Kong extension of an overseas company.
Key Facts:
Higher in cost than a representative office as the company has to register with the Hong Kong Companies Registry and appoint a local, authorized representative, such as Shepherd Asia.
Required to file a profits tax return in Hong Kong, and generally required to pay profits taxes locally in Hong Kong.
The company may have to pay tax on the same profits twice, i.e. once in Hong Kong and once at home (for example, if there is no ‘Double Taxation Agreement’ between Hong Kong and the home jurisdiction). The risk of double taxation is increased compared to that of limited companies.
If audited accounts are required in the home jurisdiction, these may have to be filed in Hong Kong as well. These filings are publicly available, so privacy needs to be considered. It’s important to note that Limited Liability companies are not required to publish their accounts
Advantage:
No limitation on business scope as long as it follows that of the foreign entity.
Setting up a branch in Hong Kong is relatively simple and straightforward
Direct Representation: A branch office represents the parent company directly in Hong Kong, eliminating the need for intermediaries.
A branch office operates under the same business model as the parent company, which can simplify operations and improve efficiency.
Provides direct access to the local market and facilitates the development of business relationships.
Sole Proprietorships or Partnership
These options are restrictive and generally not by SMEs looking to enter into the Hong Kong market.
Key facts:
A Sole Proprietorship is used by “Solopreneurs”, for example, a practitioner who isn’t looking to hire staff. Some industries may require the use of Sole Proprietorships or Partnerships rather than limited companies
It’s not a separate legal entity and the individual is responsible for all debts and obligations of the business. This poses additional risks when going into business with partners.
Limited Partnerships may be suited for certain industries such as investment vehicles. Contact Shepherd Asia to provide information on this.
Summary of Company Structures
| Limited Liability Company | Representative Office | Branch Office | Sole Proprietorships & Partnerships | |
|---|---|---|---|---|
| Must register with Hong Kong Companies Registry | Y | Y | Y | N - Register with Inland Revenue Dept |
| Separate Legal Entity | Y | |||
| Can be fully foreign-owned | Y | Y | Y | Only if foreign citizen is present in Hong Kong |
| Requires a representative located in Hong Kong | Y
Company secretary (located in Hong Kong), this can be outsourced to another entity Director & Shareholder also required, (located in Hong Kong or overseas) |
Y - an individual employed by the company | Y - an individual employed by the company | N/A |
| Can generate profits | Y | Y | Y | |
| Required to pay Profits Tax | Y | N/A | Y | Y |
| Can open a local Hong Kong bank account | Y | Y | Y | Y |
How should I choose the company type?
When choosing the best entity type for a foreign-owned business in Hong Kong, consider the following five factors:
Business activities: What kind of business activities will you be conducting in Hong Kong?
Taxation: What is the tax rate in your home country compared to Hong Kong, and is there a Double Taxation Agreement between Hong Kong and your home jurisdiction? What is the tax implication of each entity type?
Capital Raising: Do you plan to raise capital from outside investors in the future?
Business Partners: Do you have other partners to work with or will the business be operated solely by you?
Long-Term Growth: Is the business intended for long-term growth, or is it a one-off project?
Registering your business in Hong Kong: Expert Advice Available
Based on the above factors, you can review which entity type may be suitable for your business. If you are still unsure, consider talking to a professional service provider, such as Shepherd Asia, for advice before you incorporate the business.
A professional corporate services company can guarantee the accurate and efficient setup of your business.
They are the experts at performing tasks like maintaining accurate bookkeeping throughout the year, applying for the appropriate business licenses, and cutting through the local jargon to ensure your company’s compliance with all local regulations.
