Company Formation
Establishments in Hong Kong
Hong Kong offers an open economy with a low tax and business friendly environment together with an efficient and dynamic banking system and infrastructure.
As China continues to open up its economy, more companies have decided to invest in China directly. However, Hong Kong would still have a competitive advantage in serving as an intermediary for investments in China because of its well-established legal systems and infrastructure to cooperate with international companies.
The following are the most common forms of doing business in Hong Kong :-
- Company
- Branch
- Representative Office
- Partnership
- Sole Proprietorship
We can assist in advising you from a business and tax perspective the form of establishment that would be more appropriate to undertake your intended activities.
The most commonly adopted form of doing business in Hong Kong is a “Company”. There are private and public companies which are usually limited by shares, meaning that members are only liable for uncalled amounts on shares. Companies with liability limited by guarantee are usually set up by non-profit organizations.
The incorporation of a private company in Hong Kong requires at least one shareholder. The liabilities of the shareholders are limited to the par value of the company's issued capital. The number of shareholders in a private limited company is limited to 50.
A private company can be incorporated with your choice of name (on the condition that the name is not being used by others in Hong Kong). An application can be made to Registrar of Companies.
The other method of starting a business by a company is to acquire an existing shelf company (“ready-made companies”) and change its name, if desired. However, the new name can only be used when the Certificate of Incorporation On Change of Name is issued.
A company incorporated outside Hong Kong may establish a branch in Hong Kong. The branch is the same legal entity as the head office. It must be registered with the Registrar of Companies within one month of establishing a place of business in Hong Kong under Part XI of the Hong Kong Companies Ordinance.
If the overseas company, in the opinion of the Registrar, has substantially the general characteristics as a private company and is not required by the law of its place of incorporation to publish its accounts, the company can apply for exemption from submitting annual accounts.
Within 30 days after the issuance by the Registrar of Companies of the Certificate of Registration of an Overseas Company, the branch should apply for a Business Registration Certificate with the Business Registration Office.
An overseas company may also consider establishing a representative office in Hong Kong. A representative office is not permitted to conduct income generating activities, such as concluding contracts, in Hong Kong. It may conduct activities such as liaison with suppliers or customers, collection of market information and promotion, etc. Therefore, as there is no profit generated in Hong Kong, it is not subject to tax. However, it must be registered under the Business Registration Ordinance.
A partnership in Hong Kong is a business entity formed by the Partnerships Ordinance, which defines a partnership as "the relation between persons carrying on a business in common with a view of profit" and is not a joint stock company or an incorporated company. If the business entity registers with the Registrar of Companies, it takes the form of a limited partnership defined in the Limited Partnerships Ordinance. However, if this business entity fails to register with the Registrar of Companies, then it becomes a general partnership as a default.
In a limited partnership the general partners are liable for all debts and obligations of the firm while the limited partners are liable only for the capital they contributed to the firm.
An individual may carry on business on his/her own and has unlimited liability towards creditors of the business.
Establishments in China
Foreign companies may use various ways to do business in the PRC, which can be categorized as follows:
Foreign investment enterprise (“FIE”) refers to equity joint ventures, cooperative joint ventures and wholly foreign owned enterprises. They are permitted to conduct manufacturing operations and other permitted activities within the PRC. This permitted scope of operation distinguishes the FIE from the rest of the major groupings.
Equity Joint Venture (“EJV”)
It takes the form of limited liability corporations in which the Chinese and foreign partners jointly invest and manage the operations. Profits and losses are shared according to the proportion of investment contributed by each partner. Each partner may contribute cash or other assets, such as buildings, land use rights, equipment or industrial property, as well as know-how or equity investment. Foreigners may not own less than 25% of the equity. Except in some special industries, the maximum amount of foreign ownership in general is not specified.
Contractual/ Co-operative Joint Venture (“CJV”)
It may take any form agreed between the Chinese and foreign partners. The rights and obligations of each partner are specified in the joint venture contract. This joint venture may be a limited or unlimited liability entity in which each party contributes capital and receives a share of the profits or products. Under this arrangement, the Chinese partners generally provide contributions in kind, such as land, natural resources or labor, whilst the foreign partners provide capital, advanced technology, etc.
Wholly Foreign Owned Enterprise (“WFOE”)
According to the law on wholly foreign owned enterprises (“WFOE”) which was first promulgated in April 1986, the establishment of WFOEs was restricted to those businesses deemed beneficial to China’s national economic development, i.e. those using advanced technology and equipment or those that export all or most of their products.
Nevertheless, pursuant to the amendments of the Law concluded on October 31, 2000, WFOEs are no longer required to balance their foreign exchange and give preference to the use of domestic materials and fuel. In addition, instead of requiring WFOEs to export most of their products or use high technology or advanced equipment, the Chinese government encourages the establishment of export-oriented or high tech WFOEs. However, WFOEs are still excluded from certain industries in accordance with State policies.
A representative office is one of the most common forms of foreign establishment in the PRC. Consistent with international practice, representative offices in the PRC may not engage in direct business operations (e.g. sales, marketing, or production activities).
However, it is widely accepted that such office may provide liaison services to group companies or even third parties, but the representative office will then be subject to PRC taxes.
Except for certain financial institutions such as foreign banks and insurance companies which may apply for approval to operate as a full branch in designated areas in the PRC, other foreign investors are generally not allowed to establish branches in the PRC.
The number of approved CHC in the PRC is increasing. A CHC is an umbrella-structure arrangement, which enables a foreign company to hold together its joint venture and WFOE investments in the PRC. A PRC holding company can be either an EJV or a WFOE. Generally, the Ministry allows a foreign company to set up a wholly foreign owned holding company in the PRC if it has a good reputation, financial strength and high technology, and the projects it undertakes is in line with the state production plans.
Chinese and foreign companies can enter into various types of cooperation arrangements, which do not involve setting up of FIEs. Three typical types of co-operation arrangement are:
- Processing and Assembly Arrangement
- Compensation Trade Arrangement
- Cooperative Production Arrangement
Foreign enterprises may be engaged in the provision of services as contractors or subcontractors in China. Although the subcontractors may not have a fixed base in the PRC, they are normally considered maintaining a place of establishment in the PRC in respect of the contract.
Establishment in other jurisdictions
In general, an offshore company is essentially the same as any other company, except that an offshore company usually has a low- or zero-tax rate and is specifically used for international, cross-border purposes and is not permitted to engage in business within the jurisdiction which it is incorporated (e.g. the BVI, the Cayman Islands, Samoa, etc).
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