Company Registration in Hong Kong or Why you should set up your business in Hong Kong although you target China
When you started considering an entry into the Chinese market, you probably heard that you should set up your business in Hong Kong first and wondered how that makes sense. Since the handover of Hong Kong from the United Kingdom to the People’s Republic of China in 1997, Hong Kong has the status of a special administrative region. Therefore, Hong Kong’s legal system is independent of the legal system of mainland China and even has its own currency. So, why register in Hong Kong when it is independent from mainland?
Hong Kong is not only bordering China geographically, but also has similarities in the culture, social customs and language. Furthermore, the location is ideal when you also want to reach other Asian key markets as they are not more than a 4-hour flight away and half of the world’s population is just around the corner.
Hong Kong has special market access benefits to the Chinese market, thanks to the “Mainland and Hong Kong Closer Economic Partnership Arrangement”, a free trade agreement CEPA that reduces or eliminates tariffs and promotes trade and investment. Furthermore, in certain cases Hong Kong entities get preferential treatment in Mainland China like reduction in the entry thresholds such as registered capital and business turnover, relaxation in restrictions over geographical location and business scope as well as in equity share requirements.
- Ease of Doing Business
Hong Kong is ranked fourth for its ease of doing business by the World bank (whereas China is no. 78). Not just the procedure to register a firm is done quickly and with low costs, but the same holds true for dealing with construction permits, getting electricity and so on. The policies welcome foreign investment without trying to protect the local industry. There are no special tax incentives attracting foreign investment, but a very low and simple taxation system.
The language of business in Hong Kong is English and all the company documents and online documentation is in English. And not only language barriers are removed, but businessmen also have an international mindset.
Furthermore, Hong Kong’s infrastructure is one of the best worldwide with a fully digitalized telecommunication system, a modern deep-water harbour and an international airport operating 24/7.
Hong Kong is a free port and imposes no customs duties on imported goods (just very few exceptions). Furthermore, the immigration policy welcomes talented individuals, professionals and investors. Another advantage is the freedom of information: Whether you want to use Western social media channels or research on Google – you’ll appreciate internet without a firewall.
- Legal Issues
One major reason, although less publicly discussed, for establishing a Hong Kong company is for legal concerns. By using a HK company as holding company for the China business entity, you’ll protect their parent company from any legal issues that may arise. The whole liability lies with the Hong Kong company, not the parent company. In the worst case, you can always close it and start again.
For the formation of a WFOE as well as a JV in China, the use of a Hong Kong entity offers the advantage that it solves some of the technical problems arising, when the system in the foreign country is very different from the Chinese one and therefore business titles don’t match and the form of notarization looks different. By using a Hong Kong company as the parent company, you’ll prevent this kind of problems and the resulting delay.
- Financial Aspect
Last but not least, the benefits of transferring money out of the country are a great advantage of Hong Kong over China as capital outflow is restricted in China. The measures meant to breakdown corruption and control China’s currency rate and foreign exchange reserves, also affect foreign companies. These new restrictions have less impact on companies that have been using a Hong Kong entity as parent company.
But: Chinese tax authorities have recently intensified their efforts to attack business arrangements that are established for the simple reason of tax avoidance. Therefore, it is essential for the parent company to have justifiable commercial reasons to establish the Hong Kong Holding Company and also maintain sufficient commercial substance in the Hong Kong Holding Company in order to enjoy the preferential treatment under the China/Hong Kong double tax agreement. Having a Hong Kong company is not a substitute for having a PRC entity when you’re operating in Mainland China. Consider forming a PRC company, maybe as a subsidy of your HK company, when you want to do business in China of a level that requests a Chinese entity (e.g. when you have employees there).
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