Opening an office in Hong Kong

The following article on establishing a legal entity in China is reproduced by courtesy of ICS Trust. Also see their comments on doing business in China. You can email Daniel Booth at dbooth@icstrust.com or download the full ICS brochure. We do not take any liability for the accuracy of material supplied by third parties.

See our serviced offices page if you are looking for an interim office solution. If you are opening an office in Hong Kong you or your staff may benefit from using an Orientation service.

Legal framework

Hong Kong's case-based common law system is modeled on the British legal system and has remained largely unchanged since the handover to China in 1997. The system is guaranteed until 2047 under Hong Kong's mini- constitution, the Basic Law.

In comparison with China's developing, Soviet-based legal system, Hong Kong offers a familiar common law, legal environment that is characterized by a completely independent judiciary, stability and transparency. Conflict resolution rather than retribution is central to the Hong Kong legal model and is supported by a strong legal profession, well-versed in local and international law. Such an environment not only helps mitigate risk exposure and protect contract terms, it also provides an effective firewall for foreign companies doing business in China.

In July 2006, China and Hong Kong signed a mutual legal assistance agreement to make civil and commercial judgments delivered in each other's courts enforceable on both sides of the border. These moves further enhance Hong Kong's role as the gateway to China.

As an arbitration and dispute resolution centre, Hong Kong is unparalleled in terms of its infrastructure and corruption-free judiciary. The Hong Kong Arbitration Ordinance provides the legislative support to mediation and arbitration in Hong Kong. Hong Kong adopts the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which lays down a detailed framework for the recognition and enforcement of arbitration awards, where over 100 countries (including China) are signatories to this Convention. Hong Kong courts recognize and enforce arbitration awards made in countries which are signatories to the New York Convention in accordance with the terms of that Convention. There is also provision in the Arbitration Ordinance for Hong Kong courts to enforce domestic awards and awards made in non-Convention centers. Similarly Hong Kong awards can generally be enforced through the courts of other signatory countries. In fact, the Hong Kong system is so well recognized, that it is not uncommon for Mainland companies to use Hong Kong as a base to settle disputes rather than do so on the Mainland.

Financial & banking system

Hong Kong is the world's ninth largest international banking centre. The territory is host to 71 of the world's 100 largest banks, 131 licensed banks and 85 representative offices of foreign banks from 31 countries.

Due to the structure of the local economy, its banks have a strong international focus, with particular strengths in trade and project finance. Since there are no capital controls or restrictions on foreign exchange, managing a multi-currency trading business is straightforward and efficient. Hong Kong banks have real multicurrency accounts, transactions can be conducted in foreign currencies and telegraphic transfers can be executed overnight.

Business friendly tax regime

Hong Kong operates a simple territorial basis of taxation, or what is called the 'onshore/offshore system'. Hong Kong imposes tax on profits or income with a Hong Kong source. Foreign-sourced income even if remitted to Hong Kong is not liable to tax. Further, transactions that are 'booked' through a Hong Kong company are not liable to tax. This is a very beneficial system for international trade, where tax can be deferred and that money reinvested into the business until the profits are repatriated back to the investor's home country.

Hong Kong corporate tax is 17.5% for transactions that originate in Hong Kong, while salaries tax is a modified at tax rate of 16% of gross income. Hong Kong does not have any capital gains tax, withholding tax on dividends and interest, inheritance tax and value added tax.

Double taxation treaty between China & Hong Kong

On 21 August 2006, China and Hong Kong signed an agreement for the avoidance of double taxation to replace a previous limited scope arrangement signed in 1998. The new arrangement is effective from 1 January 2007 in China and 1 April 2007 in Hong Kong.

The new agreement reduces withholding tax on passive income such as, royalties and interest and offers tax exemption on certain capital gains. This again further enhances Hong Kong's role as a base for foreign investors when doing business or investing in China.

	Dividends	Royalty	Interest
China's non-treaty rate:	0% to 20%	10%	10%
HK's non-treaty rate:	Nil	5.25%	Nil
Treaty rate:	5% to 10%	7%	0% to 7%

Withholding Tax

Although China currently does not impose tax on dividends received by foreign investors from FIEs, this exemption is expected to be withdrawn as part of China's tax reform. The 5% withholding tax is therefore regarded as a low rate and helps to provide certainty for investors, where the recipient directly owns 25% of the capital of the Chinese company, otherwise a withholding tax of 10% is levied. In general, the new agreement offers the most favorable rates available amongst the double taxation treaties signed by China, and compares favorably to China's domestic tax law.

Capital Gains

Tax exemption is available in China on capital gains derived from the sale, by an Hong Kong investor, of shares in a Chinese company, subject to the following criteria: 1) the disposal must represent less than 25% of the ownership interest in the mainland company; and 2) the Chinese company must not be a real property holding company. As Hong Kong has no capital gains tax this arrangement creates a unilateral benefit to Hong Kong taxpayers.

Exchange of Information

The new agreement also has an article on Exchange of Information that adopts a more restrictive standard for the exchange of information between Chinese and Hong Kong Tax authorities than the 2004 version adopted by most countries in their double taxation avoidance treaties. The article provides that only information on those taxes covered by the new double avoidance tax treaty can be exchanged.

If you are opening an office in Hong Kong, you or your staff may benefit from using a Hong Kong Orientation service.