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Why Should You Have a Hong Kong Company for Your China Operations?

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Hong Kong is undoubtedly one of the most attractive business hubs in the world today. This status has been earned over a long period of time, partly as a result of Hong Kong being geographically part of Guangzhou, historically one of the wealthiest regions of China.

In more recent times it has become recognised as one of the world’s most business-friendly environments for both local and international enterprises alike, and particularly for those wishing to establish operations in mainland China.

Hong Kong has a simple and efficient tax regime based on the source principle, meaning only profits derived from business activities carried on in Hong Kong are taxable in Hong Kong. When you add the rule of law, independent judiciary, ready access to top professional advisors, high living standards and a multi-cultural environment, it is easy to see how Hong Kong has earned its reputation.

But what if you wanted to start a business in Hong Kong and operate in mainland China too?

The relationship between Hong Kong and the rest of China is described as “one country – two systems.” Does that mean you should or should not set up a company in Hong Kong if you also have the mainland China market in mind? If you want to find the answer to the question above, take a look below.

What does ‘one country, two systems’ actually mean?

“One country, two systems” describes the principle upon which the governance of Hong Kong and Macau has operated since 1997 and 1999 respectively when they became Special Administrative Regions (“SARs”) of the People’s Republic of China.

This principle stipulates that each of these regions can enjoy a high degree of autonomy for a period of 50 years and can maintain their own social and economic systems independent of mainland China in terms of:

  • government
  • legal, economic, and financial affairs
  • trade relations with foreign countries

One of the conditions of the Sino-British Joint Declaration of 1984 was that prior to 1997 Hong Kong would draft and adopt a mini-constitution known as the Basic Law. This law enshrines the “one country two systems” principle and guarantees that Hong Kong will have the right for fifty years to maintain its capitalist way of life.

Differences between Hong Kong and China

Hong Kong and mainland China have the same sovereign power, namely the People’s Republic of China. However, each has its own head of government:

  1. China has a President who is also Chairman of the Chinese Communist Party and
  2. Hong Kong has a Chief Executive who leads the Hong Kong SAR government.

The Chief Executive reports to the Central People’s Government and can serve a term of five years subject to a maximum of two consecutive terms.

Under the “one country two systems” principle, Hong Kong also has its own legal and judicial system, its own district authorities, civil service, currency (the Hong Kong dollar) and the freedom to raise its own taxes, set its own budgets and infrastructure spending plans, all without the involvement of the Chinese government.

Another major success story for Hong Kong is its Stock Exchange which remains the pre-eminent exchange for Chinese companies and overseas investors looking to raise capital in Asia. Mainland Chinese stock markets have more restrictive regulation and higher financial requirements making them less attractive.

Is Hong Kong good for business?

Many entrepreneurs choose to set up Hong Kong companies and this trend is not showing any signs of weakening. Hong Kong is one of the most popular jurisdictions for investors and this is mainly due to its ease of establishing business operations, simple and efficient tax system, minimal bureaucracy, and a well-educated work force with multiple language skills.

Applications for work visas for overseas senior staff are handled efficiently and transparently by the Immigration Department and can usually be obtained within a matter of weeks.

Below is a list of the benefits of establishing a company in Hong Kong.

Easier business operations

You can set up a business in Hong Kong in about two weeks. The SAR is known for its excellent infrastructure facilities and business premises, which can be expensive but are of a high standard and readily available.

Additionally, intellectual property (“IP”) protection is taken seriously with strict regulations in place. IP rights are enforceable through the courts or via arbitration. Hong Kong is playing an increasingly important role in international arbitrations due to its deep pool of available technical expertise and the predominant use of English in such proceedings. In 1985, the International Arbitration Centre was established, and Hong Kong has since become a key destination for arbitration worldwide.

The Intellectual Property Department monitors the IP regime in Hong Kong and is known for its extensive experience in handling IP issues.

Free economy

Hong Kong has one of the most successful economies in the world thanks to one thing – openness. To be precise, its dynamic economy is driven by the principles of free enterprise, free trade, and free markets. This economy has seen GDP growth at an average annual rate of 5% in real terms over the past 20 years. There are practically no restrictions on inward and outward investments, no foreign exchange controls, and no foreign ownership restrictions.

Additionally, there is almost no public debt, plus the banking and legal systems are of the highest international standard.

Moreover, Hong Kong businesses can now benefit from the preferential access to the mainland Chinese market derived from the Closer Economic Partnership Arrangement (“CEPA”). This is a free trade agreement between the Central People’s Government and the Government of the Hong Kong SAR.

As a result, one of the benefits of CEPA is that all goods of Hong Kong origin can be exported to the mainland tariff-free.

Attractive tax regime

Hong Kong takes pride in having one of the lowest tax jurisdictions of any developed economy in the world.

Personal income tax starts at only 2% and goes up to 17% for income above HKD200,000. Furthermore, corporate tax is set at 8.25% for the first HK$2M of assessable profit, and 16.5% thereafter for corporations.

There are no capital taxes and no withholding tax on dividends and interest or collection of social security benefits. Finally, there is no sales tax or VAT in Hong Kong.

Clean governance

Hong Kong still enjoys a high degree of autonomy in all matters except for foreign and defence affairs. The SAR has a semi-democratic system with separate political, economic, and judicial systems and operates a “light touch” approach to government intervention.

Corruption levels are among the lowest in the world driven by strict anti-corruption legislation and enforcement. Hong Kong has world standard anti-money laundering legislation, making it a safe place to invest and grow your business.

Strong legal system

Hong Kong operates under its own legal system based on English common law, independently of both China and the SAR government. Every person and entity are equal before the law. There are jury trials for serious offences and a presumption of innocence.

Legislation provides for the protection of IP rights and there are specific rules covering patents, copyrights, trademarks, and registered designs

Wrap Up

As you can see, there are numerous factors which make Hong Kong an excellent choice for setting up your next business in the region. Hong Kong’s regime is geared towards helping every aspiring entrepreneur to succeed and flourish in the world of business.

In a nutshell, Hong Kong is a great place to live and to do business.

If you need any help with Hong Kong company incorporation or any other issues relating to doing business in or from Hong Kong, please feel free to contact A-Pass. The entire set-up process is incredibly easy when you are working with service providers who are familiar with the business environment of the region and have a proven record of success.

Good luck and enjoy your Hong Kong business endeavour!

This information is provided for reference only. For more information please email our office at enquiry@a-pass.com.hk.