Hong Kong, officially Hong Kong Special Administrative Region of the People’s Republic of China, is one of the best place in Asia to do business, it is more than the marketing campaigns that the Hong Kong government advertise itself, it is a fact as Hong Kong is ranked as the world’s freest economy again. We think it is the moment to give our readers a refresh about doing business in Hong Kong in 2017.
Hong Kong as the international financial hub
It is more than a marketing punch line to advertise the city’s image, it is a statement written on the Basic Law, the de-facto constitution of Hong Kong after the 1997 handover from the British government to the People’s Republic of China. The Basic Law provides for Hong Kong to continue its independent currency system, monetary and financial policies.
Read more: Hong Kong Basic Law – Economy
Hong Kong as a foreign exchange hub
By April 2016, Hong Kong is one of the busiest foreign exchange (FX) market, the average daily turnover of FX transactions in Hong Kong is US$436.6 billion, it brings Hong Kong to the fourth place of the world biggest FX trading hub in turnover. USD is the dominant currency, it accounts for over 96% of all transactions.
Read more: HKMA statistics and numbers
Hong Kong dollar as de facto US dollar
Hong Kong dollar (HKD, HK$) remains as the official currency of Hong Kong SAR after its handover of sovereignty to China, and the city’s currency has been loyally linked to the US dollar since October 1983 at a rate of HK$7.8 to US$1. Since May 2005, the currency has been set to float between HK$ 7.75 and HK$ 7.85 per USD.
The peg is a solid anchor to not only Hong Kong’s monetary but also to the survival of Hong Kong which is fundamentally an open and free economy. The HKMA safeguards the stability of the peg by maintaining a massive US$395.6 billion foreign-exchange reserve (at the end of March 2017) which represents over seven times the total HKD in circulation.
Hong Kong banks are swimming in money
Hong Kong banks have historically maintained capital reserve ratio in excess of Basel standard. The banks are holding over 2.5 percent of their capital as countercyclical butter which is built up during times of earnings growth so that they can be drawn down when things are not going so well, compared with a maximum of 2.5 percent under Basel standard.
Furthermore, Hong Kong banks are scheduled to fully implement the Basel III standard, which is to further improve the local banking sector’s ability to absorb financial and economic shocks, on January 1, 2019.
Read more: Banking regulatory – Basel III
Hong Kong is not Tax Heaven
Hong Kong has joined and fully implement the Common Reporting Standard (CRS) by the Organisation for Economic Co-operation and Development (OECD) to realize Automatic Exchange of Financial Account Information (AEoI) among participating jurisdictions. Under the policy, every financial institution which is able to hold the account for the customers is required to automatically transfer the information about the account to the tax service authority where the account is held. Therefore, whenever a customer holds an account in a Hong Kong bank, the information of the account is transferred to Inland Revenue Department (IRD), the tax authority of Hong Kong, and shared with other jurisdictions which deem the account holder is their tax resident according to their tax laws.
For the residents and company of the US, it is noteworthy for them that most of the international banks in Hong Kong are committed to fully FATCA compliant, the Foreign Account Tax Compliance Act (FATCA) is a new piece of legislation by the United States Department of Treasury (Treasury) and the US Internal Revenue Service (IRS) to counter tax evasion in the US.
Read more: Automatic Exchange of Financial Information
Legality and equality before the law
The law of Hong Kong is based on the rule of law and the independence of the judiciary. These are the fundamental principles of law that govern the way in which power is exercised in Hong Kong.
Read more: Legal System in Hong Kong – DOJ
The massive surplus in government reserve
Hong Kong government has vast fiscal savings, with net fiscal savings of HK$1.7 trillion or about 70 percent of gross domestic product. By net fiscal savings, it means the sum of the Hong Kong government’s accumulated fiscal surpluses, the deposits of other statutory bodies with the Exchange Fund, and the accumulated investment profits on these.
Clean and transparent government
Corruption is a secretive crime and difficult to detect. The Independent Commission Against Corruption (ICAC), which was established in 1974, is an independent law enforcer committed to fighting corruption. With the support of the Government and the community, Hong Kong has now become one of the corruption-free jurisdictions in the world.
Read more: ICAC
Easy to do: Business Nature, Company incorporation, Annual Return, General Meeting, Tax Filing, and Audit
Regardless of your nationality or tax residency, once you have decided to incorporate a limited company and chosen a company name, you can apply for incorporation with the Hong Kong Companies Registry (“CR”) through its “One-stop company incorporation and business registration” service for simultaneous application for business registration and company formation. Online submission and payment are available via the CR e-Registry portal website, processing time can be as short as one hour.
The CR demands all Hong Kong companies to file an annual return to maintain their statutory registration. The return is simple that you could file it by yourself.
Instead of meeting physically, a Hong Kong company may hold a general meeting at two or more places using any technology that enables the members who are not together at the same place to listen, speak and vote at the meeting. In addition to the general meeting, a company must hold an annual general meeting (AGM) in respect of each financial year of the company.
Tax Return Filing
Inland Revenue Department (IRD) is the only tax service authority in Hong Kong. Your Hong Kong company and all of its directors are required to file profits tax returns and individuals tax returns annually. The tax returns are the summary of taxable incomes, deductible expenses, and allowance generated in the previous tax year, so you need to keep reasonable records of your financial information and finish accounting works before the submission deadline.
Accounting & Audit
For every Hong Kong company, you have to hire a practicing Certified Public Accountants (practicing CPA) to audit the company’s accounting reports annually, then the audited accounting reports are required to be delivered to IRD
Low Tax Rate
According to the 2016 Paying Taxes* study of 189 economies, Hong Kong has one of the most tax-friendly economies in the world. Why? The city only imposes three direct taxes and has generous allowances and deductions which reduce your taxable amount.
- Profits tax is capped at 16.5 percent
- Salaries tax is a maximum of 15 percent
- Property tax is 15 percent
- Duty-free trading port
Duty is paid on very few products, for example, tobacco.
More important are the taxes that Hong Kong does not impose:
- No sales tax or VAT
- No withholding tax
- No capital gains tax
- No tax on dividends
- No estate tax
Simple and friendly Taxation
Hong Kong adopts a territorial source principle of taxation. Only profits which have a source in Hong Kong are taxable here. Profits sourced elsewhere are not subject to Hong Kong Profits Tax. In brief, a company that carries on a business in Hong Kong but derives profits from another place, these profits are exempt from tax in Hong Kong. If the profits are earned from activities that take place outside of Hong Kong, these profits are not taxable in Hong Kong even if the company’s transactions are carried out through the company’s Hong Kong bank account. Although the principle itself is very clear, its application in particular cases can be, at times, contentious. The IRD has taken a certain approach to make the decision whether profits are “sourced” in Hong Kong.