Running My Business in Hong Kong
There is a famous Chinese Proverb “创业难，守业更难。”. It means “keeping is harder than winning”.
Apart from being concerned with sustainable and profitable corporate development, business operators should regularly check and balance the long-term interests of the company, shareholders and stakeholders, especially employees. The management should maintain and promote good corporate governance in the company. The topics related to “Accounting & Reporting Standards”, “Business Taxes”, “Internet and E-commerce”, “Employee Rights in Hong Kong”, “Personal Data Protection”, “Intellectual Property Rights” and “ Commercial Issues – Small Claims” are also important for running the business in Hong Kong.
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Directors duties in Hong Kong
Directors should clearly understand their duties for good corporate governance. The legal regime relating to directors in Hong Kong is contained in both statute and case law. The Hong Kong Companies Ordinance (Cap 622) (“CO”) sets out in some detail a director’s powers and duties, while the company’s articles of association can be found in the Companies (Model Articles) Notice (Cap 622H)..
The duties of directors of listed companies can be found in Securities and Futures Ordinance (Cap 571) (“SFO”) and the Listing Rules.
In 2014, the Companies Registry issued the useful ‘Guide on Directors’ Duties’ which laid down the basic eleven principles to be observed by all Hong Kong company directors:
- Principle 1: Duty to act in good faith for the benefit of the company as a whole.
- Principle 2: Duty to use powers for a proper purpose for the benefit of members as a whole.
- Principle 3: Duty not to delegate powers, except with proper authorization, and to exercise independent judgement.
- Principle 4: Duty to exercise care, skill and diligence
- Principle 5: Duty to avoid conflicts between personal interests and the interests of the company
- Principle 6: Duty not to enter into transactions in which the directors have an interest, except in compliance with the requirements of the law.
- Principle 7: Duty not to gain advantage from use of position as a director.
- Principle 8: Duty not to make unauthorized use of company’s property or information.
- Principle 9: Duty not to accept personal benefit from third parties conferred because of their position as a director.
- Principle 10: Duty to observe the company’s constitution and resolutions.
- Principle 11: Duty to keep accounting records.
HIGHLIGHTS FOR LISTED COMPANIES
As mentioned in the Corporate Governance section of the Structuring My Business in Asia pages here, the separation of ownership and control is a more important and serious issue in a listed company.
Hong Kong has a well-developed regulatory system to protect the interests of shareholders and stakeholders. There is a top down government-imposed set of laws with strict enforcement provisions.
Hong Kong has a regulatory system of three tiers.
The first tier is the government as the regulator of last resort, under Article 109 of the Basic Law. The Chief Executive of the Hong Kong Special Administrative Region, together with the Financial Secretary, have the reserve power under the Securities and Futures Ordinance (Cap 571) to take control of a listed company, when that company is in a financial crisis.
The second tier is the Securities and Futures Commission which serves as the market watchdog.
The third tier is the Hong Kong Exchanges and Clearing Limited which monitors and supervises Hong Kong listed companies. This system enables Hong Kong has a balance of self-regulation and top-down government approach.
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Accounting & Reporting Obligations in Hong Kong
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Companies established in Hong Kong are required to keep and file financial statements in accordance with local accounting standards. With a view to attract foreign investors, Hong Kong Accounting Standards (“HKAS”) and Financial Reporting Standards (“HKFRS”) are largely aligned with internationally accepted standards (i.e. IFRS). Both are issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), which is also responsible to grant certificates to certified public accountants in Hong Kong.
The latest version of HKAS and HKFRS was adopted in January 2005, and comprises of 41 accounting standards, 9 financial reporting standards and several interpretations. In addition, the new Hong Kong Companies Ordinance, of 2014, provides specific simplified standards for Small and Medium Enterprises (“SME”). HK companies qualify as SMEs if their total income, assets and employees are below certain thresholds (i.e. HKD 100 million and 100 employees).
Hong Kong limited companies are required to fulfil three reporting requirements:
Every year, within 42 days from the anniversary of incorporation, private companies established in Hong Kong shall submit an Annual Return to the Company Registry. The Annual Return records key information and changes occurred during the past year. The reports details, such as share capital, directors, shareholders, registered address, etc. It is generally prepared by the Company Secretary, who must be an individual residing in Hong Kong or a company registered therein.
Every year in April, the Inland Revenue Department (“IRD”) issues Employer’s Returns to Hong Kong companies to report the salaries paid to the staff and subject to Hong Kong taxation. The returns are required to be completed and filed within 1 month of issue.
Profits Tax Return:
At the end of the financial year, Hong Kong companies are required to complete and submit a Profits Tax Return to the IRD. In Hong Kong, companies are free to set the date of the year end, however, most companies choose December 31st or March 31st as their financial year-end, in order to match up with their overseas parent company or with the Hong Kong government’s fiscal cut-off date (i.e. March 31st). The first year-end date of a newly incorporated company can be any date within 18 months from incorporation. The same year-end shall apply in subsequent years.
The IRD generally issues Profits Tax Returns on the 1st of April every year. The returns should normally be filed within 1 month from the issuance date. Extension of time can be granted on request, depending on the specific circumstances of the request.
Hong Kong companies shall file the Profits Tax Return with the following supporting documents:
a certified copy of the Balance Sheet, Auditor’s Report and Profit & Loss Account for the relevant period; a tax computation with supporting schedules showing how the assessable profits (or adjusted loss) has been computed; and other documents and information as specified in the notes and instructions of the Profits Tax Return.
RECORD KEEPING OBLIGATIONS
As well as reporting obligations, HK companies must comply with record keeping obligations by law under both the Companies Ordinance and the Inland Revenue Ordinance. Below are the three main requirements:
Audited Annual Accounts & Directors’ Report:
The directors must prepare a statement each financial year that complies with the disclosure requirements of the Companies Ordinance. The accounts must be audited by Hong Kong registered auditors and laid before the shareholders in the annual general meeting
Annual General Meeting:
Private companies established in Hong Kong must hold an annual general meeting (shareholder’s meeting) within 9 months after the end of its accounting period. An annual general meeting must be held even though there may be no accounts available for presentation to the meeting and no other relevant business.
Obligation to keep business records for not less than seven years:
Any person or company carrying on a business in Hong Kong is required to keep sufficient records in English or Chinese for at least seven years. These include books of accounts, receipts and payments, income and expenditure vouchers and bank statements.
See also here
Business Taxes in Hong Kong
Hong Kong relies on a territorial tax system, under which Hong Kong companies are only taxed on income arising in or deriving from Hong Kong. Meanwhile, foreign-source income is not subject to Hong Kong tax. For tax purposes, companies are treated as Hong Kong residents if their place of control and management is located in Hong Kong.
Hong Kong is introducing a two-tier profits tax rate system, by lowering the profit tax rate for the first 2 million HKD of profit from the current 16.5% to 8,25% (expected to be implemented in April 2018)
Profit tax is levied at a rate of 16.5% on Hong Kong source income earned in or derived by companies carrying on business in Hong Kong. In assessing the source of profits, Hong Kong adopts the “operation test”, which consists of identifying the most important profit earning profits activities and the place where those activities are carried out.
Foreign-source income is, therefore, not subject to Hong Kong profit tax (the “Offshore Income Exemption”). No prior application is required to enjoy such exemption, and Hong Kong companies deriving offshore income simply declare that income as foreign-source income in the tax return. However, the Inland Revenue Department (“IRD”) may require the company to provide evidence to justifying the offshore nature of the income declared as offshore and can challenge the exemption from tax of such income.
There is no profit tax on capital gains, dividends and/or interest. Only certain gains on speculative transactions can be subject to profit tax as trading income.
DOUBLE TAX TREATIES
Thanks to Hong Kong’s territorial tax approach, Hong Kong businesses rarely face double taxation issues, as their offshore income is exempt from tax in Hong Kong.
As of January 2018, Hong Kong has concluded 38 double taxation agreements (DTA) with other countries, including Canada, France, Italy, Luxembourg, and the UK. Most treaties are concluded on the OECD model and Hong Kong has also adopted OECD standards for information exchange.
Hong Kong does not levy any tax on dividends and interest.
As for royalties: payments made to non-residents for the use of intangible assets located in Hong Kong or if the payments are tax deductible for the payer, then such royalty payments are subject to withholding tax in Hong Kong. The tax rate will vary depending on whether or not the non-resident company is associated to the payer. For non-associated companies, 30% of the gross amount of the royalties paid is subject to profit tax at 16.5%, resulting in an effective rate of 4.95%. For associates, 100% of the gross amount of the royalties paid is subject to profits tax, resulting in an effective rate of 16.5%. Additionally, the payer of the royalties has a withholding obligation under the Inland Revenue Ordinance to withhold the corresponding tax and to remit it to the IRD.
VAT: There is no Value Added Tax in Hong Kong.
Stamp Duties: Ad valorem stamp duties are charged on documents connected with a lease, sale or transfer of immovable property, and on the sale of shares. Rates generally vary from 0.25% (short term lease) to 8.5% (sale and conveyance of property).
Customs: Hong Kong does not levy customs duties. The only excise taxes apply on alcoholic beverages, tobacco, methyl alcohol and hydrocarbon oil.
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Hong Kong Double Tax Treaty Network
Because of its Offshore Income Exemption, Hong Kong’s network of Double Tax Treaties (“DTA”) is less developed than other Asian jurisdictions.
The purpose of the DTA’s is the elimination of double tax issues and the provision of reduced rates of withholding tax on dividends, interest and royalties. Most of Hong Kong’s DTAs are based on the OECD model, which determines the rights to tax different categories of income, allocated to each signatory country. In addition, most DTA’s contain exchange of information provisions, inspired from the OECD model.
To enjoy the benefit of Hong Kong’s DTA’s, a tax residence certificate issued by the tax authorities of the country where the recipient is a resident, must be submitted to the Hong Kong tax authorities. When the recipient is resident outside Hong Kong, the DTA’s provisions can be enjoyed without too many difficulties. However, when the recipient is a resident of Hong Kong, the Inland Revenue Department will not grant a tax residency certificate if the company’s income (or most of it) benefit from the Offshore Income Exemption. In such a case consideration should be given to structuring transactions.
As of January 2018, Hong Kong has entered into 38 DTAs, with the following countries:
Austria – Belarus – Belgium – Brunei – Canada – China – Czech Republic – France – Guernsey – Hungary – Indonesia – Ireland – Italy – Japan – Jersey – Kuwait – Latvia – Liechtenstein – Luxembourg – Malaysia – Malta – Mexico – Netherlands – New Zealand – Portugal – Pakistan – Qatar – Romania – Russia – Saudi Arabia (ratification is pending) – South Africa – South Korea – Spain – Switzerland – Thailand – United Arab Emirates – United Kingdom – Vietnam
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