Hong Kong is one of Asia’s most important business and banking hubs. It also is a gateway to China, the world’s second largest economy and home to a fifth of the human population. This, combined with a number of tax benefits, makes it an attractive jurisdiction to register your business in and in this guide, I provide an overview of the LTD, Hong Kong’s most popular business structure. I also explain how to register one and how to handle compliance.
An overview
Hong Kong is not a country in the traditional sense, it instead is a special administrative region of China. This gives it a number of advantages, such as preferential access to the Chinese market and protection from Beijing (not only militarily but also economically). This also gives it a number of disadvantages, as it exposes the city to interference from Beijing (an authoritarian state with a tendency to make market unfriendly moves) and to interference from the rest of the world (a foreign country taking a hard line approach on China may also take that approach with Hong Kong and Macau, the other SAR).
Because of the above, Hong Kong is suitable primarily for businesses focused on Hong Kong itself and China. Businesses with a global focus should instead consider Singapore and the UAE. Hong Kong is also unsuitable for businesses setup purely to be operated tax-free, due to the complexities and costs related to its offshore exemption process.
The most popular entity type in Hong Kong, and best suited for most types of businesses, is the LTD, or Limited company (limited by shares).
The Hong Kong LTD is essentially a standard corporation, managed by directors on behalf of shareholders, with a separate fiscal personality.
To register an LTD, you will first need to ensure that your preferred name is available. This is done via ICRIS’s cyber search centre (Hong Kong’s business registry).
Once you have confirmed the availability of your preferred name, the registration forms can be filed immediately, via the e-Registry. Unlike Singapore, Hong Kong does not require the use of a local director (nominee director) nor does it imposes filing restrictions on non-residents.
In most cases, the government will approve the application within a day or two, and will send you your company documents in electronic form. You can then go ahead and open business bank accounts with most of the local banks (in some cases remotely, if you have a HKID), and payment processing accounts. I have written a guide detailing how banking works in Hong Kong, you can read it here. Do note that services such as Stripe and PayPal charge significantly higher fees in Hong Kong than they do in Europe and the US. If your business processes significant volume, it can make sense to use a payment processing subsidiary.
A Hong Kong LTD will be liable to tax on its profits, at the flat rate of 16.5%. Rebates are available for small companies and this includes a 50% rate rebate on the first two million HKD in annual profits (resulting in a 8.25% rate on those two million HKD, and 16.5% on any profits above that amount). Do note that while Hong Kong is a territorial taxation country, it does not automatically exclude foreign sourced income. An offshore exemption claim must be filed, along with supporting evidence, to receive the exemption.
The above makes it impractical, and expensive due to the cost charged by local accounting firms to file an offshore exemption claim, to run a Hong Kong LTD tax-free. There is also the issue of tax residence, as the Hong Kong LTD has a separate fiscal personality and thus a tax residency of its own. If it is not a Hong Kong tax resident, it must be a tax resident somewhere else (typically the country it is run from). See my place of management rules and CFC rules guides for more details.
Hong Kong LTDs are required to renew their registration certificate on an annual basis, and must file a corporation tax return with the IRD. Regardless of the size of the company, its financial statements must be audited by a licensed Hong Kong-based accountant. Most accountants charge per transactions, so this can result in a significant compliance cost especially for companies with a large number of transactions.
