The Hong Kong Market Entry Playbook: Business Establishment

Hong Kong has a long history of being a business-friendly location to set up both as a regional business hub and to access the sophisticated local market. In the next of a series of articles exploring the attraction of Hong Kong as a regional and international business centre, Pádraig Walsh of Tanner De Witt explains key points about business set up and establishment in Hong Kong especially for growing businesses in the technology space.

Pre-incorporation

Many founders will operate as individuals in the early concept stage, and perhaps only consider a Founder Collaboration Agreement to organise affairs between them. This is a commercial agreement between founders in the form and style of a binding term sheet. The Founder Collaboration Agreement will summarise the key terms agreed by the founders in respect of important features of the business, including:

(a) timing of incorporation;

(b) initial shareholding of founders;

(c) assignment of intellectual property rights; and

(d) reverse vesting of shares held by founders.

These terms will require more formal agreements once the business has incorporated.

Incorporation

The decision to create a formal business structure is usually reached quite early in the development of the business. Common triggers include:

(a) the creation of any material value (especially intellectual property);

(b) an increase in the risk environment, particularly if it impacts personal liability of the founders; and

(c) investment or grant funding.

Private company limited by shares

Legal status: A private company may be limited by shares. This means that the liability of shareholders will be limited to the unpaid capital on their issued shares in the company. A private company must restrict the right to transfer its share, limit the number of shareholders to 50 (excluding employees and former employees), and prohibit any invitation to the public to subscribe for any shares or debentures of the company.

Requirements: A private company limited by shares incorporated in Hong Kong must have at least one director, one company secretary and one registered shareholder. One of the directors must be a natural person. The company secretary and the shareholders can either be natural persons or a body corporate. The company secretary must be resident in Hong Kong. There are no other residency requirements for officers or shareholders of the company. A sole director must not also be the company secretary.

Significant controller: A private limited company must maintain a significant controller register. This will contain details of persons who directly or indirectly hold more than 25% of the issued shares or voting rights in the company or otherwise exercise significant influence or control over the company (including rights to appoint the majority of directors). The significant controller register is not a public document, but may be inspected by enforcement authorities in prescribed circumstances.

Company name: Any company name that is the same as that of an existing company is not permitted. A company name may be in English, Chinese or both, but subject to restrictions on the use of certain words by the Companies Registry.

Registered office: Every Hong Kong private limited company must have a registered office in Hong Kong for communications and notices. Any change of address of the registered office must be notified to the Registrar of Companies for public filing.

Accounts: The accounting records of the company must be audited for each financial year, sent to the shareholders and laid before shareholders in an annual general meeting. The audited accounts for private limited companies do not need to be publicly filed or disclosed.

Share capital: There is no prescribed minimum or maximum share capital for any type of company in Hong Kong. A company can be formed with different types or classes of shares including ordinary or preferred shares with special rights attached to them. These must be set out in the company’s Articles of Association. If no separate share classes are designated, then the shares will be considered ordinary shares.

Annual general meeting: Every Hong Kong private limited company must hold an annual general meeting of its shareholders nine months after the end of its accounting reference period for that financial year. If the first accounting period exceeds twelve months, then the private company must hold an annual general meeting nine months after the anniversary of the company’s incorporation.

Annual return filing: Annual returns must be delivered to the Registrar of Companies for registration within 42 days after the anniversary of the date of the company’s incorporation.

Tax: Profits tax is levied in Hong Kong against all companies, at the rate of 8.25% on assessable profits up to HK$2,000,000; and 16.5% on any part of assessable profits over HK$2,000,000 (for the year of assessment 2018/19 onwards), which carry on a trade, profession or business in Hong Kong in respect of profits arising in or derived from Hong Kong. Offshore profits are beyond the general scope of Hong Kong tax. There are no capital gains taxes or value added taxes in Hong Kong. Dividends are generally payable free of withholding tax, though royalty payments may be subject to withholding.

Business registration: Every company incorporated in Hong Kong must obtain a business registration certificate. The application must be made within one month from the start of business. If a company carries on a business using one or more business or trade names, a business registration certificate is required for each such name. A branch business registration certificate is needed for each separate office of the company in Hong Kong.

Timeline for incorporation: A company may be incorporated in Hong Kong by submitting the prescribed forms, documents and fees to the Companies Registry and it will be deemed to have made a business registration application at the same time. The Certificate of Incorporation and the Business Registration Certificate is usually available within five working days. The company legally exists from the date of incorporation.

Other business structures

Non-Hong Kong companies: Foreign companies (non-Hong Kong companies) that establish a place of business in Hong Kong must register prescribed particulars with the Companies Registry within one month from establishment of that office. Generally, if a foreign company enters legally binding contracts in the course of business from a continuing location in Hong Kong, then it will have established a place of business in Hong Kong and trigger this registration requirement. The foreign company and its branch office in Hong Kong are the same legal entity, and do not have separate legal liability. This is the main reason why this business structure is mainly used if required for regulatory reasons.

Representative office: Foreign companies can have a business presence in Hong Kong by setting up a representative office. If a foreign company in Hong Kong has an office in Hong Kong but does not enter into legally binding contracts in Hong Kong, then that office is referred to as a representative office. The activities conducted by a representative office are limited. A representative office cannot transact any business which creates legal obligations that would amount to the establishment of a place of business. Its activities are limited to liaison with offices in other parts of the world, and business representation, customer promotion and customer liaison in Hong Kong. A foreign company that has a representative office must obtain a business registration certificate from the Inland Revenue Department within one month from the establishment of its office.

Partnership: A general partnership is established by operation of law when two or more people carry on a business in common to make a profit. Every partner in a company or firm is jointly liable with other partners for all the debts and obligations of the business incurred as long as the act is done in the partnership business. A partnership must obtain a business registration certificate from the Inland Revenue Department, which will state the names of all partners of the business as well as the trading name of the partnership. Given the potential personal liability consequences, founders must be especially careful to avoid their activities being considered a partnership at the pre-incorporation stage.

Hong Kong also has a limited liability partnership structure, but this is typically used in relation to investment funds.

Sole proprietorship: Businesses can be owned and operated by an individual in sole proprietorship. There is no separation of liability between the business and its owner. A sole proprietor must obtain a business registration certificate from the Inland Revenue Department, which will state the name of the sole proprietor as well as the trading name of the business. Given the potential personal liability consequences, sole proprietorship is normally only used at a very early stage of the business.

Pádraig Walsh

* This article is an expanded version of our contribution to the iTech Law global publication “Startup Legal Playbook”, which can be accessed on this link.

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Pádraig Walsh

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Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication. This article was last updated on 06 February 2024.