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How to Start a Business in Hong Kong

Starting Up in Business. How to Start a Business in Hong Kong

This article aims to help you understand some of the many things you need to think about when you are starting and running a low-tax business. Our company is designed to provide information and guidance in starting and developing foreign business within the Hong Kong. Allow us to help you establish your company and get it running, to select the best business for incorporation, or to register your company with the Hong Kong Companies Registrar. Company formations usually completed in 7-10 working days by delivering duly signed incorporation documents to the Hong Kong Companies Registry. We supply expert advice in navigating Hong Kong legal and business systems helping you set up in Hong Kong, Cyprus, British Virgin Islands Ireland, Belize, Nevis, Panama and in Gibraltar, etc.

If you have an idea for a business, we can also assist you in start-up your new business directly in Hong Kong from the ground up. In Hong Kong, you must register your business, which we can do for you. Kaizen also offers a host of additional offshore administrative services, including: nominee directors and shareholders, invoicing, re-invoicing, handling of letters of credit and all related commercial documentation. Registration of P. O. Box, telephone and mail forwarding, accounting and bookkeeping services.


HONG KONG COMPANY FORMATION. INCORPORATE OFFSHORE COMPANY IN HONG KONG Hong Kong became a Special Administrative Region of the People's Republic of China with effect from 1 July 1997. Hong Kong has inherited the best legal system from the United Kingdom. Low tax, an excellent regulatory framework, the rule of law upheld by an independent judiciary and also strong anti-corruption enforcement are all important factors in drawing international business to Hong Kong. As at June 1, 2000, more than 850 international corporations had established regional headquarters in Hong Kong, while more than 2,100 had set up regional offices, a 20% increase over the preceding year. You can incorporate Hong Kong Private Company Limited by Shares or Limited by Guarantee. Partnership and Limited Partnership are also available. In addition, a foreign company incorporated outside Hong Kong can be registered under Part XI of the Companies Ordinance as a branch (non-Hong Kong Company). We recommend reviewing this site in its entirety, so that you are knowledgeable of Hong Kong jurisdiction and the powers granted to HK companies. We will guide you through the process of registering your company in Hong Kong and establishing your registered identity. We will express mail your corporate documents to the mailing address you specify in your incorporation order. If you want to become familiar with the description and the contents of Hong Kong company formation packages, offered by Kaizen and to find above, what kind of service is included in this or that Hong Kong companies incorporation package, to get an idea about the price of annual renewal of the service, and about the general legal requirements to the company registration within Hong Kong,


Our aim is to establish a close working relationship with our clients and, because of this, all new clients are provided with an initial consultation with no cost or commitment, which will enable them to evaluate the nature and scope of their specific requirements. We provide everything you need to easily and affordably incorporate your business in Hong Kong. Kaizen provides complete and confidential Hong Kong corporate management services. Included are wide ranges of financial and administrative services to individuals and corporate entities, as a base for their international and local business activities in Hong Kong. Our mission is to provide high quality services to our clients over the long-term at competitive fees. You will find that we are able to render certain additional services exceedingly valuable when the time factor is of special importance. Kaizen offers the following services:


  • Incorporation of Hong Kong and other onshore/offshore companies and structures
  • Full corporate management services
  • Registered office, business office, mail redirection and business centre (available in selected locations only)
  • Accounting services
  • Re-invoicing services
  • Asset protection and preservation advisory services
  • Business establishment services
  • Nominee shareholders, directors and secretaries
  • Preparation and submission of statutory returns
  • Preparation of resolutions
  • Deregistration
  • Liquidation


Please pay careful attention to the following instructions if you plan to incorporate a private company limited by shares or guarantee company through Kaizen. If you are interested in having Kaizen provide nominee directors, nominee shareholders, bank account signatories, administrative or clerical services, or grant general power of attorney for the proposed company, please send an email to enquiries@bycpa.com or call us at +852 2341 1444.


We recommend reviewing this site in its entirety, so that you are knowledgeable of the Hong Kong jurisdiction and the powers granted to Hong Kong companies. Your reasons for incorporating in Hong Kong cannot be determined by Kaizen, although we can refer you to the appropriate professionals for business planning, legal or tax advice. You should know who your shareholder(s), director(s) and officer(s) are, the overall structure and organization of your company, and you must confirm agreement by all parties involved before you proceed with the incorporation.


Wiring instructions will be provided separately upon application. The total amount due, including all government fees, must be paid in advance. Kaizen will not incorporate your company and cannot release company documentation (including the Memorandum and Articles of Association, company seal, share certificates, etc.), or take further action on behalf of the company, until it has confirmation of your payment. Our Pricing Schedule is made readily available on this site.


We will express mail your corporate documents to the mailing address you specify in your incorporation order. If everything proceeds as planned, you will have all corporate documents within seven business days of your incorporation request. Your possession of these documents finalizes the incorporation process and grants you the right to use the powers of the company as provided for under Hong Kong law. If Kaizen is serving as Director, we will retain the original documents and company seal, and send you a copy of the memorandum and articles of association.
Please note ?The prices payable for the items that you order are clearly set out in the web site. There will be no contract of any kind between you and us unless and until we receive payment from you. We act as your agent in the incorporation of offshore companies. We are not able to guarantee that any such filing will be acceptable to Companies Registrar, nor are there any contractual obligation upon us to do so. If Companies Registrar rejects incorporation or other filing, we will credit your account with a full refund and the contract between us will be made void. Companies Registrar does not offer a cancellation facility for the incorporation of companies or the filing of documents. We will be unable to cancel any such submission on your behalf and will not refund any payment you have made. All prices shown at Kaizen Web Site are in US Dollars. We can accept payment in Hong Kong Dollars, UK Pounds Sterling, US Dollars, Euros, Australian Dollars and Canadian Dollars, Japanese Yen.


HONG KONG TYPES OF COMPANY


In Hong Kong businesses normally trade as either limited companies, limited partnerships or sole proprietorships. Being a common law jurisdiction the concept of a trust is readily understood and widely used. The tight secrecy, minimal corporate disclosure and loose administrative requirements which characterize some island offshore common law jurisdictions and make these territories attractive locations in which to base commercial operations have no counterpart in Hong Kong, whose company and trust law are virtually identical to their United Kingdom equivalents. Private Company Limited by Shares. Corporate entities are governed by the provisions of the Hong Kong Companies Ordinance 1984 which brought the territory's company law into line with United Kingdom company law. Their key features are as follows:


Hong Kong company limited by shares. There is no minimum authorized or issued share capital requirement. Shares of no par value and bearer shares are not permitted. Shares can be issued at a premium or discount (if sanctioned by the court). A company may purchase its own shares out of distributable profits. Nominee shareholders, directors and secretary are permitted. The minimum number of directors is one; corporate directors are permitted (unless the company is a public company). The articles can provide that the directors' liability for the company be unlimited. Every company must have a secretary which can be an individual or a corporate body, but must be resident in Hong Kong. Meetings can be held anywhere in the world. Accounts must be prepared, filed and audited. The migration and re-domiciliation of corporate entities to or from a foreign jurisdiction is not permitted. Annual returns must be filed. The Articles of Association of a private company must restrict the right to transfer shares, must limit the number of members to fifty (excluding employees), must prohibits any invitation to the public to subscribe for any shares or debentures of the company.


Branch of Overseas Company. Overseas companies starting businesses in Hong Kong can form a private company limited by shares, as above, or can simply establish a branch (Non-Hong Kong Company, formerly known as Overseas Company). When a company incorporated outside Hong Kong establishes a place of business in Hong Kong, it must lodge the following documents with the Registrar of Companies: a Certified copy of its charter or memorandum and articles of association. Particulars of directors and the company secretary. Name and address of a resident of Hong Kong authorised to accept notices on behalf of the company. Power of attorney or other document appointing a Hong Kong representative. Address of principal place of business in Hong Kong and addresses of registered office and principal place of business in the company's country of incorporation; and a Certified copy of the certificate of incorporation.
A branch office is relatively easy to set up but is open to greater potential liability than a limited company since it is not treated in Hong Kong law as a separate legal entity. In some countries, branches have tax advantages as against limited companies, for a foreign parent, but not in Hong Kong: the territorial basis of taxation means that the branch will be taxed exactly as a limited company, on Hong Kong-source income.
Limited Partnership. The law is contained in the Limited Partnership Ordinance. Limited partnerships have the following characteristics: the maximum number of partners permitted by law is 20. Limited partnerships consist of general and limited partners; there must be at least one general partner whose liability for the firms debts is unlimited; the remaining partners are limited partners whose liability is limited to the amount of their unpaid share capital. A limited partner cannot reduce or take out his share capital whilst the partnership continues in existence and is not allowed to take an active part in the management of the partnership nor bind the same vis a vis third parties in default of which provision he assumes the liability of a general partner. Limited partnerships must be registered at the Companies Registry under the Limited Partnership Ordinance in default of which they are deemed to be general partnerships with unlimited liability for each and every partner. All partnerships are required to obtain a business license under the provisions of the Business Registration Ordinance which license annually costs US$300 per annum.


WHY INCORPORATE IN HONG KONG?


Hong Kong is a low tax jurisdiction with companies paying tax at the rate of 17.5% on local profits. The Hong Kong Government is keen to promote Hong Kong as a regional centre for Asia and offers an exemption to tax for companies registered in Hong Kong but transacting its business outside of Hong Kong. The effect of the exemption is that qualifying companies can operate tax-free. Please note we are experienced in obtaining this exemption should your business model qualify. In summary Hong Kong is an established and highly regarded jurisdiction, has not been blacklisted by any regulatory authority, benefits from low taxes and has developed into an efficient base for doing business in China and throughout Asia. Most importantly businesses can operate in Hong Kong and enjoy the tax benefits associated with most tax havens without creating the negative image commonly associated with being based in a tax haven.


Corporate and trust laws are virtually identical to the corporate and trust laws of the United Kingdom and most business activities are carried out behind the vehicles of limited companies, limited partnerships and sole proprietorships. Being a common law jurisdiction trusts are also widely used and understood. The chief factors driving Hong Kong's economic success are a combination of its non-discriminatory low tax regime under which only income derived from or arising in the jurisdiction is taxable and its geographical proximity and historical entrepot role for western trade with and investment into China.


While Hong Kong has a large and vibrant local business community, with over 470,000 locally registered companies, it is also home to the largest community of multinational firms in Asia. This is in part due to the territory's colonial roots, which have for the past 150 years made it the natural hub in Asia for British companies, and, in part, to its consistent and longstanding reputation for openness, simplicity of operation and institutional familiarity. As a result, more than 2,000 multinational companies maintain regional offices or headquarters in the territory. Hong Kong is one of the world's leading centres for overseas firms. Over 200 of the Fortune 500 companies have a presence in the territory. The American Chamber of Commerce in Hong Kong, with more than 1,100 corporate members, is the largest American Chamber outside of North America. The Japanese Chamber in Hong Kong reports that more than 2,000 Japanese companies operate from the territory.


Hong Kong is a major transhipment and re-export centre, activities which in turn fuel strong demand for trade support services such as banking and financing. In the wake of the Asian financial crisis new laws have been passed which encourage financial transparency such as the Organized and Serious Crimes (Amendment) Ordinance, which came into operation in June 2000. The law requires money changers and remittance agents to follow anti-money laundering measures such as customer identification and keeping transaction records for transactions over HK$20,000.
It has helped to prevent criminals from using non-bank financial businesses as conduits for money laundering. Hong Kong is the regional headquarters of over 714 multinational companies attracted by a combination of the territory's English common law legal system, its low tax regime and its historical trading links and unique access to the People Republic of China, the world fastest growing economy and biggest potential market. In 2001 alone Hong Kong trade with the mainland totalled US$167 billion.


Hong Kong have no IBC, but only limited companies: private and public limited companies. Public limited companies are mainly used for listing purpose, but can be changed from a private limited company by amending its memorandum and articles of association subsequently. Hong Kong assess taxes only on those profits arrive in or derived from Hong Kong, but not on a Hong Kong company's worldwide income, and Hong Kong have only one kind of tax for a corporation, i.e. Profits Tax which is currently at 17.5% on its assessable profits, not based on its income.


HONG KONG 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. The principle itself is very clear but its application in particular cases can be, at times, contentious. To clarify the operation of the principle, we have prepared this simple guide on the territorial source principle of taxation. It gives a brief explanation of how the principle operates and provides simple examples for illustrative purposes of the tests applied to different types of businesses. Hong Kong's basis of taxation on profits from businesses. Hong Kong adopts a territorial basis for taxing profits derived from a trade, profession, or business carried on in Hong Kong. Profits Tax is only charged on profits, which arise in or are derived from Hong Kong. In simple terms this means that a person who carries on a business in Hong Kong but derives profits from another place is not required to pay tax in Hong Kong on those profits. Many places levy tax on a different basis. Unlike Hong Kong, they tax the worldwide profits of a business, including profits derived from an offshore source.


Pre-conditions for liability to Profits Tax. Under the Inland Revenue Ordinance, a person is chargeable to Profits Tax under the following conditions: he carries on a trade, profession or business in Hong Kong. The trade, profession or business derives profits; and the profits arise in or are derived from Hong Kong. The first two conditions are straightforward. Some elaboration is necessary for the third. Let us have a brief look at the basic principles for determining the source of profits. Basic principles for determining the source of profits. The Courts have over the years considered the subject of the source of profits. The following principles have emerged from authoritative court decisions:
Matter of fact. The question of locality of profits is a hard, practical matter of fact. No universal rule can apply to every scenario. Whether profits arise in or are derived from Hong Kong depends on the nature of the profits and of the transactions, which give rise to such profits.
The operations test. The broad guiding principle is that one looks to see what the taxpayer has done to earn the profits in question and where he has done it. In other words, the proper approach is to identify the operations, which produced the relevant profits and ascertain where those operations took place.


Gross profits from transactions. The distinction between Hong Kong profits and offshore profits is made by reference to the gross profits arising from individual transactions. Only those business activities, which directly produce the gross profits, are taken into consideration in determining the source of profits. Activities such as general administration are normally not relevant.
Place where decision is made. The place where the day-to-day investment/business decisions take place is only one factor, which has to be taken into account in determining the source of profits. It is not usually the deciding factor.


Business presence overseas. A business may maintain a presence overseas, which earns profits outside Hong Kong, but the absence of a business presence overseas does not, of itself, mean that all the profits of a Hong Kong business invariably arise in or are derived from Hong Kong. However, in the vast majority of cases where the principal place of business is located in Hong Kong and there is no business presence overseas, profits earned by that business are likely to be chargeable to Profits Tax in Hong Kong.


Profits of trading firms. Contracts for purchase and sale. The factor that determines the locality of profits from trading in goods and commodities is generally the place where the contracts for purchase and sale are effected. "Effected" does not only mean that the contracts are legally executed. It also covers the negotiation, conclusion and execution of the terms of the contracts.


Totality of facts. Following the recent Court of Appeal judgement (Magna Industrial Co. Ltd v CIR) it is now clear that a wider approach is necessary. The proper way is to look at the totality of facts. In other words, all relevant facts have to be considered, not simply the purchase and sale of the goods.


Irrelevant facts. Facts not directly related to the trading activities are considered irrelevant in determining the locality of profits. For example, renting office premises, recruiting general staff, setting up office, etc.


General practice. Where the contracts of purchase and sale are effected in Hong Kong, the profits are taxable here. Where the contracts of purchase and sale are effected outside Hong Kong, the profits are not taxable here. Where either the contract of purchase or the contract of sale is effected in Hong Kong, the initial presumption is that the profits are taxable here. However, the totality of facts will have to be examined to determine the source of profits. Where the sale is made to a Hong Kong customer, the sale contract will usually be taken as having been effected in Hong Kong. Where the effecting of the purchase and sale contracts does not require travelling outside Hong Kong but is carried out in Hong Kong by use of telephone, or other electronic means including the Internet, the contracts will be considered as having been effected in Hong Kong. Trading profits are regarded as being either wholly taxable or wholly non-taxable here. Apportionment is not appropriate.
Sale or purchase commissions. The place where service is performed. When a business earns commission by securing buyers for products or by securing suppliers of products required by customers, the activity which gives rise to the commission income is the arrangement of the business to be transacted between the principals. The source of the income is the place where the activities of the commission agent are performed. If such activities are performed in Hong Kong, the income has a source in Hong Kong.


Factors such as the place where the principals are located, how they are identified by the commission agent, and the place where incidental activities are performed prior or subsequent to the earning of the commission are not generally relevant in determining the source of the commission income. In the event that the commission income is earned by a person carrying on a business in Hong Kong but the activities which give rise to the commission are performed entirely outside Hong Kong, the commission is not taxable in Hong Kong.


Advance rulings. It is apparent from the foregoing that it may not always be easy to determine with certainty the source of the profits of a business. To provide certainty in the operation of the territorial source principle, the Inland Revenue Department will, commencing in April 1998, provide advance rulings on the source of profits of a business for Profits Tax purposes. The service is subject to the payment of a fee. Full particulars will need to be provided before an advance ruling can be given. Please write to the Assistant Commissioner, Unit One, Inland Revenue Department, 14/F, Revenue Tower, 5 Gloucester Road, Hong Kong for further details of the procedures for seeking advance rulings on source matters.


One of the major advantages of utilising a Hong Kong company is that there is no immediate suggestion that the company is a tax avoidance vehicle as Hong Kong is major trading entity in its own right and the vast majority of the 50,000 Hong Kong companies incorporated annually are local trading companies doing real business in the region.


HONG KONG PROFIT TAX

With effect from April 1, 2003, the rate of taxation for company profits is presently 17.5%. Companies are liable to Profit Tax based on the profit derived from a source in Hong Kong during the actual year of assessment ending March 31 or on the results of the accounting year ending in that year of assessment. A branch of a foreign corporation is liable to Profits Tax in the same way and at the same rate as a Hong Kong Company. If a company engaged in re- invoicing negotiate and concludes contracts outside Hong Kong but does not accept orders there, any profits which arise have an off-shore source and are not normally subject to Profits Tax. Letters of Credit will be received to the Hong Kong Company from buyers in another country and the L/C will then be transferred or back-to-back to suppliers in Hong Kong or South East Asia. The Hong Kong Company will earn a price differential.

HONG KONG COMPANY FORMATIONS

Kaizen is your one stop solution for incorporating and managing businesses in Hong Kong, China and throughout Asia. In over of 6 years experience providing advice to international clients we are well positioned to incorporate and manage your business efficiently and cost effectively. Our services can be tailored as required and confidentiality is assured.


We offer a choice of Hong Kong (HK) company formation packages to suit your practice requirements. We do not cut costs on expertise and quality but still maintain a cost effective pricing structure. We process all Hong Kong companies formation orders within 24 hours from the time we receive payment (please allow for extra time on weekends). We offer a choice of Hong Kong company incorporation packages to suit your practice requirements. In Hong Kong, company can be divided into "company limited by shares", "company limited by guarantee", and "unlimited company". Each of them has its own advantages and disadvantage. Our professional and experienced staffs can help you to set-up your business in Hong Kong.
Our services include: formation of Hong Kong limited companies. Formation of unlimited companies. Acts as Hong Kong Company Nominee Secretary. Provide Accounting Services. Provide Taxation Services. Provide Auditing Services. Acts as Business Consultant. Deregistration. Formal liquidation. Our professional and experienced staffs can provide company secretary services to your company. It includes: acting as company nominee secretary of your company. Assisting and advising on establishment of new companies in H.K / Overseas. Organizing and witnessing required meeting of directors and shareholders alongside preparation of minutes. Preparing and filing annual returns. Alternation of director or secretary. Transfer of share. Changing company name. Changing of company Hong Kong registered address. Share allotment. Applying for Deregistration of Limited Company.


Hong Kong company formation procedures. A client shall fill in and submit to us the Formation Form for providing the details of proposed company name, shareholders, directors, secretary and registered office. Then we shall check and confirm if it is registrable within two to three working days. We shall prepare all the documents for incorporating a company, including Memorandum and Articles of Association, appointment of first directors and secretary, notice of registered office and application for business registration certificate. The client will sign all the documents (but not dating any) and return the same back to us. We shall arrange the filing of the documents to the Companies Registry and apply for business registration certificate. After obtaining the business registration certificate from the Inland Revenue Department, the documents (including chops and certified true copies) will be sent to the client, and then the company can be used. The procedures are usually completed within two weeks (excluding transit time of documents).


On 2 July 2003, the Legislative Council of the Hong Kong Special Administrative Region of the People's Republic of China ("Hong Kong") passed the Companies (Amendment) Ordinance 2003 ("Amendment Ordinance"), which is an ordinance to amend the Companies Ordinance of Hong Kong2. The Amendment Ordinance came into effect on 13 February 2004. The amendments include, among other matters, enhanced shareholders' rights, changes in requirements regarding directors and shareholders, and procedural improvements. The purpose of this article is to outline briefly several of the most important elements of the Amendment Ordinance, discuss the impact of the Amendment Ordinance particularly in relation to the Closer Economic Partnership Arrangement between Hong Kong and the Peoples Republic of China ("CEPA") and consider several outstanding issues not addressed in the Amendment Ordinance.


The Amendment Ordinance represents approximately three years of somewhat tedious and often contentious work by the Standing Committee on Company Law Reform ("SCCLR"). It seeks in its 153 pages to improve the Companies Ordinance, which governs matters related to Hong Kong companies.
Directors: The Amendment Ordinance permits a private company to have only one director5. Where a private company has only one director, that director cannot also be the secretary of the company. It also provides a statutory definition of "Shadow Director".
Members (shareholders): The Amendment Ordinance permits a private company to have only one member.
Insurance for officers and auditors: The Amendment Ordinance permits a company to purchase and maintain insurance for any officer or auditor of the company against any liability to the company in respect of any negligence, default, breach of duty or breach of trust (except for fraud) or incurred in defending proceedings, whether criminal or civil, in respect of negligence, default, breach of duty or trust (including fraud) of which such officer may be guilty in relation to the company or related company.


Shareholders' rights: The Amendment Ordinance grants every member of a company a personal right to sue to enforce the terms of the memorandum and articles of association"'. A director may be removed by an ordinary resolution of members (which may be passed by a simple majority vote) instead of a special resolution (which requires a three-fourth majority vote). The threshold for a members proposal is reduced from "holders of not less than 5% of the voting rights or not less than 100 shareholders" to "2.5% of the voting rights or not less than 50 members".


Statutory declarations or affidavits: The Amendment Ordinance replaces the filing requirements of statutory declarations or affidavits in respect of certain matters with simple written statements 13.


The Amendment Ordinance, to a large extent, reflected the SCCLR's desire to relax certain corporate formalities for private companies". However, equal importance was given to ensuring that companies would continue to conduct their business in accordance with international standards of corporate governance and that Hong Kong would continue to be perceived as a credible jurisdiction by practitioners and the international business community. For many reasons, including an international quality financial infrastructure, free economy and relatively low and simple system of corporate taxation, Hong Kong has been positioned in the offshore world as a credible jurisdiction in which to form a company. However, prior to the implementation of the Amendment Ordinance, several requirements imposed upon Hong Kong companies have deterred some offshore practitioners from actively using the jurisdiction for clients' international activities. The decision to allow Hong Kong companies to be formed with only one member and one director is a major step towards positioning Hong Kong in a more competitive posture vis-a-vis other jurisdictions, most notably those in the Caribbean.


The issue of bearer shares was also considered. Although relaxing the requirement of members to only one, the drafters of the Amendment Ordinance were wary of suggestions that Hong Kong companies should also be allowed to issue bearer shares and ultimately rejected such proposals'9. Given the attention afforded to the issuance of bearer shares by the Financial Action Task Force on Money Laundering, among others, this decision should prove beneficial to Hong Kong.


The one member (one director) Hong Kong company that is prohibited from issuing bearer shares should prove more attractive to offshore practitioners forming a wide variety of vehicles for their clients, particularly international trading companies. In addition, the impact of the Amendment Ordinance in terms of offshore practitioners using Hong Kong companies more for their clients is further strengthened by CEPA. The objective of CEPA is to strengthen trade and investment cooperation between the People s Republic of China ("China") and Hong Kong.


The benefits of CEPA only apply to Hong Kong companies. The rapid economic growth of China has attracted the attention of the world and businesses engaged in international activities are keen to begin doing business in or with China. For international businesses willing to form a Hong Kong company, CEPA provides an opportunity to access the World Trade Organisation ("WTO") trade liberalisation conditions to which China has agreed several years in advance of the implementation of those WTO rules.


As such, it is likely that the Amendment Ordinance's relaxation of requirements for members and directors, among other provisions, coupled with CEPA will result in offshore practitioners seeking to use Hong Kong companies to do business on a global scale as well as in or with China. Although the Amendment Ordinance is welcomed legislation, many practitioners believe several outstanding issues still need to be addressed. This includes the fact that Hong Kong companies must keep accounting records, and a profit and loss statement and balance sheet must be laid before the company in an annual general meeting together with the auditors report The audit requirement imposes a fairly significant annual cost on a Hong Kong company. Many practitioners have argued that private companies generating below a certain level of revenues or assets should be exempted from the audit requirement. This is common in many other jurisdictions. However, there are at least three reasons why this exemption was rejected.


Firstly, some practitioners, albeit probably a minority, believe that the audit requirement, as opposed to a voluntary system, lends additional credibility to Hong Kong as a jurisdiction in which to form a company. Although this argument has some merit for Hong Kong as a jurisdiction, it does little for the everyday business concerns related to the ongoing maintenance costs of private companies.

Secondly, the accounting profession is quite influential in Hong Kong. If the exemption was granted, then the accounting profession would stand to lose significant revenue. It is generally believed that the Hong Kong Society of Accountants, via its member in the Legislative Council and other avenues, was very active in ensuring that an exemption was not granted.


Given the political influence of both the Inland Revenue Department and the Hong Kong Society of Accountants, it is unlikely that an exemption for the annual audit of small, private companies will be granted in the near future. Hong Kong allows for the use of corporate directors for private companies. Prior to the Amendment Ordinance, Hong Kong companies were required to have two directors, which often resulted in the promoter of a company being appointed as one director by the subscriber while a corporate "nominee" director was appointed to fulfil the other required directorship. Simply stated, it is not unusual in Hong Kong to see many small, private companies with at least one corporate director.


Some practitioners believe corporate directors should be eliminated as they contribute to a lack of transparency and are often misused. These practitioners believe the requirement of individual directors, rather than corporate directors, would lend additional credibility to Hong Kong as a jurisdiction. However, in addition to the audit function, it is fairly common for accountants to provide corporate directors for clients. Notwithstanding the obvious conflict of interest, which occasionally becomes a problem particularly when tax issues arise with the Inland Revenue Department, the accounting profession apparently has taken a stand against the elimination of corporate directors. With the requirement of only one director for Hong Kong companies coming into effect under the Amendment Ordinance, it is likely that corporate directors may be prohibited in the near future as their usefulness, arguably, would have largely been eliminated. Having said that, the accounting professions influence in such matters may delay or, for that matter, completely derail any future changes in this area.


Hong Kong companies must have a resident company secretary. The company secretary, among other services, maintains the statutory records of the company, prepares minutes and resolutions and usually provides the registered office address. In addition, the company secretary assists the company with filing annual returns to the Companies Registry. Some practitioners believe the office of the company secretary, particularly the requirement of residency in Hong Kong, imposes unnecessary costs on Hong Kong private companies. This is particularly true when one considers the costs of the business registration license, which is required, and the fact there is no requirement of a company secretary for companies formed in other jurisdictions with which Hong Kong competes, particularly the Caribbean. However, many practitioners believe the requirements of filing annual returns and maintaining the statutory records of the company necessitate the office of the company secretary. In addition, it is fairly common for accountants to provide the office of company secretary for Hong Kong companies.


Given the continued obligations of filing annual returns and the influence of the accounting profession, it is unlikely the requirement of a resident company secretary will be eliminated in the future. The Amendment Ordinance has been well-received in Hong Kong and has provided some important improvements in the ever-competitive world of company formation. Depending upon one's viewpoint, there remain several areas where improvements could be implemented. Given the pace of development of such laws in the past and the influence of certain vested interests in Hong Kong, it would be unreasonable to expect such changes in the near future. In any event, the Amendment Ordinance should serve Hong Kong well in the coming years.


Memorandum & Articles of Association. The memorandum and articles are the primary legal document of a company. Memorandum contains the name of the company, authorized share capital, initial members and object clause (if any). Articles are a set of internal regulations that governs the day to day operations of the company. Both memorandum and articles have to be filed to Companies Registry at the time of incorporation or if there is any changes thereafter. At least two subscribers are required in the memorandum and each of the subscribers must subscribe to at least one share in the company. For a new incorporation it is necessary to file the Memorandum & Articles of Association with the Registrar of Companies for formal clearance of the name and thereafter the Registrar issues a Certificate of Incorporation and from that date the Company may commence business. The complete process takes approximately 10 days. We also have a stock of clean shelf corporations available for immediate use. Where it is necessary to use particular name which cannot be approved, it can be registered as a Branch, or Business Trading as, without "Limited". The Memorandum of Association must be in English and contain the company's name, the objects for which the company is to be incorporated, the fact that the liability of its members is limited and the share capital and type of shares with which it is to be registered. The Articles of Association will reflect many of the administrative regulations of the company, in particular, the way in which the Members exercise their rights, the number of Directors, their powers and the way in which shares may be transferred.


Share Capital. Shares must be expressed in a fixed amount. "No par value" or "bearer" shares are not permitted. While it is usual for the share capital to be expressed in Hong Kong dollars, it can be expressed in any currency. A multiple currency share capital is also permissible. The amount of share capital must be stated together with the par value of the shares, e.g. ordinary (common), preferred, non-voting, voting, etc. Capitalization in currencies other than Hong Kong dollars is permitted. Unless otherwise instructed, we will organize the company with 10,000 ordinary shares of HK$1.00 each, of which 1 ordinary shares will be issued.


Companies are required to maintain a registered office in Hong Kong and a notice of situation of registered office must be filed with the Registrar of Companies within 14 days from the date of incorporation. The original Certificate of Incorporation, Annual Business Registration Certificate, the Corporate Seal must be kept in the Registered Office. A company must apply for Business Registration within one month of incorporation and maintain its registration annually with the required fees. Renewal of the Business Registration Certificate will be requested around two months before expiry and a penalty will be levied in the event of late payment. When payment is long overdue the Inland Revenue will begin legal action against the company.


Annual General Meeting of a company held once a year, the ordinary business of which concerns Directors, Accounts, Auditors and dividend, then an annual return made by a company and filed at the Companies Registry, explaining details of Capital, Charges, Directors, Secretary, Members and place of statutory records. If fail to file the annual return, the maximum penalty fee is HK$3,480. An annual general meeting (AGM) must be held once in every calendar year and not more than 15 months after the last preceding AGM. However, a company need not hold its first AGM until 18 months of its incorporation. A company can dispense with the holding of AGM if everything that is required or intended to be done at the meeting is done by resolutions.


Accounts & Auditors. Every company is required to appoint an auditor each year at its AGM. An auditor must be qualified by virtue of the Hong Kong Professional Accountants Ordinance and completely independent of the company. In case of private company, its audited accounts must be laid before its AGM not more than nine months from its financial year-end. The company must compile audited accounts annually who prepared by a registered Hong Kong auditor. The first audited accounts must be prepared up to date within 18 months after incorporation. Kaizen is able to arrange for filing "Nil" Profits Tax Return and "Nil" Employers Return if the client's company has not commenced its business in Hong Kong.



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