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When your company is seeking international locations for growth, Hong Kong may well be near the top of your list. However, establishing a presence there can be a complicated endeavor.
That’s why we’ve created this comprehensive guide to company formation. We’ll walk you through the process of expanding your company to Hong Kong, outline some challenges you may face, and provide a few essential tips for getting started.
Why do business in Hong Kong?
Hong Kong is a highly attractive place for companies looking to grow internationally. The World Bank has named Hong Kong third in its rankings of international business friendliness, just behind New Zealand and Singapore. Let’s take a closer look at some of Hong Kong’s many business advantages.
1. Booming economy
Over the past several years, Hong Kong’s economic growth rate has generally hovered between 2 percent and 6 percent. In 2020, the gross domestic product (GDP) was the equivalent of about US$346 billion, making Hong Kong’s economy one of the top 40 largest worldwide.
Switzerland’s prestigious International Institute for Management Development has also ranked Hong Kong as the seventh most competitive economy in the world and the second most competitive in all of Asia.
2. Location and access
Hong Kong’s enviable location on China’s southeastern coast gives it unparalleled access to the immense mainland Chinese markets. Hong Kong’s impressive transit infrastructure, including a world-class airport and high-speed trains, makes business travel to and from mainland China practical and convenient.
Hong Kong’s location also gives companies operating in Hong Kong unique access to other large nearby Asian markets, such as those in India, Singapore, and Japan.
3. Free enterprise
Hong Kong has long been renowned internationally for its free markets and free trade. For 25 years, the Index of Economic Freedom ranked Hong Kong as the freest economy in the world.
What qualities make Hong Kong’s economy so free? Its extremely low taxes, trade freedoms, low tariffs, and unrestricted investment and currency exchange combine to boost Hong Kong’s reputation in this area.
4. Skilled and educated workforce
Hong Kong’s workforce is highly trained and well educated. About three-quarters of Hong Kong’s total labor force has completed higher education.
Many of Hong Kong’s students go abroad for their post-secondary studies — that is, their education after high school. Its top students attend prestigious universities around the world. Those who study domestically have an excellent university system to support them, and high-quality technical and vocational training are also available.
5. Lucrative trade deals
Hong Kong has trade deals that give companies operating there preferential treatment in international business transactions.
For example, Hong Kong participates in the Closer Economic Partnership Agreement (CEPA) with mainland China and an additional free trade agreement with the Association of Southeast Asian Nations (ASEAN). These two critical agreements provide unique access to the enormous Chinese market and other markets throughout the region.
Challenges of registering your company in Hong Kong
When you’re considering Hong Kong company registration, you’ll want to think carefully about the challenges you may encounter. That way, you can be better informed and prepared to tackle them successfully. Here are a few of those challenges.
1. Working with banks
Registering your company in Hong Kong requires opening a bank account and, often, depositing share capital. However, international companies often face obstacles in partnering with banking institutions. Hong Kong’s banks are highly selective in their dealings with international clients.
Opening a bank account is often a time-intensive process with paperwork and other bureaucratic requirements to complete. For instance, Hong Kong’s laws require directors, shareholders, and signatories on bank accounts to go to Hong Kong for in-person bank interviews.
Additionally, if your company requires a loan for establishment purposes, you will likely not be able to obtain it locally. Most Hong Kong banks will not loan money to anyone who does not already own property there.
2. Planning physical properties
Planning physical properties so your company can register an address in Hong Kong is often challenging. It requires significant monetary and time expenditures.
Finding a physical space to rent or buy may be difficult because population density is one of the highest in the world. Hong Kong ranks fourth in this metric, behind only Macao, Monaco, and Singapore.
With such high numbers of residents clustered in a relatively small land area, real estate comes at a premium. Even Hong Kong’s famous high-rises can only do so much to create more space. Prices are high, and space can be challenging to come by. Prime rent in Hong Kong’s most desirable areas is the equivalent of about US$255.50 per square foot per year.
Additionally, acquiring electricity for a new property poses a significant hurdle for many companies. To connect to the power grid, your company will need to submit a written application, and the time estimation before the power is turned on may be well over a month.
3. Time-consuming and expensive establishment requirements
The requirements for international company registration in Hong Kong are complex and can be challenging to navigate. The paperwork and fees necessary to obtain registration certificates and licenses can throw roadblocks into your company’s path toward full operations.
You may need to work with the Hong Kong Companies Registry (CR), the Inland Revenue Department (IRD), and the Mandatory Provident Fund (MPF). All of these entities will require separate applications and operate on their own timelines.
How to register a company in Hong Kong
Once you have determined if the many benefits of growing your company in Hong Kong outweigh the risks, it’s time to formally establish your organization in the country.
The first step is to determine the type of company you would like to register. Hong Kong allows international companies to take a few different forms. These are the most common:
- Limited company: A limited company is a popular choice for international businesses. It must have at least one director and one shareholder, with a maximum of 50 shareholders. It may be public or private, and it may be limited by shares or limited by guarantees. The liability of each shareholder is limited to the unpaid amount of that person’s shares. In Hong Kong, a limited company must register with the CR and the IRD’s Business Registration Office.
- Sole proprietorship: As its name suggests, a sole proprietorship involves a single owner. That person is not legally distinct from the company, so personal assets receive no protection from liability for losses and debts. A sole proprietorship is often useful for entrepreneurs but has limited utility for larger organizations.
- Partnership: A partnership is distinctive because it features at least two members. It can be limited, with limited partners assuming liability only for their own contributed capital. It can also be general, with partners assuming joint liability. A partnership agreement among all members is necessary, and the partnership must apply for a business registration certificate.
- Branch: Under Hong Kong law, a branch is an extension of the parent company, rather than a separate company. The parent company assumes all liability for the branch’s debts and losses. A company wishing to establish a branch must register with the CR and receive a certificate of registration as an international business.
- Representative office: Like a branch, a representative office represents an international company in Hong Kong. It differs from a branch in that it does not generally conduct business in the region. Representative offices generally exist to promote and advertise the company or serve as a point of contact for customers.
Once you have chosen your company structure, you will need to complete these requirements of business formation in Hong Kong:
- Determining and checking availability for your company name
- Naming your directors, shareholders, and company secretary
- Drafting and submitting articles of incorporation
- Submitting an official application form
- Submitting copies of all required company documents, passports, and ID cards
- Applying for business licenses and permits with the appropriate registration department
- Opening a corporate bank account
- Obtaining an appointed auditor with a practicing certificate
- Registering for your MPF scheme
All these steps can take weeks or months to complete. To minimize registration requirements and reduce expenses, your company might partner with a global employment platform like Globalization Partners instead.
Leveraging our platform streamlines the legal, administrative, and HR processes of hiring new international employees. With an established presence in Hong Kong, Globalization Partners allows your company to expedite your operations, save money, and build international teams more efficiently.
Challenges of hiring employees in Hong Kong
Your company will also need to consider the potential hiring challenges it may face in Hong Kong. Here are a few processes that may require concentrated attention.
1. Recruiting and hiring
In recruiting and hiring, you may need to make a few adjustments as you tailor your strategies to Hong Kong. The recruiting techniques you use in your home country may require a few changes, or you may need to research the best places to find qualified candidates.
You may also need to alter the steps of your interviewing and hiring processes. These adjustments might mean drafting formal employment contracts, engaging translation services, or using technology to interview candidates remotely.
2. Drafting employment contracts
Like many countries, Hong Kong does not allow at-will employment. Your company will need to draft and finalize employment contracts for its workers.
Hong Kong laws allow for either verbal or written contracts. However, we recommend putting a strong written contract in place for each employee. Written contracts maximize clarity, reduce misunderstandings, and enable productive, harmonious relationships between your company and your workers. Each agreement should lay out the employee’s job duties, compensation, termination requirements, and benefits.
Contracts in Hong Kong may be written in English, Cantonese, or Mandarin, with most contracts written in English. The contract should also give all monetary amounts in Hong Kong dollars rather than your home country’s currency.
3. Determining expenses and payroll
Remember that Hong Kong is relatively business-friendly, especially in its tax rates. Nevertheless, Hong Kong may present different expenses than the ones you handle in your home country.
Hong Kong does not have payroll taxes, but employers must withhold taxes from each paycheck and pay them into Hong Kong’s Mandatory Provident Fund (MPF). Employers must also contribute directly to this same fund.
For both employers and employees, the minimum required amount is 5 percent of the employee’s salary, and contributions are often larger. The maximum contribution is HK$1,500.
After you establish your company in Hong Kong, you will also need to pay the profit tax, Hong Kong’s version of the corporate income tax. Fortunately, tax rates in Hong Kong are famously low. The profit tax rates for any business carried out by a limited company in Hong Kong are 8.25 percent on profits up to HK$2,000,000 and 16.5 percent on any profits over HK$2,000,000.
Hong Kong law does not require employers to give their employees 13th-month bonuses. However, in practice, many companies provide these bonuses to thank their employees for their hard work. If your company plans to give 13th-month bonuses, be sure to include them in your budget as you calculate your expenses.
4. Complying with Hong Kong’s labor laws
Hong Kong’s labor laws require your company to treat employees fairly and provide them with specific benefits.
Unlike many other countries, Hong Kong does not specify a maximum number of hours employees can work each week. However, its labor laws stipulate that employees must have at least one day off out of every seven. Employees in Hong Kong should also receive paid sick leave and paid time off for Hong Kong’s statutory holidays.
Employees in Hong Kong must also receive annual paid vacation time. This required time off ranges from seven to 14 days per year and depends on how long the employees have worked. In practice, most employers provide at least 14 paid vacation days per year. Many senior executives receive more — often three or four weeks of paid vacation annually.
Hong Kong’s labor laws require a notice period and severance pay when a company wishes to terminate one of its employees. Most employees are generally entitled to receive a one-month termination notice.
If employees have worked for their employers for at least two years, they become entitled to severance pay or a long service payment. They can receive these payments as long as the termination resulted from a layoff or redundancy rather than misconduct.
5. Navigating changes in the law
Recent legal changes have led to uncertainty for international companies. In 2020, the mainland Chinese government implemented a new national security law intended to safeguard against secession, terrorism, and international influence in Hong Kong.
For companies, the new law raised questions about potentially tighter government oversight and restrictions. International investment in Hong Kong plummeted by about 48 percent in response. Companies considering Hong Kong as a place for growth may want to weigh the potential effects on their operations carefully before committing.
Simplify international operations and hiring with Globalization Partners
When your company is ready to start growing in Hong Kong, let Globalization Partners help.
Our comprehensive and fully automated global employment platform enables your company to recruit, hire, onboard, and manage employees with just a few clicks. You can minimize the challenges of international growth and expedite your team building. Our experienced customer service professionals are always here to help resolve complex issues and keep your company compliant with the law.
Download our helpful eBook about international growth mistakes to avoid or request a proposal to learn more about how we can help expand your company to Hong Kong.
