Search Advanced Knowledge Author: David Lawrence Service Area: Company Formation & Corporate Services Date: October 2005 Country: Hong Kong Setting up a Business in Hong Kong SUMMARY OF CONTENTS A. Introduction B. Hong Kong Companies C. Hong Kong Branches of Foreign Companies D. Corporate Services from Deacons E. Taxation, Duties and Fees F. Employment Visas A INTRODUCTION 1 General 1.1 A foreign company wishing to carry on business in the Hong Kong Special Administrative Region ("Hong Kong") may do so by either incorporating a Hong Kong company or registering a branch of that foreign company in Hong Kong. (The process by which a Hong Kong company is set up is the same whether the incorporator is a foreign company, a Hong Kong company, an individual or other legal entity.) The relevant government authority is the Registrar of Companies (the "Registrar"). 1.2 The purpose of this publication is to assist our clients in setting up and maintaining a business in Hong Kong through a Hong Kong (see Part B) or a foreign (see Part C) company. 1.3 Some of the issues which arise in connection with doing business in Hong Kong, such as registration with the taxation authorities and compliance with visa requirements, involve similar considerations whether the business is to be operated as a separate Hong Kong company or as a branch operation. These issues have accordingly been dealt with generally (see Part A, paragraph 3 and Part F respectively). 1.4 Other issues, such as the method of registration of the relevant entity, differ greatly depending on whether the client wishes to incorporate a Hong Kong company or register a branch operation and have been dealt with separately. Accordingly, those readers who are only interested in setting up a Hong Kong company need not refer to Part C and, likewise, those who have decided to set up a branch may disregard Part B. 2 Branch or subsidiary 2.1 The differences between a Hong Kong branch and a Hong Kong subsidiary of a foreign company stem from the fact that, unlike a branch, a subsidiary is an entity which, under Hong Kong law, is entirely separate from its parent. The business activities available to a company in Hong Kong are generally not dependent upon whether the company is locally incorporated and there is generally little practical difference between operating a branch and a subsidiary company in respect of profit computation. The rate of tax levied on profits is the same for local and foreign companies and dividends are not subject to separate taxation in Hong Kong. 2.2 The usual reasons for preferring a subsidiary over a branch include the following: (1) the parent company will not be liable for the debts of its subsidiary; its legal liability will be limited to the amount of any unpaid issued share capital and its potential loss will therefore be limited (in the absence of a guarantee or other security) to the value of any assets it contributes by way of capital to the company (2) only that information which relates to the subsidiary must be filed with the Registrar and kept up to date (3) a subsidiary does not need to file its accounts on the public record whereas in some cases a foreign company will need to (see Part C, paragraph 3.1) (4) the presence of a branch in Hong Kong makes it more likely that the "parent" company would be sued in Hong Kong even in connection with matters unrelated to its business operations there (5) it is usually simpler and more cost effective to set up a Hong Kong company than it is a Hong Kong branch (6) where the constitutional documentation in relation to the "parent" company is not in English or Chinese, this will not require translation if a local company is incorporated, whereas in the case of a branch it will require translation (7) it is not necessary to arrange for certified copies of any documents to incorporate a Hong Kong company whereas in the case of a branch it is so necessary 2.3 On the other hand, the usual reasons for preferring a branch over a subsidiary include the following: (1) there may be tax advantages under the tax laws of the place of incorporation of the "parent", in particular, in relation to the treatment of any losses which the Hong Kong operations may incur in the first few years of its operation (2) a branch can often rely on the credit of the "parent" company (3) if business operations are terminated in Hong Kong, the lengthy liquidation process required for a Hong Kong company can be avoided and any capital can simply be remitted out of Hong Kong (4) a Hong Kong company can normally only reduce its issued capital with the consent of the Court (5) share repurchases by Hong Kong companies in some cases will require the consent of the Court (6) no stamp duty (except in relation to any land or any shares in Hong Kong companies owned by the foreign company) will be payable on any transfer of the Hong Kong business operated by a foreign company, whereas stamp duty will generally be payable on any transfer of shares in a Hong Kong subsidiary company (see Part E, paragraph 5.1) (7) no duty is payable in Hong Kong on the authorised (or issued) share capital of a foreign company with a Hong Kong registered branch (8) the ongoing maintenance expenses involved with a branch can be lower than those involved with a subsidiary, in particular, as Hong Kong law does not require the separate audit of a branch 3 Business registration 3.1 The Business Registration Ordinance requires that every business in Hong Kong register with the Business Registration Office. This is effected by the issuance of a business registration certificate in respect of each location from which the business is conducted. The certificate must be displayed on the premises. A business registration certificate is valid for one year unless an election has been made for an expiry date of three years from the date of commencement endorsed on the certificate. The fee and levy for the issue of the principal certificate is presently fixed at HK$2,600 per annum and for each additional certificate HK$673 per annum. Normally, a new business registration certificate can be issued immediately upon application and payment of the required fee and levy. There is some relief for small business. 3.2 Registration with the Business Registration Office amounts to notification to the Commissioner of Inland Revenue (the "Commissioner") that a business, which may be subject to the payment of profits tax (see Part E, paragraph 4), has been established. It does not mean that any actual profits tax liability exists or is acknowledged. 3.3 All Hong Kong companies and foreign companies which have branches registered in Hong Kong are deemed to be carrying on business in Hong Kong and must register under the Business Registration Ordinance within one month of incorporation, even if business operations have not yet commenced or within one month of having a place of business in Hong Kong. 3.4 The particulars of the business must be briefly described in the application. The date of commencement of business and, in the case of a company, the address of the registered office (see Part B, paragraph 2.14) or, in the case of a foreign company, the authorised representative (see Part C, paragraph 2.1 and Part C, paragraph 2.3) must also be specified. A company which has adopted a Chinese name informally only (i.e. it is not included in the company's Certificate of Incorporation or Certificate of Change of Name) may also include this name in its application, but it is not necessary to do so. 3.5 The particulars registered with the Business Registration Office are available for public inspection and any change in the registered particulars must be notified to the Business Registration Office within one month. 4 Registration of charges 4.1 Both Hong Kong companies and foreign companies with Hong Kong branches (see Part C, paragraph 2.7) must file (with the Registrar) the particulars of any registerable charge: (1) given by the company over its assets or (2) existing over assets acquired by the company normally within five weeks of the creation of the charge or the acquisition of such assets, respectively. 4.2 Generally speaking, those charges requiring registration include floating charges and charges over land, ships, goodwill, book debts, trademarks and patents and other tangible assets. Foreign companies are only required to register charges over relevant assets located in Hong Kong or which come into Hong Kong. 4.3 All companies are required to keep a register of charges over their assets (whether they are registerable charges or not) containing short particulars of the assets charged and the amount secured. In the case of foreign companies, this is limited to assets located in Hong Kong or which come into Hong Kong. Further, all companies are required to keep copies of registered charges. The register of charges must be open for inspection by anyone whereas copies of registered charges are open for inspection by members and creditors only. 4.4 Charges requiring registration which are not registered are generally void against a liquidator of a company in a winding-up and against other creditors. For this reason a person taking the benefit of a charge will usually take steps to ensure that the charge is registered if it is required to be. 5 Additional licences and consents 5.1 Certain businesses may not be carried on in Hong Kong without a specific licence or other consent to do so from the relevant regulatory authority, in addition to the corporate requirements set out in this brochure. These businesses include banking, deposit-taking, money-lending, securities and commodities dealing and advising, leveraged foreign exchange trading and insurance. A discussion of the relevant requirements for these businesses is beyond the scope of this brochure but before commencing to operate any such business, specific professional advice should be obtained. 5.2 A summary of the requirements in relation to the businesses of banking, deposittaking and money-lending is contained in our publication entitled "The Banking Ordinance - An Overview of the Regulatory Provisions". 6 Prospectuses 6.1 The Companies Ordinance and the Securities Ordinance contain extensive provisions in relation to the issue and distribution of prospectuses in Hong Kong concerning shares in or debentures of companies, whether the company is registered in Hong Kong or not. Advice in this regard is available upon request. Back to Top B HONG KONG COMPANIES 1 Introduction Private companies 1.1 Companies incorporated in Hong Kong can be public or private and can be limited by shares or by guarantee. Most companies limited by guarantee are set up by non-profit organisations and most public companies are listed on the Hong Kong stock exchange. 1.2 The appropriate vehicle for a business which wants to: (1) limit its liability (2) obtain private funding only (3) generate financial returns for its shareholders is a private company limited by shares. The great majority of companies in Hong Kong are private companies limited by shares and in this brochure we limit our discussion accordingly. Characteristics 1.3 A private company is a company which, in its articles of association: (1) restricts the right to transfer its shares (2) limits the number of its members to 50 (excluding employees) (3) prohibits any invitation to the public to subscribe for any shares or debentures of the company. Liability of shareholders 1.4 The liability of each member of a company is limited to the amount (if any) unpaid on the shares held by that particular member. Accordingly, if the company becomes insolvent and is wound up, the shareholders stand to lose their agreed investment in the company only, and need not make any further contribution to meet the company's liabilities. Ongoing maintenance obligations 1.5 The ongoing maintenance obligations relating to a Hong Kong company are set out in detail later in this chapter. These obligations can be divided into annual obligations and those obligations which only arise where there has been a change in relation to the corporate structure and other matters (see Part B, paragraph 4 and Part B, paragraph 5, respectively). Where a company becomes dormant, it will not be necessary for the company to comply with these annual obligations (see Part B, paragraph 7). Pre-incorporation contracts 1.6 Any person who purports to enter into a contract in the name of or on behalf of a company which has not yet been incorporated will be personally liable for that contract. The contract may be ratified by the company after incorporation (in which case the person will no longer be personally liable) but this situation can usually be avoided in the first place by the use of a "shelf" company (see Part B, paragraph 2.15 and Part B, paragraph 2.16). 2 Incorporation of a company General 2.1 The incorporation of a private company in Hong Kong requires at least one shareholder (who subscribes his name to the memorandum of association of the company). There may be registered with the memorandum of association, articles of association signed by the subscriber to the memorandum. After the constitutional documents are filed with (and a Statement of Compliance and the prescribed capital fee are submitted to) the Registrar, the Registrar will issue a certificate of incorporation certifying the name and the date of incorporation of the company. Name 2.2 A company can be incorporated with any name (except for names which are the same as existing company names). The Registrar has the power to require a company to change its name, including where the name gives so misleading an indication of the nature of the company's activities in Hong Kong as to be likely to cause harm to the public or it is too like another name of an organisation established in Hong Kong under any ordinance at the time of registration. 2.3 A company may be incorporated with either an English name or a Chinese name or both. Where a company is incorporated with an English and a Chinese name so that both names appear on the certificate of incorporation, the two names together constitute the full formal name of the company. This means that both names should be used on the company's seal (see Part B, paragraph 3.18) and in all documents. If both an English and a Chinese name are to be used it is worth considering the meaning of the name in both languages and ensuring that the translation from the primary to the secondary language is well done. The secondary name may be a translation or a transliteration of the primary name or wholly unconnected with it. Shareholders 2.4 Every company must have at least one registered shareholder. There is no requirement that a shareholder be resident in Hong Kong. Any legal entity can be a shareholder in a company, including a company, receiver, liquidator or sole proprietor. 2.5 In order to save time, we normally incorporate companies with one of our nominee companies acting as subscriber. The first share is usually transferred to one of the ultimate shareholders or their nominees after incorporation. We can, however, provide continuing nominee shareholders services (see Part D, paragraph 4). Memorandum and articles of association. 2.6 The memorandum of association of a company may include, among other things, the objects and powers of the company. As a company is deemed to have the capacity and the rights, powers and privileges of a natural person, a detailed description of a company's objects and powers does not generally now have to be included in its memorandum of association and registered with the Registrar (as it had to be before 1997). Shareholders may choose to set out the company's objects and powers if they wish to limit them. As the exception to the general rule, companies incorporated to promote charitable and similar objects, and which have been authorised to dispense with the use of the word "Limited" in their name, must provide a description of their objects and powers. 2.7 The articles of association are the regulations (or bye-laws) of the company. They normally follow a standard form, incorporating the regulations contained in Table A (the first schedule of the Companies Ordinance) or a more detailed version which excludes Table A and contains all the regulations in the articles themselves, or a combination of the two. To the extent to which specific articles (regulations) are not registered with the Registrar, the provisions of the articles of association in Table A will apply. 2.8 In general, companies incorporated by our firm are incorporated with detailed articles rather than Table A articles. Articles may include a wide range of special provisions to meet individual situations, such as special classes of shares and pre-emption rights on the transfer of shares. Initial share capital 2.9 The amount of a company's initial authorised share capital, the number of shares and the par value of each share must be stated in the company's memorandum of association. The authorised share capital is the maximum amount of share capital which the company may issue. 2.10 There is no minimum authorised capital required and, as a capital fee (see Part E, paragraph 5.3) is payable on authorised (and not issued) share capital, unless there are particular reasons for a high initial authorised capital, most companies are incorporated with a fairly low authorised capital which is increased later as the company's need for capital grows. It is common for companies to start with an authorised capital of HK$1,000 or HK$10,000 divided into shares of HK$1 or HK$10 each. The capital can, however, be denominated in any currency and there are no legal prohibitions on a company having a multi-currency capital structure, although in practice this can be quite cumbersome. 2.11 The share capital may be divided into different types or classes of shares, including preference shares, in which case the capital clause in the memorandum of association should reflect this. A company may also have shares with different nominal values or carrying differing rights. 2.12 At least one subscriber share must be issued on the incorporation of a company, but the balance of the authorised capital may be issued and paid up in accordance with the company's capital equirements. 2.13 Shares may be allotted for cash, services or other consideration such as the transfer of property. The issued share capital may be issued at "par" value or may be partly paid-up or paid at a premium. If a company's articles of association permit, shares may also be issued as redeemable shares. Registered office 2.14 Each Hong Kong company must have a registered office in Hong Kong to which all official communications and notices (including service of process) may be addressed. The address of the registered office of a new company must be notified to the Registrar from the day on which a company begins to carry on business or within 14 days after the date of incorporation of the company, whichever is earlier. Our address must be used as the registered office address when we also provide company secretarial services to the company (see Part D, paragraph 3). Timing/shelf companies 2.15 It is always possible to set up a new company but many of our clients prefer to acquire a "shelf" company (a company which has already been incorporated using our standard form memorandum and articles of association). The main advantage in acquiring a shelf company is that it is not necessary to wait for the Registrar to process the incorporation, which usually takes about 10 working days. Once acquired, the name and/or the memorandum and articles of association of the shelf company can be changed if the client so desires (see Part B, paragraph 5.3 and Part B, paragraph 5.7 respectively). Fees 2.16 We can provide, on request, details of the costs involved in incorporating a new company or acquiring a shelf company. Our standard charges include: (1) legal expenses (2) filing and other government fees (3) business registration certificate (see Part A, paragraph 3) (4) printing charges (5) statutory books (share register, minute book, etc.) (6) common seal and in either case are based on the adoption of standard form memorandum and articles of association. Our standard charges do not include the items listed below as post-incorporation matters as these are charged for separately on a time-spent or item basis. 3 Post-incorporation matters and general requirements Directors 3.1 Hong Kong private companies must have at least one director. The directors need not be resident in Hong Kong. Anyone who is over the age of 18 may, subject to certain exceptions, be appointed as a director. Corporate directors may be appointed in the case of a private company, unless the company is a member of a group of companies of which a Hong Kong listed company is a member. Where a private company has only one shareholder and that shareholder is the sole director of the company, the company may nominate a person over the age of 18 as a reserve director to act in the place of the sole director in the event of the latter's death. 3.2 The particulars of the directors (which as a matter of practice includes alternate directors) and reserve director of a company must be filed with the Registrar within 14 days of their appointment/nomination. 3.3 Directors must disclose to the other members of the board as soon as possible any material interest, direct or indirect, which they may have in any contract or proposed contract with the company which is significant in relation to the company's business. If a director fails to do so, that director may be accountable to the company for any profit he or she makes from that contract, also the director can be subject to a default fine. In certain circumstances the contract may also be voidable at the option of the company. Generally a director may not vote at, or be counted towards the quorum of, a meeting to discuss the matter in which he is interested although often this is relaxed in the articles of associations. Where any general interests exist (for example, where the director is a director or shareholder of other companies), it is common for a general disclosure to be made at the first meeting of the directors after the appointment of the relevant director or as soon as possible. 3.4 A director may normally be removed by an ordinary resolution of the company even where there is an agreement, or there is a provision in the memorandum or articles of association, to the contrary. The removal of a director under this statutory power entails certain procedures designed to allow the director to make representations against the proposed removal. The articles of association may also expressly provide for the removal of directors in other ways. Removal of a director contrary to an agreement with the company may give rise to a claim by the director against the company. Issuing shares 3.5 The issuing of new shares in a company is a three-stage process involving the allotment by the directors of the shares to particular persons and then the issuance of the shares to such persons after the entering into the company's register of shareholders of the relevant particulars. 3.6 Allotments of shares, other than allotments pursuant to offers to existing shareholders pro rata to their existing holdings, may only be made with the prior approval of the shareholders in general meeting. This approval may be given either in relation to a particular allotment or allotments or generally. In either case this shareholder approval expires (if not previously revoked by the company in general meeting) when the next annual general meeting of the company is held or ought to be held. 3.7 A return of allotment of shares, disclosing the members and their shareholdings must be filed with the Registrar within one month of the date of the allotment. If this time limit is not met, the Registrar will usually refuse to accept the return of allotments for filing and an application will have to be made to the court for leave to file the return out of time. 3.8 A share may be beneficially owned by someone other than the registered holder. In the case of a private company, it is not normally necessary for the identity of the beneficial owner to be revealed to the company or to any authority or to be a matter of public record, although a subsidiary is required to state in its accounts the name of its ultimate holding company. We provide a nominee shareholder service (see Part D, paragraph 4). Secretary 3.9 Each Hong Kong company must have a secretary who or which is resident in Hong Kong. If the company has a sole director, that person cannot also be the secretary of the company. The particulars of the secretary must be filed with the Registrar within 14 days of the appointment of the secretary. The secretary's responsibilities include keeping a register of the company's members, directors, charges and the company's minutes. 3.10 Our firm can provide secretarial services (see Part D, paragraph 3) and where we do so we usually require that the registered office (see Part B, paragraph 2.14) be at our office. Auditors and books of account 3.11 A Hong Kong company must keep proper books of account and have the accounts audited annually by Hong Kong registered auditors. It is advisable for the auditors to be appointed as soon as practicable after incorporation, especially where advice is required on accounting systems and the like. The first auditors are generally appointed by the directors. The appointment of auditors is normally reconfirmed at each annual general meeting. Auditors may be removed by an ordinary resolution of the shareholders. (Most of the large international accounting firms have offices in Hong Kong and can act as auditors. There are also many reputable and competent local accounting firms.) 3.12 The books of account must be open to inspection by the directors at all times. If the books are kept outside Hong Kong, certain accounts, returns and other information must be sent to and kept in Hong Kong for inspection by the directors, at least once every six months. The board has the power to decide where the books of account are kept, or where the accounts, records and other information are to be sent. A company must keep its books of account for at least seven years. Bankers 3.13 After a company is incorporated it may open bank accounts in Hong Kong and elsewhere. A directors’ resolution will usually be required to authorise the opening of each account and to authorise signatories to operate that account. Most banks have standard form resolutions which they require to be passed in connection with the opening of any account. 3.14 It is important to ensure that the company's cheques and other financial instruments include the name of the company in full. It should also be made clear on the face of the instrument that any individual signatory signs "for and on behalf of" the company to avoid any personal liability on the part of the signatory. Financial year 3.15 The financial year end of the company should be determined, and any change in the financial year end authorised, by a directors’ resolution. 3.16 The initial choice of financial year end must permit accounts to be prepared, audited and laid before an annual general meeting within 18 months of incorporation. Business registration 3.17 All Hong Kong companies must register under the Business Registration Ordinance (see Part A, paragraph 3). Seals and chops 3.18 A Hong Kong company must have a common seal which is normally kept with the statutory records of the company at the registered office. If a seal is required for use outside Hong Kong, an official seal can be adopted by a directors’ resolution, provided that the use of an official seal outside Hong Kong is authorised by the articles of association and (where they are stated in the memorandum of association) the company's objects include the transaction of business outside Hong Kong. 3.19 As a matter of practice, many authorities in Hong Kong, in particular governmental and other regulatory authorities, expect a signature on behalf of a company to be accompanied by the imprint of a rubber stamp or "chop" showing the name of the company and some words indicating the authority of the signatory. There is, however, no legal requirement for such chops. 4 Maintenance - annual requirements Annual accounts/directors’ report 4.1 A profit and loss account and a balance sheet for the company must be audited by Hong Kong registered auditors and laid before the shareholders in general meeting within 18 months of incorporation and then at least once in every calendar year. There are lengthy and detailed provisions in the Companies Ordinance regarding the types of accounts to be prepared and we can supply further details on request. Generally, Hong Kong private companies having a share capital are not required to file their accounts with the Registrar. 4.2 A directors’ report must be prepared in conjunction with the annual accounts. The Companies Ordinance provides a list of what this report should contain and this list includes details of contracts with the company or certain companies with which it is associated which are significant in relation to the company's business and in which any director has a material interest. Annual general meeting 4.3 An annual general meeting of the shareholders must be held within 18 months of incorporation and then at least once in every calendar year, although not later than 15 months after the last annual general meeting. (This 15 month period may be extended at the discretion of the Registrar upon payment of a fee.) 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 to attend to. 4.4 Before the annual general meeting is held, the directors must approve the accounts and the directors’ report, they may recommend a dividend and must resolve to call the annual general meeting. If all the shareholders entitled to attend and vote at the annual general meeting so agree, the meeting may be held at short notice, but otherwise at least 21 clear days’ notice is required. Copies of any audited accounts to be considered at the annual general meeting must be sent to all shareholders, debenture holders and other persons so entitled not less than 21 days before the date of the meeting, unless all shareholders entitled to attend and vote at the meeting otherwise agree. 4.5 An annual return must be filed with the Registrar at least once a year (except if there has been no change in the filed particulars since the date of the last annual return, in which case a certificate confirming this fact can be filed in lieu of an annual return). The annual return contains among other things: (1) particulars of the authorised and issued share capital of the company (2) the names and addresses of its directors and the secretary (3) the names and addresses of its registered shareholders (4) the amount secured by any registered charges. 4.6 The return must be signed by a director or the secretary of the company and must be filed within 42 days of the anniversary of the incorporation of the company. Public companies and companies limited by guarantee without a share capital must file their annual return within 42 days of the annual general meeting in each year. 5 Maintenance - changes in particulars Filing obligations 5.1 A company must file the relevant particulars with the Registrar within the period indicated, in the event of: (1) any change in the directors or secretary or in the filed particulars of any existing directors or secretary - 14 days (2) any change in the location of the registered office - 14 days (3) any increase in the authorised share capital (this also requires the payment of a capital fee, see Part E, paragraph 5.3) - 15 days (4) any relocation of the company's statutory books from the company's registered office - 14 days (5) any change of name of a company – 15 days after the passing of the resolution (6) the passing of a special resolution (other than special resolutions to change the name of a company) or certain other resolutions - 15 days (7) any allotment or issue of new shares (this also requires the payment of a capital fee (see Part E, paragraph 5.3) on the amount of any premium over the nominal value at which the shares are allotted or issued) - one month (8) the creation of a charge over certain types of assets or the acquisition subject to an existing charge of certain types of assets, in either case whether the asset is within or outside Hong Kong (see Part A, paragraph 4) - 5 weeks 5.2 In relation to the last two items, if the relevant particulars are not filed with the Registrar within the prescribed period, an application will have to be made to the Court for an extension of the time within which the particulars may be filed. Any such application will need to be supported by an affidavit giving an explanation as to why the particulars were not filed within the prescribed period. Change of name 5.3 To effect a change in the name of a company (which includes the adoption or abandonment of a formal English or a Chinese version of the name - see Part B, paragraph 2.2): (1) the shareholders must approve of the change in name by special resolution (see Part B, paragraph 6.4) (2) the new name must be registered with the Registrar 5.4 It normally takes about 10 working days from the time of the filing of the specified form giving notice of the change of name for the certificate of change of name to be issued. The change in name is effective from the date on such certificate. Increases in authorised and issued share capital 5.5 Any increase in the authorised share capital of a company requires the approval of the shareholders. A company's articles of association typically provide for the increasing of the company's authorised share capital by way of ordinary resolution. As discussed in Part E, paragraph 5.3, any increase in authorised share capital will attract a capital fee. Notice of the increase must also be filed with the Registrar (see Part B, paragraph 5.1). 5.6 The procedure for allotting and issuing new shares is set out under Part B, paragraph 3.5 and the related filing obligations are included under Part B, paragraph 5.1. Changes to memorandum or articles of association 5.7 Most of the provisions of a company's memorandum and articles of association can be changed by special resolution (see Part B, paragraph 6.4). 5.8 There are exceptions to this general rule. Where a company has issued different classes of shares, the special rights of any one class may, subject to the articles of association, be changed only with the approval of 75% of the holders of shares of that class. Where the special rights exist by virtue of the memorandum of association and there is no provision for alteration, all such shareholders must agree before the rights can be changed. Also, a member must agree in writing to an alteration to the memorandum or articles of association which requires that member to take or subscribe for more shares or increase his liability to contribute to the share capital of the company or otherwise pay money to the company. 5.9 A signed copy of every special resolution and every resolution varying a provision in the memorandum or articles of association must be filed with the Registrar and annexed to every copy of the memorandum and articles of association of the company issued subsequently to any such change. When the memorandum or articles of association is amended a printed copy of the memorandum or articles as amended must be filed with the Registrar. Share transfers 5.10 The transfer of legal title to shares in a Hong Kong company is effected by an "instrument of transfer". Beneficial title to shares is transferred by way of contract notes (a bought note and a sold note). 5.11 Contract notes must be submitted for stamping within two days (30 days if the sale takes place outside Hong Kong) of their execution. Ad valorem stamp duty is levied on each contract note (i.e. both the bought note and the sold note) at the rate of HK$1.00 per HK$1,000 or part thereof, of, whichever is the higher of the consideration paid or the value of the shares transferred (so that the total rate of duty on a sale of shares is effectively 0.2%) (see Part E, paragraph 5.1). Exemptions from stamp duty are available for intra-group transfers. We will be pleased to provide more detailed advice on the requirements for exemption on request. 5.12 In the case of a private company, a copy of the latest audited accounts (consolidated where relevant) or latest management accounts (if audited accounts have not been prepared or if they are not up to date) together with details of any land and properties held and a copy of any sale and purchase agreement must normally be submitted when the documents are lodged for stamping. The Stamp Office may also require additional information. 5.13 The instrument of transfer attracts a HK$5 fixed duty. In the case of a sale and purchase of shares by a person who is not resident in Hong Kong, the ad valorem stamp duty can be paid on the instrument of transfer in addition to the HK$5 fixed duty if contract notes have not been made out and stamped. 5.14 Where a transfer of the beneficial ownership is made otherwise than by sale and purchase e.g. by way of gift, the instrument of transfer is stampable at the fixed rate of HK$5 plus ad valorem stamp duty of 0.2% of the value of the shares at the date of transfer. 5.15 When there is a sale of beneficial ownership only and no transfer of legal ownership (i.e., where the shares will remain registered in the name of the same person as a nominee for the beneficial owner), contract notes must be made out and ad valorem stamp duty of 0.2% paid. An instrument of transfer will not be required in this case but it is advisable for there to be a declaration of trust (see below). 5.16 Ad valorem stamp duty is not payable on a transfer in registered ownership which does not involve any change in the beneficial ownership of the shares. Where shares are registered in the name of a nominee, it is sensible to execute a declaration of trust and to have the declaration of trust adjudicated as not chargeable to duty. The fee for this is HK$50. Adjudication can avoid later disputes with the Stamp Office about the beneficial ownership of shares. 5.17 Penalties for failure to stamp documents within the required time range from two to ten times the amount of duty payable, although the Collector of Stamp Revenue has power to remit the whole or any part of any penalty in appropriate cases. Neither the company nor any other person is permitted to act on or in general rely in court proceedings on any stampable instrument which is not duly stamped. An unstamped instrument may not be registered in the company's books. 5.18 After stamping (and compliance with any other formalities prescribed by the articles of association), the transfer can be registered in the statutory books of the company and a new share certificate issued. 5.19 Share transfers are sometimes restricted by, for example, provisions in the company's articles of association which require that the shares are first offered for sale to existing shareholders. 6 Management Directors and board meetings 6.1 Responsibility for the overall management of a Hong Kong company typically rests with its board of directors. Generally, the board authorises the actions of the company through board resolutions passed at board meetings or, if authorised by the articles, by written resolution signed by all the directors or a stated proportion of them. 6.2 There is no Hong Kong requirement that board meetings be held in Hong Kong or at any specific intervals. Normally, reasonable notice of meetings must be given to each director, but the articles of association can modify this general obligation. The board of directors may delegate its powers to certain persons. A certain degree of delegation is, so far as third parties dealing with the company are concerned, normally implied in the case of managing directors and senior employees of a company. 6.3 Where a private company only has one director and that director takes a decision that may be taken at a meeting of directors, the decision shall be evidenced by a resolution in writing or a written record of the decision which must be delivered to the company within 7 days of the decision having been made. Shareholders and shareholders’ meetings 6.4 Certain decisions however must, by law, be made or sanctioned by the shareholders in general meeting. This is done by the passing of an ordinary or, in some cases, a special resolution. Such resolutions may be proposed as special business at annual general meetings or at separately convened meetings, called extraordinary general meetings. 6.5 An ordinary resolution requires a simple majority of the shareholders who attend and vote at a meeting to approve it. A special resolution, on the other hand, requires a 75% majority of the shareholders who attend and vote at a meeting to approve it. 6.6 Generally, 14 clear days’ notice is required for a meeting at which an ordinary resolution is proposed and 21 clear days’ notice is required for a meeting at which a special resolution is proposed or for the holding of an annual general meeting. A majority in number of shareholders having the right to attend and vote at general meetings who together hold not less than 95% in nominal value of all the shares, or all the shareholders in the case of an annual general meeting, may agree that a meeting be held at short notice. 6.7 The articles of association should make provision for the quorum and voting rights and will determine whether or not the chairman of the meeting has a casting vote. There is a statutory right on the part of a shareholder to appoint a proxy to attend and vote on his or her behalf at any meeting at which the shareholder is entitled to attend and vote. A statement to this effect must be included in the notice of each general meeting. A proxy need not be a member and will have the same right to speak at the meeting as his or her appointor. A corporation which is a member can attend a meeting by appointing a representative to attend the meeting on its behalf. Such a representative can speak and vote on a show of hands or on a poll. A proxy's rights to vote are limited to voting on a poll unless the Articles provide otherwise. It is usually necessary to lodge appointments of proxies (but not of corporate representatives) in advance of the meeting. 6.8 A company's articles of association will usually permit resolutions to be passed by a written resolution signed by all the shareholders, without the need to hold a meeting, however notice of written resolutions must be provided to the auditors at or before the time of submission to members for signature. 6.9 Where a private company only has one shareholder and that shareholder takes a decision that may be taken in a shareholder’ meeting, the decision shall be evidenced by a written resolution or a written record of the decision which must be delivered to the company within 7 days of the decision having been made. 7 Dormant companies Directors and board meetings 7.1 An inactive Hong Kong private company may be classified as "dormant". To become "dormant" the company must pass a special resolution (see Part B, paragraph 6.4) authorising its directors to deliver to the Registrar the special resolution declaring that the company will become dormant . Once the necessary formalities have been complied with, the company will be exempt from complying with the requirements for holding annual general meetings, preparing and filing annual returns and carrying out audits of its accounts. 7.2 A company will be eligible to apply for dormant status if, since the date of incorporation or any other specified date, it has not entered into what is known as a "relevant accounting transaction". A "relevant accounting transaction" is a transaction which is required by Section 121 of the Companies Ordinance to be entered into the company's books of account. This includes the receipt and expenditure of money and the sale and purchase of goods, assets and liabilities, but does not include a fee which a company is required to pay by law, for example the annual business registration fee. 7.3 Prior to a company ceasing to be dormant, the directors must deliver to the Registrar a further special resolution declaring that the company intends to enter into a relevant accounting transaction, at which stage the company will cease to be dormant and the normal requirements will apply again. The advantage of being able to put a company into dormancy is that the cost of maintaining the company can be significantly reduced without having to wind up or apply to the Registrar to de-register the company. Back to Top C HONG KONG BRANCHES OF FOREIGN COMPANIES 1 Introduction Requirement to register 1.1 Foreign companies must register a Hong Kong branch with the Registrar within one month of "establishing a place of business in Hong Kong". In practice, it is sufficient if the application for registration is lodged with the Registrar within one month. It is common for foreign companies to complete the registration of a branch before actually establishing a place of business in Hong Kong. 1.2 The obligation to register with the Registrar discussed in this paragraph is separate from the obligation under Part A, paragraph 3 to register businesses with the Business Registration Office. Representative office 1.3 A foreign company which has a presence in Hong Kong but does not create legal obligations (i.e. a representative office) is not considered as having established a place of business in Hong Kong for the purpose of registration with the Registrar. Advice should therefore be sought as to whether, based on the nature of the business, in a particular case it is necessary to register a "representative office" as a branch. Name of company in Hong Kong 1.4 Foreign companies can and usually do register the Hong Kong branch in their own name. However, the Registrar has power to require a foreign company which is carrying on business in Hong Kong under its corporate name to use a different name under certain circumstances. This power must be exercised within six months of the date of registration of a branch or the date of registration of any change in the name of the foreign company. Display of name of company 1.5 Foreign companies which register a branch must conspicuously exhibit at every place in Hong Kong where they carry on business, and include on their letterhead, the name of the company and the place of incorporation of the company. Where the liability of the shareholders of the foreign company is limited, this must also be stated. These requirements are generally complied with by the use of the words, "[Name of Company] incorporated in [place] with limited liability". Continuing obligations 1.6 Once registered in Hong Kong, a foreign company has continuing maintenance obligations in relation to the Registrar and the Commissioner of Inland Revenue. The obligations in relation to the Registrar fall into two categories: the updating on a case by case basis of information filed with the Registrar and the filing of certain documents with the Registrar on an annual basis. The continuing obligations in relation to the Commissioner relate to the registration of each of the company's businesses (see Part A, paragraph 3) and the filing of a profits tax return (see Part E, paragraph 4). 2 Registration procedure Documents required for registration 2.1 To register a branch, an application for registration together with the following documents must be filed at the Companies Registry (see Part B, paragraph 2.4 and Part C, paragraph 2.5 as to translation and certification respectively): (1) certified copy of the charter, statutes or memorandum and articles of association (or equivalent) of the foreign company or if it is not in English or Chinese a certified translation hereof (2) list in English or Chinese in the specified form of the directors and the secretary (if any) of the foreign company including, in the case of each individual: (a) given name and family name in full (without initials) with Chinese characters where appropriate (b) any former names (c) any aliases (d) usual residential address (e) Hong Kong identity card number or the number and issuing country of passport and, in the case of a body corporate, corporate name and address of registered or principal office (3) names and addresses in English or Chinese of either one or more persons who are resident in Hong Kong (which expression does not include a body corporate or a firm other than a solicitor corporation, a company which is for the time-being registered under the Professional Accountants Ordinance or a firm of solicitors or professional accountants) who are authorised to accept, on behalf of the foreign company, service of process and any notices required to be served on the foreign company (the company's authorised representative) (see Part C, paragraph 2.3) (4) address of the principal place of business of the company in Hong Kong (5) the addresses of the principal place of business (if any) and the registered office (or equivalent) of the foreign company in its place of incorporation (6) certified copy of the foreign company's certificate of incorporation or such other evidence of incorporation as the Registrar deems sufficient together with a certified translation into English or Chinese if the original is not in English or Chinese (7) unless exemption is granted (see Part C, paragraph3.4 to Part C, paragraph3.7), a certified copy of the latest accounts of the foreign company in the form required by the law of the place of its incorporation or, if no such form is in force, in the form in which the accounts are submitted to the shareholders of the company - the accounts must also be confirmed to be in such form by a lawyer or an auditor. If the accounts in their original form are not in English or Chinese, only a certified translation hereof into English or Chinese is required. 2.2 All documents (except originals) which are filed at the Companies Registry must be on white paper, single sided and A4 size. Detailed requirements such as this are not prescribed by law but specified by the Companies Registry and they have discretion to vary their requirements from time to time. Accordingly, we recommend that clients contact us before spending time gathering documents together. Authorised representative 2.3 Often the chief local executive is appointed as the authorised representative of a foreign company but our firm can also provide this service (see Part D, paragraph 5). 2.4 Any translation required to be filed at the Companies Registry must be certified by the translator as correct. The translator must also be certified by a person fitting one of the descriptions in Part C, paragraph 2.5 as being a person competent to translate the document into English or Chinese (as appropriate). The Registrar will usually also require that: (1) all translator's and certifier's signatures are hand written and not mechanical (2) all certifications are in English or Chinese (3) a copy of the Certificate of Incorporation or its equivalent is attached to the translation and identified as the original from which the translation was made (4) any certificate of competence expressly refer to the competence of the translator and not simply the usual chop or stamp of the person certifying Certification of translator 2.5 Those persons able to certify the skills of a translator (as set out in Part C, paragraph 2.4) are as follows: (1) if the document is translated in Hong Kong - a Hong Kong notary public or a Hong Kong solicitor (2) if the document is translated outside Hong Kong - a notary public in the place where the translation is made or such other person as may be specified by the Registrar in exceptional circumstances and on a case by case basis (3) Where the Registrar is satisfied that compliance with the above provisions is not possible, the Registrar may allow the translation to be duly certified as a true translation by certain officially recognised translators instead. Certification of documents 2.6 Where certified copies of documents are required (see Part C, paragraph 2.1), the copy should be certified as a true copy in the place of incorporation of the company by one of the following persons: (1) an official of the government to whose custody the original is committed or (2) a notary public of such foreign country (3) Where the Registrar is satisfied that compliance with the above provisions is not possible, the Registrar may allow copies of documents to be duly certified as true copies on oath by a director, secretary, manager or authorized representative of the company, before a person having authority to administer an oath in the place where the certification is made. Charges/mortgages 2.7 If a foreign company has, when it establishes a place of business in Hong Kong, property in Hong Kong which is subject to a registrable charge (see Part A, paragraph 4) the foreign company must, within 5 weeks after the date on which it establishes a place of business in Hong Kong, send to the Registrar the following documents for registration: (1) particulars of the charge and mortgage (2) an original or copy of the instrument creating the charge or mortgage. Branch registration certificate 2.8 It usually takes about 22 working days for the Registrar to issue the "Certificate of Registration of Oversea Company". 3 Maintenance - annual requirements Annual filing obligations 3.1 Subject to it being exempted from the obligation to do so (see Part C, paragraph 3.3 to Part C, paragraph 3.5), every year the foreign company must file the following documents with the Registrar: (1) a return confirming that there has been no alteration, other than those of which the Registrar has already been notified, in the documents and particulars which were filed with the Registrar at the time of registration of the branch (2) certified copies of each of the following documents (see Part C, paragraph 3.2 as to the certification requirements) or certified translations if the original is not in English or Chinese: (a) balance sheet as at the end of the company's last financial year (b) profit and loss account for the company's last financial year (c) group accounts, if any, in respect of the company's last financial year (d) directors report, if any, in respect of the company's last financial year (e) auditor's report, if any, on the balance sheet and the accounts. Certification of accounts 3.2 Accounts and reports requiring certification (see Part C, paragraph 3.1) must be certified by a director, the secretary or other principal officer of the company. Exemption - US companies 3.3 In the case of companies incorporated in the United States, the Registrar has determined that an exemption from the annual filing requirements set out in Part C, paragraph 3.1 will be granted if the company can satisfy each of the following requirements in respect of the entire year for which the exemption is claimed: (1) the company has been either a wholly-owned subsidiary of another company or the actual number of its members has not exceeded 35 and (2) there has been no provision in its constitution, articles of association or bye-laws for the creation or issue of bearer issues or share warrants, and its shares have not been transferable by delivery and (3) the company has not, under the law of its place of incorporation or origin, been obliged to publish its accounts or to deliver copies to any person in whose office they may be inspected as of right by members of the public Exemption - other foreign companies 3.4 In the case of foreign companies incorporated other than in the United States, the Registrar has determined that an exemption from the annual filing requirements set out in Part C, paragraph 3.1 will be granted if the company can satisfy each of following requirements: (1) the company has no more than 50 members and (2) its shares are not listed on any official stock exchange and the company is prohibited from offering and has not offered any shares or debentures to the public and (3) there is no power in its constitution to issue bearer shares or share warrants and (4) shares in the company cannot be transferred merely by delivery and (5) the company is not required by the law to file accounts or to make its accounts available for public inspection at its place of incorporation Application for exemption 3.5 In order to apply for an exemption, a certificate must be provided by either (1) the auditor or the lawyer of the foreign company practising in its place of incorporation or (2) an "independent" solicitor or auditor practising in Hong Kong 3.6 The Registrar has a discretion as to whether or not to grant a foreign company an exemption and the practice of the Registrar is to deal with applications for exemption on a case by case and a year by year basis. Tax authorities 3.7 It is important to note that the exercise by the Registrar of the discretion does not exempt the company from any obligation to file its accounts with the Hong Kong tax authorities if business is being conducted in Hong Kong 4 Maintenance - changes in particulars Filing obligations 4.1 Foreign companies registered in Hong Kong must deliver a return to the Registrar within a fixed period in the case of any change to any of the following particulars in relation to the company: (1) its constitutional documents (2) the details of its directors (and secretary where relevant) (3) the details of its authorised representative(s) (see Part C, paragraph 2.3) (4) the address of its registered office or its principal place of business (5) its corporate name Liquidation 4.2 If liquidation proceedings against a foreign company registered in Hong Kong are commenced in its place of incorporation, notice of that fact and of the appointment of any liquidator must also be filed with the Registrar. Back to Top D CORPORATE SERVICES FROM DEACONS 1 Introduction 1.1 Deacons has a large Corporate Services Department which provides a range of corporate secretarial services to clients in relation to companies incorporated in Hong Kong, Bermuda, the Cayman Islands, the British Virgin Islands, Liberia, Mauritius, Bahamas, Panama and Vanuatu and for foreign companies registered in Hong Kong. The department operates under the direction of a partner and every clients’ secretarial affairs are handled by an executive who is a member of the Institute of Chartered Secretaries and Administrators. 1.2 These services are generally provided using one of a number of nominee companies. The services available include providing: (1) ongoing secretarial services for Hong Kong and offshore companies and foreign companies registered in Hong Kong (2) one or more nominee shareholders (3) registered office facilities (for Hong Kong companies) (4) an authorised representative (for foreign companies registered in Hong Kong). 2 Fees 2.1 The Corporate Services Department charges for its services on a two fold basis. (1) Firstly, a fixed annual charge which is payable in advance at the beginning of each calendar year is levied in relation to the basic services discussed separately in Part D, paragraph 3 to #4, paragraph 8 (2) Further, any additional work not covered by the annual charge is invoiced separately on a time spent and item basis. Disbursements such as filing and similar fees are also charged separately 2.2 A list of our current fixed annual charges is available on request. 3 Secretarial services 3.1 Every Hong Kong company is required by law to have a Hong Kong resident secretary (see Part B, paragraph 3.9) and clients often find it convenient and reassuring to appoint our nominee company as secretary. For companies incorporated in Hong Kong, our secretarial nominee company is Consec Services Limited. The services covered by our fixed annual charge include: (1) provision of a company secretary (2) provision of the registered office (3) custody of the statutory books and records (4) renewal of the business registration certificate kept at our address (5) provision of access to our Extranet Service 3.2 For companies incorporated in Liberia, Panama, the British Virgin Islands, Bermuda or the Cayman Islands, we can provide secretarial services even where our nominee cannot be formally appointed as secretary of the company. The services covered by fixed annual charge in these cases include: (1) custody of the statutory books and records (2) arranging payment of the company's resident agent's fee (3) payment of the corporation registration fee/franchise tax imposed in the place of incorporation (4) preparation of routine minutes for the annual shareholders’ and directors’ meetings where required (5) provision of access to our Extranet Service 4 Nominee shareholders 4.1 Every Hong Kong company is required by law to have at least one shareholder (see Part B, paragraph 2.4). Our nominee shareholder companies are Descona Limited and Seconda Limited. The services covered by the fixed annual charge include: (1) the giving of a proxy or authority to attend the annual general meeting (2) the onward transmission of any dividend received 4.2 Where nominee shareholder services are provided, the shares must be fully paid up and a declaration of trust will be executed by our firm in favour of the principal shareholder. 5 Authorised representative for foreign companies registered in Hong Kong 5.1 Every foreign company registered in Hong Kong is required to appoint an authorised representative (see Part C, paragraph 2.3). We can provide this service for an annual fixed fee. 6 Nominee director/alternate director 6.1 We only provide nominee and alternate director services in exceptional cases and usually only to dormant companies or companies which conduct investment holding business. 6.2 Our nominee director companies, where the services can be provided, are Anscode Limited and Consade Limited (incorporated in Hong Kong) and Townfair Company Limited and Bluebell Holding Limited (incorporated in the British Virgin Islands). The services covered by the fixed annual charge include routine attendances and signatures to cover approval of the annual audited accounts, the holding of an annual general meeting and the execution of the annual return where necessary. 6.3 For companies incorporated in Liberia, Panama, Bermuda or the Cayman Islands, in appropriate cases we nominate our nominee director companies to act as directors. The services covered by the fixed annual charge include: (1) routine attendances and signatures to cover approval of the annual audited accounts, if any (2) execution of documents in relation to the holding of annual meetings of shareholders and directors (3) execution of the annual return when required 7 Arranging resident agent for foreign companies 7.1 The services covered by the fixed annual charge include: (1) routine correspondence with the resident agent (2) arranging payment of the resident agent's fee (3) arranging payment of the corporation registration fee/franchise tax in the country of incorporation of the company (4) provision of access to our Extranet Service 8 Agent for service of process 8.1 Our nominee company, Consec Services Limited, is also available to act as agent in Hong Kong for the service of process on clients where clients need to appoint a service agent in Hong Kong e.g. in connection with a commercial transaction. This service is provided at a fee which varies according to the length of time that we act as agent. Back to Top E Taxation, Duties and Fees 1 Introduction 1.1 Hong Kong taxes are essentially territorial so that, in most cases, only income which in substance arises in or is derived from Hong Kong is subject to Hong Kong tax. Domicile, nationality and residence are therefore generally immaterial in determining whether or not Hong Kong tax is payable in a particular situation. There are three taxes on income in Hong Kong: (1) property tax (2) salaries tax (3) profits tax 1.2 The Inland Revenue Department is responsible for the administration and collection of these taxes and the taxation regime is set out in the Inland Revenue Ordinance. 1.3 In addition, ad valorem stamp duty is levied on transfers of shares in Hong Kong companies and on agreements for sale of residential land and conveyances of nonresidential land. Ad valorem capital fees are payable on the authorised capital of a company and on increases in capital. Estate duty is charged on the aggregated value of assets located in Hong Kong on death where the total value of such assets exceeds HK$7,500,000. Sweeping anti-avoidance provisions apply where companies are used to avoid Hong Kong estate duty. 1.4 There is no separate tax on interest in Hong Kong but in general, interest earned by financial institutions from the carrying on of banking and similar financial activities in Hong Kong and by other businesses where the interest has a Hong Kong source, is liable to profits tax. However, interest derived from deposits placed in Hong Kong with Hong Kong licenced banks, restricted licenced banks or deposit taking companies by companies or other persons (who are not financial institutions) generally will not be subject to profits tax unless the deposit secures a borrowing the interest expense of which is tax deductible. 1.5 Dividends are not subject to tax and there is no withholding tax on dividends or interest paid to non-residents. There is no capital gains tax in Hong Kong but profits arising from trading in shares, commodities or land are liable to profits tax. 1.6 The Inland Revenue Ordinance provides for a system, known as personal assessment, under which resident individuals can elect to have tax liability calculated by reference to total taxable income from all sources. 1.7 Although when compared with many taxation systems, Hong Kong tax is relatively simple in concept and application, we recommend that clients take specific tax advice when establishing operations in Hong Kong to consider the most tax effective way of structuring operations. Tax evasion is viewed as a serious matter in Hong Kong and there are various specific anti-avoidance provisions and also two general antiavoidance provisions in the legislation. 2 Property tax 2.1 Property tax is charged on the owner of land or buildings located in Hong Kong at the rate of 16% of, generally, the actual rent or other consideration received, less the amount of any rates paid by the owner and also less an allowance of 20% for repairs and maintenance. Owner occupied buildings are exempt from property tax liability. 3 Salaries tax General 3.1 Salaries tax is charged on income arising in or derived from Hong Kong from: (1) any office of employment or profit (2) any pension Income 3.2 The income which is subject to salaries tax includes wages, salary, leave pay, fees, commission, bonus, gratuity, perquisites and allowance. Examples of payments which are not subject to salaries tax include severance payments and long service payments and (up to a limit of HK$12,000) employees’ mandatory provident fund contributions. Source 3.3 The rules which have been established for determining whether income derived from employment arises in or is derived from Hong Kong can be summarised as follows: (1) Employees with Hong Kong employment are subject to salaries tax on all their income, irrespective of where they work, except in respect of any income earned for services rendered in another territory which is taxed in that territory or unless the employee visits Hong Kong for not more than 60 days in any tax year. (2) Employees with non-Hong Kong employment are only subject to salaries tax on that part of their income which is derived from services performed in Hong Kong. Therefore, employees with non-Hong Kong employment who work partly in Hong Kong and partly outside Hong Kong will be subject to Hong Kong salaries tax only in respect of income attributable to the proportion of their income which relates to services performed in Hong Kong. The apportionment can be done by reference to days in/out of Hong Kong or the value of the services performed in Hong Kong. If an employee is a visitor to Hong Kong who spends not more than 60 days on such visits in any tax year, no salaries tax will be payable in respect of services rendered during such visits. 3.4 For the purpose of these rules, a "non-Hong Kong employment" will normally only be found to exist where the following three factors (or at least the first two) are present: (1) the contract of employment was negotiated and entered into outside Hong Kong and is enforceable outside Hong Kong (2) the employer is resident outside Hong Kong (3) the employee's remuneration is paid outside Hong Kong. 3.5 The Commissioner generally takes the view that a resident cannot be a "visitor" and therefore a resident who is physically present in Hong Kong for not more than 60 days in a year of assessment is normally chargeable to salaries tax. Directors’ fees 3.6 Directors’ fees paid to the directors of a company which is controlled and managed in Hong Kong are chargeable to salaries tax irrespective of where the director resides. For this purpose any person holding a position similar to that of a director will be regarded as a director. Deductions 3.7 Deductions from assessable income may be made for certain outgoings and expenses which have been wholly, exclusively and necessarily incurred in the production of the assessable income. It is, however, rare for an employee to succeed in making a claim for such a deduction. Accordingly, in Hong Kong, emphasis is placed on reducing assessable income by the use of non-taxable benefits rather than expenses in the case of salaries tax. Deductions are permitted for contributions of employees to mandatory provident fund schemes up to a limit of HK$12,000 per year. Benefits 3.8 Non-salary benefits should be tax-deductible expenses for the employer and will, generally speaking, not be subject to salaries tax if: (1) the benefit is not in the form of "money or money's worth" (2) in the case of a payment made by the employer for the benefit of an employee, the employer (and not the employee) has the primary obligation to pay for the benefit and no other person has guaranteed payment (3) the benefit is not in connection with the education of a child of the employee. 3.9 Special tax rules apply to accommodation. The taxable amount is generally restricted to a maximum of 10% of the employee's remuneration provided that certain conditions are observed. Rates of tax 3.10 Tax is charged on a progressive scale up to 20% after generous personal allowances but this is subject to a maximum effective rate of 16% applied to gross income. The amount of personal allowances to which a salaries tax payer is entitled depends on a person's marital status and the number of children and other dependents. Returns 3.11 Employers must file returns of remuneration paid to and benefits provided for employees and must notify the Commissioner of Inland Revenue when employees are employed or are about to leave employment. The procedure to be followed by an employer where an employee is about to leave employment is important and should be closely observed. Provisional salaries tax 3.12 There is a system of provisional salaries tax in Hong Kong. A provisional assessment for the current year is made based on the previous year's final assessment and tax is charged accordingly. Once the actual income for the year of assessment is known, a final assessment is issued based on the actual income crediting the provisional salaries tax already paid. 4 Profits tax General 4.1 Individuals, partnerships, corporations and other bodies carrying on business in Hong Kong are liable to pay profits tax on those profits which arise in or are derived from Hong Kong. The corporate profits tax rate is currently 17.5% of assessable profits and the rate for sole proprietors and partnerships is 16%. Source of income 4.2 It can sometimes be difficult to determine whether or not profits have a Hong Kong source. However the broad guiding principle is "what did the taxpayer do to earn the profits in question and where did the taxpayer do it?". 4.3 By way of example the following activities would normally amount to the carrying on of business in Hong Kong which would give rise to profits with a Hong Kong source: (1) manufacturing in Hong Kong (2) performing services in Hong Kong (3) selling goods in Hong Kong (4) appointing an agent in Hong Kong with general authority to negotiate and conclude 4.4 Certain profits, including receipts from the use of films, the use of intellectual property rights or the hire of movable property in Hong Kong, are deemed to be profits of a business carried on in Hong Kong and to be profits which arise in or are derived from Hong Kong. Profits from arm's length licensing arrangements attract tax at 5.25% thereof, provided that various conditions are satisfied. 4.5 Special provisions apply to: (1) insurance and ship and aircraft owning companies (2) disposals of certain discounted financial instruments (3) profits of financial institutions in respect of interest derived from financial business carried on in Hong Kong Chargeable profits and deductions 4.6 In general, only the difference between gross Hong Kong profits and Hong Kong expenses incurred in producing profits is assessable to profits tax. Interest paid is only deductible if it is of a revenue nature and only then if various specific conditions are met. Provision is made for depreciation allowances for approved capital expenditure. 4.7 Subject to certain anti-avoidance provisions, business losses may be carried forward and set-off against future profits. There are no provisions for transferring the benefit of losses between group companies or for carrying back terminal losses. Tax year 4.8 The tax year in Hong Kong runs from 1st April to 31st March and businesses potentially liable to profits tax are usually issued with a tax return in April or May of each year requesting that they complete the return and furnish it to the Inland Revenue Department with the relevant accounts within one month of the date of issue of the return. Profits for a particular tax year are usually based on the profits earned in the accounting period ending in the year of assessment. Provisional profits tax 4.9 The Inland Revenue Department issues a provisional profits tax assessment for each year of assessment at the same time as it issues a final profits tax assessment for the preceding year. Provisional tax is applied first against profits tax payable on the profits of the current year of assessment. When the final assessment is calculated any underpayment of tax is added to the provisional profits tax assessment for the following year. Who is responsible? 4.10 The secretary, managers and directors of a company are each responsible for ensuring compliance with the company's obligations under the Inland Revenue Ordinance. Where there is no one from the company resident in Hong Kong who can be so responsible, the company is obliged to appoint a "tax representative" and advise the Commissioner accordingly. The Registrar has the power to impose penalties in relation to late filing and payment of taxes so care should be taken to comply with the time limits imposed by the Registrar. 5 Stamp duty and capital fee Share transfers 5.1 Stamp duty is levied on the transfer of shares in Hong Kong companies at an effective aggregate rate of 0.2%. (There are exemptions available for intra-group transfers and we will be pleased to provide advice about these exemptions on request). Duty is charged on the consideration for the transaction or, if higher, the market value (as assessed by the Stamp Office based on the company's most recent accounts or other supporting documentation) (see Part B, paragraph 5.10). Sale and purchase agreements and conveyances of land 5.2 Stamp duty is payable on "agreements for sale" (which is widely defined) of residential land at the maximum rate of 3.75% and on conveyances of non-residential land, at the same rate. Lower rates apply where the sale price or gift value does not exceed various thresholds which are regularly increased in line with inflation. Where ad valorem duty has been paid on an agreement for sale of residential land, a fixed duty of HK$100 is payable on the conveyance. Capital fee 5.3 A capital fee of 0.1% is payable on the nominal value of, and on any increase in, the authorised share capital of a company and on any premium on the allotment of shares. It is capped at $30,000 per case. Estate duty 5.4 Estate duty is a tax imposed under the Estate Duty Ordinance. It is levied on the principal value of all dutiable assets situated in Hong Kong passing on the death of an individual. The residence and domicile of a deceased person are not relevant in determining whether the deceased person's estate is chargeable to estate duty. Certain assets, including a matrimonial home, are exempt from estate duty. Estate duty 5.5 The rate of estate duty payable ranges from 5% (where the principal value of the estate exceeds HK$7,500,000) to 15% (where the principal value of the estate exceeds HK$10,500,000). Where the aggregate value of Hong Kong assets does not exceed HK$7,500,000 no estate duty is payable. Estate duty 5.6 Relief is available where the same property passes on successive deaths occurring within five years of each other. There are provisions in the Estate Duty Ordinance designed to prevent the avoidance of estate duty by transferring Hong Kong assets to companies and continuing to enjoy the use of or benefits from the assets. Gifts made within three years of death and gifts which are not absolute are not effective for estate duty purposes. This may affect a gift into trust if the settlor is a potential or actual beneficiary. 5.7 In the 2005-06 Budget, the Financial Secretary proposed the abolition of estate duty and subsequently, on May 6, 2005, the Revenue (Abolition of Estate Duty) Bill 2005 was published in the Gazette. The first reading of the Bill took place on May 11, 2005. It is anticipated that the Bill will be passed into law in the near future. Back to Top F EMPLOYMENT VISAS 1 Foreign companies often wish to transfer certain of their employees to Hong Kong in connection with setting up business operations in Hong Kong. Unless such employees have the right of abode or unconditional stay in Hong Kong they will need to obtain a Hong Kong employment visa to work in Hong Kong. 2 In order to qualify for a Hong Kong employment visa, a person must possess skills and experience relevant to the job that are unavailable locally. This test can generally be satisfied in the case of an intra-company or intra-group transfer. The applicant will also be required to nominate a sponsor, which must be a Hong Kong company or a foreign company registered in Hong Kong. Accordingly, the sponsor will usually be the employer company. 3 Under normal circumstances, an employment visa application may be lodged with the Hong Kong Immigration Department by post or in person. The Immigration Department prefers that employees obtain visas before coming to Hong Kong but in some cases it is prepared to consider processing an application made after the employee has arrived in Hong Kong. Back to Top Whilst every effort has been made to ensure the accuracy of this publication, it is for general guidance only and should not be treated as a substitute for specific advice.

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