Registration of Subsidiaries & Foreign Entities in Hong Kong
Overseas companies must register with the authorities before they are permitted to do business in Hong Kong. Foreign enterprises have a great deal of flexibility when it comes to doing business in Hong Kong. For some companies that are less familiar with the market and are unsure of their long-term interests in the region, they may set up a representative office, which allows them to establish a limited presence in Hong Kong without undergoing the somewhat more onerous procedures associated with forming other entities such as a private limited liability company. However, even for foreign companies that wish to establish a full-fledged entity in the Territory, incorporation and compliance procedures remain simple, clear, and few, particularly by comparison with most countries. Additionally, the corporate tax rate is very competitive (16.5%) and Hong Kong corporate tax is not extended to profits earned overseas.
Hong Kong continues to attract a large number of foreign companies seeking a variety of advantages in Hong Kong. Hong Kong attracts a great number of large multinational corporations seeking to cement their global reach, small and medium companies seeking to develop marketing and sales opportunities, as well as financial investors of all kinds. Hong Kong is also an important location for businesses seeking to expand into nearby markets including Mainland China and the emerging and frontier markets of Southeast Asia.
Hong Kong maintains an extremely business friend environment, a high level of political and regulatory stability, and enjoys effective and efficient economic governance. The World Bank ranked the Hong Kong SAR the world’s 5th easiest place to do business in 2016. Hong Kong enjoys a very developed financial industry as well as full capital account convertibility. Business can find financial services providers that can process every kind of financial transaction.
The role of a representative office is to act as the Hong Kong liaison for an oversees company. To form a representative office, the local founder merely needs to register with the Inland Revenue Department where they will obtain a business registration certificate. A representative office is not considered a legal entity. As such, a representative office may not engage directly in profit-making activity including, but not limited to, the signing of contracts, directly negotiating deals, or the issuing of invoices. However, a representative office is permitted to act as a liaison between prospective customers or suppliers and the parent company, and can, therefore, be a powerful sales and business development asset. The representative office may engage in promotional activities on behalf of the overseas parent organization. Finally, a representative office is permitted to engage in market research and many other activities that do not directly involve profit making and that are done solely on behalf of the parent organization. Generally speaking, a representative office can be a prudent and effective first step for a business that is interested in developing marketing opportunities in Hong Kong but is not ready to make the commitment and bear the costs (financial and time burden) associated with forming a full-fledged legal entity, such as a subsidiary or branch office.
A subsidiary is effectively a wholly foreign-owned limited liability company. As such, it is a far more complex endeavor to form and operate than a representative office and is best suited for those with more certain, long-term interest in Hong Kong. A subsidiary’s liabilities and debts do not extend to the parent organization. From a risk management perspective for the global organization, this gives a subsidiary a distinct advantage over a branch office, whose liabilities do extend to the parent organization.
A branch office is distinct from a subsidiary in that it is not a separate entity from the parent company, though it is considered a legally incorporated entity. As such, the parent organization is fully responsible for the debts and liabilities of the branch office.
Determining the Best Option for your Business
Companies are advised to consider the nuances of their own circumstances when determining the best option for their entry into Hong Kong. In particular, companies should consider the time horizon and level of certainty concerning their future in Hong Kong. For example, if a company is certain of their long-term interest in direct, profit-making activities within the Hong Kong market, incorporating a Subsidiary or a Branch office may be the best option.
Even with a long time horizon in Hong Kong, a representative office could suit a multinational company’s needs if those goals do not involve signing deals, directly earning income, and issuing invoices. Some businesses may set up a representative office for long-term use as a base to source suppliers. For others, the very international nature of their business, for example, might suggest that their Hong Kong presence need only act as a liaison between prospective customers and the oversees parent organization.
A subsidiary and branch office are similar in that they may both engage in profit making activities and exist as their own legal entities. One of the main factors when deciding between a Branch Office and Subsidiary is the risk profile of the Hong Kong business. If the nature of a company’s future work in Hong Kong may mean relatively higher risk, it could be worthwhile to go to the trouble of forming a subsidiary.