Increasingly, Hong Kong stands out as a key jurisdiction for holding investments directly, as well as being an ideal location for setting up companies to invest in other markets.
Often, this includes the Mainland of China and different parts of the Guangdong-Hong Kong-Macao Greater Bay Area (GBA).
This is an approach Francesco Montonati, Managing Director in our Hong Kong office, is seeing from companies structuring their China presence. In this Expert Q&A, he shares his perspective on the key advantages and opportunities of having Hong Kong as an entry point:
- How would you describe the current business environment in Hong Kong?
- Which sectors stand out as the strongest or most competitive for foreign businesses entering Hong Kong?
- What questions do you usually get from companies entering Hong Kong?
- From Hong Kong, where do companies typically expand into next?
- How can businesses leverage Hong Kong as a gateway to the Mainland of China?
- How do you see Hong Kong evolving in the next five years?
- Finally, are there any challenges that companies face when expanding operations?
About Francesco Montonati
Francesco is an International Law graduate, who began his career at the Italian Chamber of Commerce in Hong Kong and Macau. He joined Hawksford in 2013 and has been working in both the Hong Kong and the Shanghai offices.
With more than ten years of practice, Francesco has supported foreign companies with their setup and business operations across Hong Kong and the Mainland of China, providing comprehensive advisory with outsourced administration services.
1. How would you describe the current business environment in Hong Kong?
If we look at Asia specifically and focus on the fundamentals from a corporate and fiscal perspective, I would say Hong Kong has one of the most supportive frameworks for doing business.
It takes about one day to register a company. If we submit the application in the morning, by the afternoon the company will be legally incorporated.
There are no minimum capital requirements, so you can set up a company with as little as one dollar, and there are no restrictions on who the shareholders can be. Individuals or corporations, local or overseas, anything is fine. There must, however, be at least one individual director, which our Hong Kong team can assist with.
Other than that, there are few tax elements in Hong Kong, which is where we stand out from most major financial centres in Asia. Hong Kong only charges profits tax at 8.25% on the first HK$2 million of profits and 16.5% on anything above that. So, if you have a profit before tax of HK$5 million, the first HK$2 million will be taxed at 8.25% and the remaining HK$3 million at 16.5%, and that’s it.
There is a light withholding tax on certain royalty payments to overseas recipients; there is no business tax, value added tax (VAT) or goods and services tax (GST). Dividend payments are not taxed, regardless of whether the recipient is a local or overseas shareholder.
Hong Kong is also one of the top three financial hubs in the world. Plus – and this is one of Hong Kong’s key advantages – if your end goal is to do business in the Mainland of China, you may consider doing so through Hong Kong.
By using a Hong Kong company to hold your Chinese Mainland investment, or even just managing your Chinese Mainland relationships from a base in Hong Kong, you have the benefits of a common law system, a simple and competitive tax regime and, in several sectors, closer access to the Chinese Mainland market. All of that can put you in a stronger position as you grow in the Mainland of China.
2. Which sectors stand out as the strongest or most competitive for foreign businesses entering Hong Kong?
Historically, there has been a lot of trading activity: buying finished products from the Mainland of China and selling them worldwide. So, sourcing, international trading and quality control vis-à-vis China is common.
For the local market, I would highlight retail, fashion, luxury, and consumer goods in general. Hong Kong is strong in this space as it is a preferred destination for Chinese Mainland tourists to come and shop. This has historically been true and remains true today. Then there is banking, finance and all the services related to these industries.
Logistics is also important because Hong Kong is a free port. Many shipping companies establish headquarters here because of the facilities. The Hong Kong airport is, in terms of cargo, one of the busiest in the world.
On top of that, we are seeing emerging sectors such as financial technology (fintech), medical technology (medtech), cryptocurrency, as well as art for business. The private and family office industry is also growing. These are all areas the Hong Kong government is actively promoting.
3. What questions do you usually get from companies entering Hong Kong?
Typically, clients will ask about the requirements for setting up correctly and efficiently. The taxation between Hong Kong and other countries, such as the United Kingdom (UK) and Singapore, also comes up sometimes as clients want to understand which jurisdiction can provide the most suitable tax structure for holding investments.
Another question we usually get is on the visa schemes for individuals and families looking to come to Hong Kong and establish residency. How easy is it to get a visa? What do I need to do to become a resident in Hong Kong? etc. The Hong Kong government has been increasing its efforts to attract back some of the talent it lost during the coronavirus pandemic (COVID-19) and so there is a range of different visa schemes available. It’s worth noting, there is no minimum salary fixed by law.
Hong Kong is also one of the few jurisdictions in Asia that would allow you to secure permanent residency in a relatively short period of time. You just need seven years of continuous employment here.
4. From Hong Kong, where do companies typically expand into next?
After Hong Kong, many companies explore the Mainland of China and the wider GBA market, starting with Shanghai or Shenzhen. Shanghai works well for retail, while Shenzhen is often preferred for innovation and technology.
We also have clients that venture into the Philippines, Indonesia, Japan, South Korea, Taiwan, Vietnam, Thailand, and Singapore. Several clients also choose to sell to the UK, the United States (US), Western Europe, and Australia from Hong Kong.
5. How can businesses leverage Hong Kong as a gateway to the Mainland of China?
From a taxation point of view, Hong Kong has a network of about 50 double taxation agreements, including the Mainland of China. And thanks to the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA), managing an entity in the Mainland of China can be easier if the Hong Kong company is the shareholder.
When you set up a company directly from overseas into the Mainland of China, the paperwork alone may take longer than a month. If, instead, your shareholder is a Hong Kong company, the process is much more straightforward. You can go to a notary in Hong Kong who holds a special qualification as a China Appointed Attesting Officer (CAAO). You notarise the documents in Hong Kong, and those documents are automatically recognised as valid in the Mainland of China.
On top of that, there are many other advantages. Take arbitration, for example. If you agree to Hong Kong as the place of arbitration and later have a dispute with a mainland counterpart, a Hong Kong arbitral award can be recognised and enforced in the Mainland of China.
There are also special rules when it comes to customs. Import and export between the Mainland of China and Hong Kong follows well-established procedures, and in many cases the process is easier. Customs duties can be lower than shipping directly from overseas into the Mainland of China.
In the medical sector, for instance, there are pilot arrangements where pharmaceuticals that have already received approval in Hong Kong can be marketed in designated Chinese Mainland locations without going through approval processes again.
6. How do you see Hong Kong evolving in the next five years?
From my perspective, the connection and relative advantage that Hong Kong has with the Mainland of China and the GBA will improve. Over the last two to three years, we’ve really seen this advantage grow, and I believe that trend will continue.
The government is putting a lot of emphasis on research and development (R&D). More companies are likely to look at Hong Kong as a place to set up R&D centres because the environment is quite supportive in terms of grants and tax deductions, especially in sectors like green technology, medtech and fintech.
Just to give one example: for certain qualifying R&D expenditure, you can get an enhanced tax deduction of up to 300%.
Then there is the Dedicated Fund on Branding, Upgrading and Domestic Sales (BUD fund) scheme. This is for companies that have established a presence in Hong Kong and want to expand outside Hong Kong. That could be into the Mainland of China or any other market in Asia and beyond, even Europe.
Under the scheme, companies can get reimbursement on qualifying expenses they incur for that expansion. The government covers 25% of eligible costs and the total funding cap can go up to around HK$7 million. Importantly, this is not for money you spend in Hong Kong, but for expenses that the Hong Kong company incurs for overseas growth, such as marketing, business development or hiring activities.
7. Finally, are there any challenges that companies face when expanding operations?
One thing to understand is that Hong Kong is different from the Mainland of China from a legal, tax and customs perspective. If you set up a company in Hong Kong, you’re operating under Hong Kong’s own common law system and tax regime. That does not, by itself, put you “in the Mainland of China” for regulatory or tax purposes.
Once you expand into China, there is a separate set of rules you need to comply with. So, you need to plan carefully and have a good understanding before entering the market, which our team has the knowledge and capacity to continue assisting with.
The Hawksford Expert Q&A series features commentary on market developments and industry trends that matter to our clients. Our subject matter experts across Hawksford share their views to help businesses navigate change and make informed decisions. Subscribe to our newsletter to get the latest insights. All information presented in this article is accurate at the time of publication.
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