This publication is a joint project with

Doing in Kong Contents

Executive summary 4 Disclaimer

Foreword 6 This document is issued by The Hongkong and Shanghai Banking Corporation Limited (the ‘’) Introduction 8 in in with PricewaterhouseCoopers (PwC). Why set up a business in Hong Kong 14 It is not intended as an offer or for investing in mainland China? solicitation for business to anyone in any jurisdiction. It is not intended How to start a business in Hong Kong 18 for distribution to anyone located for investing in mainland China in or resident in jurisdictions which restrict the distribution 22 of this document. It shall not be copied, reproduced, transmitted or further distributed by any recipient. Taxation in mainland China 30 The information contained in Audit and accountancy 38 this document is of a general nature only. It is not meant to Human Resources and Employment Law 40 be comprehensive and does not constitute financial, legal, or 44 other professional advice. You should not act upon the information Banking in Hong Kong 46 contained in this publication without obtaining specific professional advice. This document is Country overview 48 produced by the Bank together with PricewaterhouseCoopers Contacts 50 (‘PwC’). Whilst every care has been taken in preparing this document, neither the Bank nor PwC makes any guarantee, representation or warranty (express or implied) as to its accuracy or completeness, and under no circumstances will the Bank or PwC be liable for any loss caused by reliance on any opinion or statement made in this document. Except as specifically indicated, the expressions of opinion are those of the Bank and/or PwC only and are subject to change without notice. This document is not a 'Financial Promotion'.

The materials contained in this publication were assembled in June 2012 and were based on the law enforceable and information available at that time. Executive summary

Hong Kong, which has been a 5-hour flight. Hong Kong’s workforce. Hong Kong‘s labour ranked the ‘World’s Freest International Airport is one force has not been known to Economy’ for over a decade, of the busiest international voice any objections against is a regional business hub in airports in the world, with foreign investment. Asia. Hong Kong’s proximity to direct flights to over 160 China, its similarities in terms international destinations. While the Hong Kong of culture, social and Government has adopted a language, and its international • Hong Kong’s proximity to, and policy of minimum intervention business environment, have close and unique relationship towards the regulation of made it an ideal base for foreign with, mainland China, has made the territory's business and investors to enter the Chinese it the gateway to mainland industry, investors still need market. These characteristics China for business. English is to be aware of regulatory also help mainland investors the language of business in aspects relating to their specific to invest in regional and global Hong Kong and many people sector, where appropriate. This markets. Hong Kong continues speak English, and document contains reference to be Asia’s second largest and Putonghua and have a good to some common issues that the world’s third largest Foreign understanding of international investors should be aware of Direct Investment recipient. and mainland Chinese business. when operating in Hong Kong and/or using Hong Kong as a Based on the World Bank • Although no particular aspects gateway to mainland China, Doing Business Survey, Hong of Hong Kong‘s tax regime although specific advice on Kong is ranked second in terms favours foreign investment their particular circumstances of ease of doing business in and there are no significant should be sought. the world. It offers a number tax incentives for foreign of competitive advantages as investment, Hong Kong‘s a hub for investors to conduct low and simple tax system their business, such as: is attractive to foreign investors. The corporate and • The Hong Kong Government rate are capped at has long been endorsing a 16.5% and 15% respectively, ‘market driven with minimal with no and no tax government interference‘ on capital gains or dividends. policy. Foreign investment is welcome and there is no policy • Hong Kong is a free port and to protect the local industry generally imposes no customs against foreign competitors. duties on imported goods, with The Hong Kong business a few limited exceptions. community is also receptive to foreign investment. • Hong Kong‘s immigration policies are designed to • Strategically located at the attract professionals, talented centre of Asia, all of the individuals and investors to region‘s key markets are within ensure the city‘s continued a 4-hour flight and half of the competitiveness and enrich world’s population is within the quality of Hong Kong‘s

4 Foreword

In today‘s world, Founded in Hong Kong and Peter Wong must compete on a much wider Shanghai in 1865, HSBC Chief Executive, Asia Pacific playing field, no longer confined has over 140 years expertise The Hong Kong and Shanghai within national borders. in helping customers to seize Banking Corporation Limited business opportunities in Since the 1950s, we have China. Backed by our global witnessed the rise of dynamic presence in 84 countries Asian economies starting with and territories with around Japan and then spreading in 6,900 offices worldwide, we the 1960s and 70s to the Asian are well positioned to assist Tigers – Hong Kong, Singapore, entrepreneurs, multinationals Taiwan and South Korea. While and conglomerates eager their economic success has to tap into this exciting and brought tremendous prosperity, booming market. it is safe to say that none attracted the same attention Created in collaboration with as the rise of China has in the PricewaterhouseCoopers, last 20 years. The awakening this guidebook, Doing of the Chinese dragon is, to Business in Hong Kong, borrow the words of Napoleon provides a thorough analysis two centuries ago, ‘shaking of various options in the world‘. establishing a business in China. It underscores Hong Today, China is the second Kong‘s strategic importance largest economy in the world for doing business in China, after the United States and explains the taxation systems, is the fastest-growing major and also takes you through economy. Not only has China the process of setting up a become the workshop of company in Hong Kong and the world, the country‘s in the Mainland. increasingly affluent population is becoming a significant As your trusted partner, HSBC consumer market itself. is always looking for ways to facilitate your business growth. With this guide, I hope you find building your venture in China has fewer complexities than you thought and I wish you a prosperous future in the land of dragons!

6 Introduction Doing business in Hong Kong

Free trade is the lifeblood of Kong Express Rail Link is under The Heritage Foundation, Hong Kong. It is one of the most construction with journey times The Wall Street Journal and the open and externally orientated from Hong Kong to Cato Institute in the United States economies in the world. only 48 minutes. and the Fraser Institute of Canada have consistently rated Hong Unrivalled location Gateway to China Kong as the world‘s freest economy.

Hong Kong has a prime Hong Kong is blessed with • The cornerstone of the economy location at the geographical an invaluable geographic rests on free enterprise, and free markets open to all. and economic centre of Asia. advantage – its proximity to Business executives in Hong mainland China. Flanking the • No barriers to trade – no tariffs, Kong have fast and easy access mouth of the PRD, Hong Kong no quotas, no exceptions. to all the major markets in the has served as the gateway to region. This central position China for more than a century • No restrictions on investments is one of the key reasons for and a half. There is nowhere inward or outward. the city‘s popularity as a better than Hong Kong to obtain location for regional operations. the expertise, information and • No foreign exchange controls. facilities needed to tap into the Hong Kong International Airport immense Chinese market. • No nationality restrictions on is repeatedly voted as one of, corporate or sectorial ownership. if not the best airport in the China‘s entry to the World world. It operates on a 24- Trade Organisation and hour basis, with daily non-stop development of increasingly flights to major cities in Asia competitive industries have Pacific, North America, Europe, set the stage for even greater the Middle East and South economic expansion. The Africa. Travelers can reach Closer Economic Partnership most countries in Asia within Arrangement (CEPA), which a five-hour flight. took effect at the beginning of 2004, provides Hong Kong with Located on the southeast coast additional and exclusive market of mainland China, Hong Kong access benefits. fronts a vast hinterland that is, with 1.3 billion people, the The marriage of Hong Kong‘s largest single market in the world-class financial, marketing world. Corporate executives and technical expertise and can travel back and forth to sophisticated infrastructure Beijing, Shanghai and other with the Mainland‘s rapidly major Chinese cities in a single developing manufacturing day while making their home and services base has created in Hong Kong. For companies a win-win situation. China with manufacturing facilities is now Hong Kong‘s largest Contents of this section in the (PRD trading partner, and thousands are adapted from the website region), their executives can of international companies of Invest HK www.investhk.gov.hk travel there by car in one to involved in China trade have as of May 2012. three hours. In addition, the chosen to establish their 8 Guangzhou-Shenzhen-Hong beachhead in Hong Kong. Rule of law courts in Hong Kong. Foreign government practices ensure The government began high-speed rail link. Opened Hong Kong maintains a stable affairs, defence and Chinese that companies are free to deregulating the industry as on 6 July 1998, it is one of the and mature legal system covering The rule of law is fundamental constitutional issues are the pursue their business interests early as 1995 when it issued world‘s busiest airports and such business-critical areas as to Hong Kong‘s success. All responsibilities of the sovereign on a level playing field without fixed-line telecommunications can process about 53.9 million intellectual property. are equal before the law. The state, China. concern for corruption. network service licences to passengers and 3.9 million legal system of the Hong Kong four providers. tonnes of air cargo annually. Special Administrative Region Arbitration Free flow of information Besides, as part of the Hong (HKSAR) is separate from The mobile phone services Kong International Airport the Mainland‘s. The impartial Hong Kong has developed Freedom of information is market is very competitive Master Plan 2030, the Airport judiciary is independent of into one of the world‘s major another core advantage that with five operators and 18 Authority (‘AA‘) recommended the legislative and executive arbitration centres since Hong Kong offers businesses. networks. There are currently that the government build branches, and is drawn from establishing its International From obtaining a driving licence 187 internet service providers an additional runway as the several British Commonwealth Arbitration Centre in 1985. Its to checking your Facebook in Hong Kong, all are allowed two existing runways are jurisdictions as well as from expertise in commerce, , account, reading the daily to provide broadband services forecast to reach capacity by Hong Kong itself. Cases are shipping and construction news or researching potential under their licences. Broadband 2020. With the government‘s heard in English and/or Chinese. provides the necessary pool business partners, Hong Kong internet connection virtually approval, AA will proceed of experienced professionals is committed to transparent, covers all households and with an Environmental Impact The Basic Law came into to promote dispute settlements. timely and reliable information. commercial buildings. Assessment process and the effect when China resumed These include accountants, preparation of the associated sovereignty of Hong Kong architects, bankers, engineers Hong Kong enjoys The only modern, fully- design details of the facilities in mid-1997 and serves as and insurance experts, as well constitutionally guaranteed developed deep-water under a three-runway system. the region‘s constitutional as lawyers. freedom of speech and freedom harbour between Singapore framework. Its underlying of the press. Information about and Shanghai, Hong Kong is International lifestyle premises are best summed up Police government services is easily the focal point of all maritime as ‘One Country, Two Systems‘ available online and there is activities in southern China. Hong Kong offers a stimulating, and ‘No change for 50 years‘. Hong Kong has long been a unrestricted access to the The container port in and dynamic and cosmopolitan Post-1997 Hong Kong inherited safe city with low crime rates. internet. around Kwai Chung is privately lifestyle, but it also has the laws of the former colony Crucial to this achievement owned. In the fourth quarter its tranquil side with lush so that Hong Kong today is its effective and efficient World-class infrastructure of 2011, Hong Kong handled countryside and remote beaches continues to benefit from a 37,000-strong police force. a total of 6.2 million TEUs. accessible only from the sea. stable and mature legal system, People in Hong Kong take it Vessel turnarounds are among Some 40% of Hong Kong covering such business-critical Clean government for granted that everything the fastest in the world and port is protected as country and areas as intellectual property. works properly. charges are among the lowest marine parks and shielded from Hong Kong is one of the most worldwide. Container ships at development. The marshlands in Court of Final Appeal corruption-free economies The electricity grid is state-of- terminal berths are routinely the north of the territory shelter in the world. Cronyism, the-art and supply is more than turned around in about ten one of the widest varieties of The Court of Final Appeal influence-peddling and bribery adequate. Blackouts are not hours, while the turnaround birdlife in the world. Botanists operates in Hong Kong and is receive zero tolerance here. part of the vocabulary. Drinking time for conventional vessels and zoologists are still finding staffed by senior judges from This is due to its strong public water is readily and reliably working in mid-stream at hitherto unrecorded species of Hong Kong and distinguished administration as well as the available. Taxis operate around buoys or anchorages is 25 flora and fauna. overseas judges on rotation. Independent Commission the clock. Mobile phones and 37 hours respectively. It is the highest appellate Against Corruption (ICAC). connect – even in tunnels and It‘s a city of eastern and western court which hears appeals in Since it was founded in 1974, in the underground railway. The state-of-the-art Hong cultures, with an abundance of both civil and criminal matters the ICAC has promoted a Kong International Airport arts centres, museums, concert and may confirm, reverse or strong anti-corruption culture The telecommunications is just 23 minutes from the halls and libraries. The annual vary the decision of the lower in Hong Kong. Clean system is fully digitised. central business district by a Hong Kong Arts Festival and 10 other cultural events all year The is charged round feature top performers at either progressive rates of from around the world. It‘s also 2% to 17% or a standard rate the food capital of China, with of 15%, and is imposed only every regional cuisine celebrated, on income from employment, and a city with well-developed office or pension of individuals international tastes. Whatever arising in or derived from one fancies, whether it‘s haggis Hong Kong. The salaries tax is or sushi, French haute cuisine or assessed on a yearly basis and burgers, falafel or pizza, diners can be paid in two instalments, are spoilt for choice. usually between January and April of the following year. Low The applies to Hong Kong taxes are among the owners of land or buildings lowest in the world, and the tax situated in Hong Kong. It is regime is simple and predictable. low by international standards: 15% (from 2008/09 onwards) The rate is the of the rental income from same for foreign and local the land or buildings with an companies – a low 16.5%. allowance of 20% permitted The actual tax bill is often even for the cost of repairs and less after various deductions maintenance. and depreciation allowances. There is no or VAT There is no , in Hong Kong. The limited withholding tax on dividends tax base, combined with and interest or collection of exceptionally low tax rates, social security benefits in makes Hong Kong's tax Hong Kong. incidence much lower than in virtually all other developed economies. Why set up a business in Hong Kong for investing in mainland China? Hong Kong is an important offshore RMB and international .

Hong Kong is one of the best Double Tax Agreement Provisions in the comprehensive In this example, it is assumed cities for businesses. It has (DTA) – Comprehensive agreement provide beneficial that the Parent Company one of the most flexible and DTA between China and treatments for Hong Kong is from a country/state that supportive corporate governance Hong Kong companies investing in China does not have a regimes in the world. (e.g. reduced withholding tax with China. In addition, the China and Hong Kong entered rates on dividends, interest, tax implications in Parent Advantages of entering into a comprehensive DTA in royalties and exemption Company‘s home country China via Hong Kong August 2006 to replace the treatment for certain capital are ignored for simplicity limited scope agreement gain). The table below briefly purposes. The following are some signed in 1998. The illustrates the tax benefits advantages of using Hong Kong comprehensive agreement relating to dividends for It is worth noting that the companies for investing in China. took effect on 1 January 2007 a foreign investor (Parent Chinese tax authorities have in China and on 1 April 2007 Company) to invest in China via recently geared up their in Hong Kong. a Hong Kong holding company. efforts to attack business arrangements that are established for the purpose Scenario 2 of . As such, Scenario 1 Parent Company Investing it is imperative for the Parent Parent Company Directly into China via a Hong Kong Company to have justifiable Investing into China Holding Company commercial reasons to establish the Hong Kong China Operating Company Holding Company and also maintain sufficient commercial Profit before tax 100 100 substance in the Hong Kong Holding Company in order China CIT 100 x 25% = 25 100 x 25% = 25 to enjoy the preferential Distributable dividend 100 – 25 = 75 100 – 25 = 75 treatment under the China/ Hong Kong DTA. Hong Kong Holding Company

China withholding income tax N/A 75 x 5%2 = 3.75 Distributable dividend N/A 75 – 3.75 = 71.25 Parent Company

China withholding income tax 75 x 10%1 = 7.5 N/A3 Total dividend received 75 – 7.5 = 67.5 71.25 Overall China and Hong Kong tax burden 32.5 28.75

Notes: 1. The withholding income tax rate on dividends under China‘s domestic is 10%. 2. The withholding income tax rate on dividends is 5% under the double tax agreement between China and Hong Kong if the Hong Kong Holding Company owns not less than 25% capital of the China Operating Company. 3.Hong Kong does not levy withholding income tax on dividends.

14 Closer Economic Partnership RMB offshore centre Arrangement (CEPA) – Opportunities for Hong Kong Hong Kong plays a vital bridging role for money flows between CEPA is the first free trade China and the rest of the world. agreement concluded between In 2004, Hong Kong became China and Hong Kong. Under the first place outside China CEPA, both sides have agreed to conduct personal to enhance co-operation in (RMB) business. Since then, trade and investment promotion the Hong Kong Government in order to improve the overall has been actively exploring business environment. Hong with Mainland authorities the Kong Service Suppliers (HKSS) introduction of new types can enjoy greater liberalisation of RMB business in Hong measures compared to foreign Kong with an aim to further investors when entering China‘s enhance the capability of service sectors. Hong Kong‘s financial system to handle RMB-denominated Professional bodies in Hong transactions. The Chinese Kong and the regulatory Government also actively authorities in China have supports the growth of the also signed a number of RMB market in Hong Kong. agreements or arrangements on mutual recognition of Starting from July 2011, eligible professional qualifications. enterprises in China can settle cross-border trade in RMB with Since the signing of the main their trading counterpartners text of CEPA in June 2003, in all foreign countries and another eight supplements jurisdictions. have been signed between 2004 and 2011 to further This further strengthens the enhance the liberalisation status of Hong Kong as an measures for various service important offshore RMB and sectors. CEPA provides a international financial centre. window of opportunity for Hong Kong businesses to gain greater access to the Mainland market. Foreign investors with business establishments in Hong Kong may leverage on the CEPA benefits to tap the vast opportunities of the Mainland market.

16 How to start a business in Hong Kong for investing in mainland China

Setting up a business in to check the index of company Business Registration bylaws, the latest published in Hong Kong. A certificate of Facts at a glance Hong Kong is straightforward. names at the Companies Certificate can be issued accounts and a specified form registration will be issued upon Procedures are transparent Registry to see whether the within 24 hours of online containing the information of completion of the registration • The most commonly used business and simple. proposed name has already application or 4 working days each director and secretary, (usually 14 working days from vehicles for doing business in Hong been registered. If the name of paper submission. the name and address in Hong the date of filing the above Kong are private limited companies Establishing an entity is not the same as one already Kong of a person resident in documents). A foreign and branches of foreign companies. in Hong Kong appearing on the index of The Business Registration Hong Kong who is authorised corporation is required company names and is not a Certificate must be renewed to accept on behalf of the to be registered under the • The procedures for incorporation of Forms of foreign investment name that requires the prior annually at the current rate foreign corporation service Business Registration a new private limited company and The principal forms through consent of the Chief Executive, of HK$2,450 (HK$2,000 is of process and any notices Ordinance within one month registration of a branch of foreign company in Hong Kong are simple which a business can be the duly signed incorporation waived for the fiscal year served on the corporation etc, from its date of commencement and straightforward. conducted in Hong Kong are documents can be submitted 2012/13). A capital fee payable within one month from having of business in Hong Kong. as follows: to the Registrar of Companies to the Registrar of Companies established a place of business • The time frame for incorporation for registration. upon incorporation is HK$1 per of a limited company can be as 1. Company incorporated in Hong HK$1,000 of authorised capital short as 24 hours for online Kong (either private or public via Effective from 11 July 2008, (subject to a maximum fee of Setting up an entity in Hong Kong applications, whilst it takes about listing on the Stock Exchange of particulars of the first directors HK$30,000). To determine the form of presence to be 14 days to register a foreign Hong Kong). and first secretary of the established in Hong Kong company as a non-Hong Kong company to be incorporated In addition to the above company in Hong Kong. 2. Branch of a foreign company. and place of its registered office requirements, a public company A private limited company OR a branch of foreign company? (which must be in Hong Kong) must file a prospectus, or 3. Representative or liaison office are required to be reported in statement in lieu thereof, before To register the foreign company To establish a private as a non-Hong Kong company of a foreign company. the incorporation documents. it allots any shares. limited company If the proposed names are (a Hong Kong branch) 4. Joint venture (can be acceptable for registration It is also possible to purchase set up either as a company under the Companies ‘ready-formed‘ private Do a name search at the or partnership). Ordinance, the company will companies. Also known as Do a name search at the CR then be registered and the ‘shelf‘ companies, these are Companies Registry (CR) 5. Partnership. certificate of incorporation companies formed in advance will be issued. of them being acquired by Prepare draft Memorandum and Articles Prepare a statutory form and 6. Sole proprietorship. an investor. The attraction of Association (M&A), incorporation form certified copies of the corporate The Companies Registry is principally one of time, and Notice to Business Registration Office documents of the foreign company Of the above, privately and the Inland since the shelf company is incorporated companies and Department jointly immediately available to trade branches of foreign companies implemented the ‘One or enter into contracts. Submit the signed M&A, incorporation Submit the signed statutory form are most commonly used by stop Electronic Company form and the Notice to the CR online or and certified documents to the foreign investors. Incorporation and Business Under the Companies in paper form for registration CR for registration Registration Service’ on Ordinance, a foreign Process 18 March 2011. Any person corporation establishing a A certificate of incorporation and a A certificate of registration to Business registration certificate to be As a result of the government‘s who applies for incorporation place of business in Hong be issued to the company policy of encouraging free of a local company will be Kong must register with the issued to the company simultaneously enterprise, formalities for deemed to have made a Registrar of Companies as a company incorporation and simultaneous application non-Hong Kong company and business registration are kept for business registration. file, inter alia, a copy of the Apply for a business registration to a minimum. To incorporate Normally the Certificate corporation‘s certificate of certificate for the branch a company, the first step is of Incorporation and the incorporation, charter and 18 Establishing an entity the parties to the venture may However, in practice, only • Formulate an appropriate • Based on the PRC Company Facts at a glance in mainland China apply for approval to have the foreign financial institutions business scope to cater for Law, in general, the minimum company structured as a have been granted licences the intended activities in China. registered capital for setting • Major forms of investment vehicles Forms of foreign investment separate legal entity with limited to operate branches. up an enterprise ranges from include representative offices, The most direct way to liability. Sharing of profits and • Ensure the application RMB30,000 to RMB100,000, equity joint ventures, cooperative penetrate into the Chinese losses may be agreed between Process documents for submission but this could be higher if the joint ventures, wholly foreign owned market is to set up local the investing parties separately are complete, accurate and enterprise is engaged in a enterprises, joint stock companies presence. There are various from the proportion of capital Setting up in China in the right format. special industry. In practice, and partnership enterprises. forms of investment vehicles contributions. If all assets revert In general, ROs and there could also be variations • Before setting up in China, a foreign available to suit different to the Chinese partner at the partnership enterprises are • Ascertain the appropriate on the registered capital company should review its current business objectives and termination of the venture, only required to be registered channel for approval and required depending on the investments and future business operations. Below are the major capital repatriations of the with the State Administration registration and go through local practice of the particular plans to determine the optimal forms of investment vehicles foreign partner are permitted of Industry and Commerce them one by one. city where investment is to investment vehicle to set up in that can be set up by foreign over the life of the CJV. (SAIC) or its local counterparts, be made. accordance with the current China companies (including Hong Kong whereas the FIEs are subject Capital structure investment regulations and specific companies) in China: 4. Wholly Foreign Owned to approval by the Ministry of Time frame industrial policies. Enterprises (WFOEs) Commerce or its local • FIE is required by China laws 1. Representative Offices (ROs) WFOEs are those established counterparts before performing and regulations to have a The approval time frame would • The investor should formulate Setting up a RO is one of the exclusively with the foreign business registration with SAIC. registered capital and depend on the type of entity to a business scope, prepare the simplest ways to get into China investor‘s capital. However, there Additional pre-approvals and a total investment. Registered be set up. Usually, it would take relevant application documents and gain on-the-market are a few industries which are special licences may be capital refers to the amount of around one to two months for and submit the application experience. Legally, ROs are to still restricted to joint venture and required for certain industries, equity contributed by the setting up a RO and may take documents to the relevant approval be established purely for liaison WFOEs are not allowed. such as banking, insurance investor(s) that is registered around three to five months for and registration authorities for purposes, and their activities and construction. with the business registration setting up a JV or a WFOE. setting up a company in China. are limited to the provision of 5. Joint Stock Companies (JSCs) bureau and has to be actually services that do not give rise JSCs, also known as companies ROs, FIEs and partnership paid up. Total investment refers • Timeframe for the set-up depends to any earnings. limited by shares, are established enterprises have to comply with to the amount of funds on the type of investment vehicle primarily for listing on Chinese or post-establishment registrations, required to establish and to be set up. 2. Equity Joint Ventures (EJVs) foreign stock markets. The capital such as registration with local operate the enterprise. An EJV is a Chinese legal entity stock of a JSC is made up of tax authorities, before they can that takes the form of a limited equal value shares. Contributions become operational. • The registered capital liability company established in are made by both domestic and contributed to the enterprise China. The partners have joint foreign shareholders. A foreign company shall take can be used as working capital management of the company, the following steps in order for daily operating purposes, and the profits and losses are EJVs, CJVs, WFOEs and JSCs to set up in China: e.g. salaries, rental, purchase generally distributed according are generally referred to as of office equipment etc. The to the ratio of each partner‘s foreign investment enterprises • Verify the feasibility and form of capital contribution can capital contribution. Capital (FIEs) in China. Profits of FIEs prerequisites for setting up be in cash and/or in kind (e.g. repatriation before the can be remitted abroad. Foreign because they could be subject by way of machinery and termination of the EJV is not companies are also allowed to to local differences in practices equipment, intangibles etc). At allowed. set up partnership enterprises and interpretations of the law. least 30% of the capital should in China. Under ‘The Company be contributed in cash. 3. Cooperative Joint Law of the Peoples‘ Republic of • Optimise the tax-effectiveness Ventures (CJVs) China‘ (the PRC Company Law), of its shareholding structure A CJV can operate as a non- a foreign company may and funding arrangements. separate legal entity, although establish branches in China. 20 Taxation in Hong Kong

Taxation in Hong Kong is low. • Property tax – tax on income Profits tax Offshore income, capital gains derived from a real property in and dividends are not taxed. Hong Kong. Tax rates The profits tax rates are 16.5% Basis of taxation Apart from income tax, stamp for corporations and 15% for is payable on chargeable unincorporated businesses Hong Kong adopts the instruments executing for the year of assessment ‘territorial source principle‘in certain transactions. For 2012-13, which are amongst charging tax. This means that transfer or sale of residential the lowest in the region (e.g. generally income is only taxed property, special compared with 25% in China if it arises in or is derived may be applicable. and 17% in Singapore). from Hong Kong through a trade, business or profession Legislative framework Key features carried on in Hong Kong. Below are the key features of the However, there are a limited Under the Basic Law, Hong Hong Kong profits tax system. number of business receipts Kong is an autonomous Special which would not otherwise Administrative Region of China Taxation of income: be chargeable to tax in Hong and has a legal system that • Trading receipts with a Hong Kong based on the above is separate from that of China. Kong source are taxable. principle but are nonetheless The adherence to the rule of deemed to be taxable in Hong law by the HKSAR Government • Capital receipts are not subject Kong (e.g. certain royalties ensures that an independent to tax. received by a non-resident for and effective legal system is the use of copyright materials being maintained in Hong Kong. • Dividends from local companies in Hong Kong or by a Hong The Hong Kong judiciary is chargeable to tax are exempt Kong taxpayer). renowned for its transparency whereas dividends from overseas and efficiency in upholding companies are generally offshore Principal taxes justice and safeguarding the in nature and not subject to tax. rights and freedoms provided Hong Kong has a scheduler under the law. • Certain exemptions are income tax system. Incomes available, e.g. certain interest of different nature are taxed The principal governing income derived by non-financial separately. The main applicable law for direct taxes is the institutions; certain income taxes for doing business in , of offshore or non-resident Hong Kong are: which is administered investment funds; exemptions by the Commissioner of for mutual funds/unit trusts/ • Profits tax – tax on profits Inland Revenue. A dispute qualifying debt instruments etc. derived from Hong Kong from between taxpayers and the carrying on a trade, business Commissioner on a question • Foreign source income is not or profession in Hong Kong. of law may be resolved through taxed even if it is remitted to the court system. Hong Kong. • Salaries tax – tax on income derived from Hong Kong from an office, an employment or a pension.

22

• is generally property was once owned Salaries tax irrelevant for profits tax by a person carrying on purposes, except for the business in Hong Kong). Tax rates purpose of A lower withholding rate may For the year of assessment arrangement/agreements. be available when the recipient 2012-13, the progressive is a resident of a jurisdiction rates range from 2% to Deduction of expenses: with which Hong Kong has a 17% (with a marginal tax • Expenses that are revenue tax treaty. band of HK$40,000) and in nature and incurred in the the standard rate is 15%. production of assessable profits are deductible. For transactions between a Key features Hong Kong company and a Below are the key features • Generous tax depreciation closely connected non-resident, of the Hong Kong salaries allowance or outright deduction where the transactions result tax system: for capital assets are available. in no profit or less than the ordinary profit for the Hong Taxation of income: • Certain capital expenditure Kong company, the non- • Income arising in or derived is deductible, e.g. qualified resident is deemed to carry on from Hong Kong from an office, expenditure on research business in Hong Kong through an employment or a pension and development, cost of the Hong Kong company. Other is subject to salaries tax. This purchasing certain intellectual than the specific transfer pricing includes but is not limited to: property rights etc. rule that deals with transactions between Hong Kong companies – salaries and wages Treatment of tax losses and non-residents, the general – leave pay There is no group tax relief anti-avoidance provisions – fees in Hong Kong. Allowable tax may also be used by the tax – commissions losses can be carried forward authority to challenge non- – bonuses indefinitely to offset against arm‘s length transactions. – gratuities future assessable profits but The tax authority issued a – perquisites cannot be carried backward. Departmental Interpretation – pensions and Practice Note in December – the rental value of a Taxation of payments 2009 to provide guidelines on place of residence to non-residents transfer pricing methodologies provided by an employer Hong Kong does not impose and related issues. In – income from vesting any withholding tax on general, the Organisation for of share awards dividends or interest paid to Economic Co-operation and – gains derived from any non-residents. Certain royalties Development (OECD) transfer employee share options received by non-resident pricing guidelines will be are also taxable when corporations are subject to applied by the tax authority. the option is exercised, profits tax at 4.95% (i.e. a Taxpayers with cross-border assigned or released. deemed profit rate of 30% related-party transactions may of the sum received at the apply for an advance pricing • For non-Hong Kong profits tax rate of 16.5%) or arrangement in respect of their employments, only income 16.5% (i.e. 100% of the sum transactions with associated derived from services rendered received is deemed taxable companies who are resident in in Hong Kong is taxable. where the amount is received a jurisdiction with which Hong from an associated corporation Kong has a tax treaty. and where the intellectual Facts at a glance • Residence, domicile or base period varies from one about to leave Hong Kong other Property tax is not assessed top of the ad valorem stamp citizenship is generally treaty to another); than on a normal business trip. when the property is used as a duty currently payable on • Hong Kong adopts the ‘territorial irrelevant except for the • the remuneration is not paid by, residence by the owner because conveyance on the sale of source principle‘ in charging tax, purpose of double taxation or on behalf of, a resident entity Property tax there is no consideration for the immovable property as shown i.e. only income arising in or derived arrangement/agreements. in Hong Kong; and use of the property. in the table below, with a few from Hong Kong is taxable. • the remuneration is not borne Property tax is levied on the certain exemptions available. Deductions and allowances: by a owner of any land or buildings Stamp duty The SSD rates range from 5% • Businesses are subject to profits • Various concessionary in Hong Kong. in Hong Kong at the standard to 15% with higher rates for tax at 16.5% or 15% on trading deductions are available: rate of 15% (for the year of The following table summarises shorter holding periods. The SSD profits sourced in Hong Kong. e.g. approved charitable In order to enjoy treaty assessment 2012-13) on income the stamp duty rates for three payable will be calculated based donations, home loan interest, protection, the individual is derived from the right to use major types of chargeable on the stated consideration or • Individuals are subject to salaries self-education expenses, required to file an individual tax such land or buildings instruments for year of the market value (whichever is tax at either progressive rates contributions to recognised return and make the claim in (i.e. rental income). assessment 2012-13. higher) of the resold property at (ranging from 2% to 17%) or retirement schemes etc. the return. the applicable duty rate. The seller standard rate of 15% on Hong Kong sourced income from an If income from property Relief is provided for the and buyer are jointly and severally office, an employment or a pension. • Various personal allowances Structuring of chargeable to property tax is transfer of shares or properties liable for paying the SSD. such as basic allowance, child remuneration package included in a corporation's between group companies if • No tax on capital gains and dividends. allowance and dependent Employees will often receive profits for profits tax purposes, certain conditions are satisfied. Capital gains tax parent allowance are also allowances and benefits in the amount of property tax paid • No turnover tax. available when addition to their regular salary, is set-off against the profits tax There is a Special Stamp Duty There is no capital gains tax rates apply. bonuses and commissions. assessed. A corporation which (‘SSD‘) on resale of residential in Hong Kong. • No withholding tax on payments pays profits tax on the profits property which was acquired of interest or dividends to non- Tax thresholds It is essential that the relevant derived from a property can on or after 20 November 2010 Turnover tax residents; certain royalties received There is a 60-day income tax issues be considered prior alternatively claim exemption and resold within 24 months by non-residents are subject to in Hong Kong. to the determination of the from property tax. from the date of acquisition. Hong Kong does not impose at 4.95% in general. Individuals who ‘visit’ Hong remuneration package. Tax The SSD will be imposed on any turnover tax. Kong for not more than 60 advantages may be provided • Other applicable taxes include days in a year of assessment without increasing the overall property tax and stamp duty. may not be liable to salaries cost of the employer. The tax. Nevertheless, tax following are some examples Three major types of stamp duty rates reporting may still be required of components which, if depending on the employment properly structured, would Chargeable instrument Duty rate Person(s) liable arrangement. With Hong be exempt from salaries tax Agreement for transfer of Half by the transferor and half Kong’s recent expansion of the or taxed preferentially: 0.2% of the value of the stock treaty network, the threshold Hong Kong stock by the transferee as defined in the respective • Accommodation provided HK$100 – 4.25% of the Conveyance on sale of All parties executing treaties is more widely used by the employer. consideration of the property immovable property the transaction to provide additional protection • Company car. (see Note 1) from being liable to salaries tax. • Relocation expenses. 0.25% – 1% of the annual rental All parties executing Individuals who are eligible for Lease of immovable property treaty protection can generally Withholding tax (see Note 2) the transaction be exempt from salaries tax if the following conditions There is no withholding on are met: wages, with the exception Notes: • the individual‘s cumulative stay that an employer is under an 1. Rate varies with the property consideration, with higher rate for higher property value and marginal relief upon entry into each higher rate band. in Hong Kong does not exceed obligation to withhold any 2. Rate varies with the term of the lease with higher rate for longer lease period. 183 days in a base period (this payment to an employee who is Administration of the Taxable profits are computed tax return is issued on the first system is available to small Tax treaty network tax system based on the accounting working day in April following corporations if certain conditions profits of the financial year the tax year. Companies are are satisfied. As of mid-May 2012, Hong The tax year runs from 1 April ending within the tax year with required to file the tax return Kong entered into 24 of a year to 31 March of the appropriate adjustments for tax within a prescribed period. Individual taxpayers will comprehensive double tax following year. purposes. Normally, the profits Electronic filing via the eTAX receive their tax returns in arrangement/agreements May. The individual tax return with the following countries has to be filed within a month respectively: Austria, Belgium, Withholding tax rates on various types of passive income from the date of issue in Brunei, the Czech Republic, Dividends Interest Royalties general. Electronic filing via France, Hungary, Indonesia, the eTAX system is available Ireland, Japan, Jersey, Kuwait, HK domestic non-treaty rate for non-resident corporations 0% 0% 4.95% to individual taxpayers whose Liechtenstein, Luxembourg, HK domestic non-treaty rate for non-resident individuals 0% 0% 4.5% case is not complicated. mainland China, Malaysia, Notice of assessment will Malta, the Netherlands, Austria 0/10% Nil 3% be issued after the tax return New Zealand, Portugal, Spain, Belgium 0/5/15% 0/10% 5% has been examined by the Switzerland, Thailand, the Brunei Nil 0/5/10% 5% tax authority. The dates of United Kingdom and Vietnam. payment of tax are specified As of mid-May 2012, the Czech Republic 5% 0% 10% in the assessment notice. agreements with Jersey, France 10% 0/10% 10% A system of provisional tax Kuwait, Malaysia, Malta, payments applies whereby Portugal and Switzerland have Hungary 5/10% 0/5% 5% estimated tax payments are not yet entered into force Indonesia 5/10% 0/10% 5% made during the current tax pending the completion of the Ireland 0% 0/10% 3% year. The provisional tax payable ratification procedures of the is normally estimated based on governments concerned. The Japan 5/10% 10% 5% the previous year‘s tax liability. table on the left summarises Jersey Nil Nil 4% The final tax liability for a tax the withholding tax rates Kuwait 0/5% 0/5% 5% year is subsequently determined on various passive incomes after lodgement of the return specified in the arrangement/ Liechtenstein Nil Nil 3% and the provisional tax paid will agreements concluded by Luxembourg 0/10% Nil 3% then be deducted from the final Hong Kong so far. tax payable. Mainland China 5/10% 0/7% 7% In addition, Hong Kong has Malaysia 5/10% 0/10% 8% entered into agreements for Malta Nil Nil 3% relief from double taxation with respect to international The Netherlands 0/10% Nil 3% air traffic and international New Zealand 0/5/15% 0/10% 5% operation of ships with Portugal 5/10% 10% 5% numerous countries. Spain 0/10% 0/5% 5% Switzerland 0/10% 0% 3% Thailand 10% 10/15% 5/10/15% The UK 0/15% 0% 3% Vietnam 10% 0%/10% 7%/10% 28 Note: The withholding rates under the domestic law would apply if they are lower than the rates specified in the arrangement/agreements. Taxation in mainland China

The standard corporate Corporate income tax (CIT) law • Arm‘s length prices must be an establishment or place c. Environment protection Facts at a glance income tax rate for tax resident used for transactions conducted of business in China but the projects and energy/water enterprises in mainland China Key messages between related parties. income derived from there conservation projects; • Starting from 1 January 2008, is 25% but various tax • Tax resident enterprises, which is not effectively connected d. Qualified new/high tech a unified corporate income tax incentives are available to include enterprises incorporated Corporate income tax system with such establishment or enterprises established in (CIT) system is applicable to businesses engaged in certain in China and foreign enterprises place of business, is subject Shenzhen, Zhuhai, Shantou, foreign investment enterprises industries. whose effective management is Residence concept to withholding CIT on China , Hainan and Pudong and foreign corporations, as located in China, are liable to CIT Enterprises incorporated in source income (generally New Area of Shanghai well as domestic enterprises. China tax regime on their worldwide income. China are automatically tax includes passive income, such established after 1 January resident enterprises. A foreign as, dividends, interest, royalties, 2008; • Tax resident enterprises in China are taxed on their Principal taxes • Accelerated depreciation enterprise with its effective rental income, capital gains). e. Software production worldwide income. Non-tax The main applicable taxes is acceptable under certain management located in China enterprises; resident enterprises are taxed when doing business in circumstances. is also regarded as a tax resident To avoid double taxation of f. IC design enterprises; on China sourced income. China are as follows: enterprise. The effective foreign sourced income, a g. Qualified IC production • Amortisation of intangible management refers to the place foreign is allowed enterprises; • CIT is at a flat rate of 25%. 1. Taxes on income: assets is allowed. where the overall management for income taxes paid to h. Qualified energy-saving a. Corporate income tax (CIT) and control over the business other countries on foreign- service enterprises; • Individuals are subject to China‘s b. Individual income tax (IIT) • In principle, the accrual method and production, personnel, sourced income. i. Encouraged enterprises in individual income tax (IIT) law. of accounting is required. accounting, properties etc, underprivileged areas of Individuals domiciled in China 2. Taxes on transactions – of an enterprise is, in substance, Tax Incentives Xinjiang. are subject to IIT on their turnover tax system: • Income tax is levied at a flat exercised. Tax resident worldwide income. a. Value-added tax (VAT) rate of 25%. enterprises are subject to Reduced tax rate Other forms of incentives b. Business tax (BT) CIT on worldwide income. The following enterprises are Other forms of tax incentives • Foreign individuals who are not c. (CT) • Dividends paid between eligible for the reduced CIT rate – reduction of revenue, domiciled in China and have not qualified tax resident enterprises A non-tax resident enterprise, of 15% upon approval: investment tax credit, etc. – are resided in China for more than 3. Other taxes: are exempt from CIT. However, which has an establishment a. Qualified new/high tech also available for enterprises five years may reduce their IIT a. Customs duties non-tax resident enterprises are or place of business in enterprises; that are engaged in encouraged liabilities on employment b. Stamp tax subject to a 10% withholding China, is subject to CIT on b. Qualified integrated circuits industries or which invest in income under certain conditions. c. Vehicle and vessel tax CIT (unless reduced under a the income derived by such (‘IC‘) production enterprises; research and development and Employment income is subject d. Motor vehicle tax treaty) on dividend income establishment or place of c. Qualified technology specific equipment. to the progressive rates from acquisition tax derived from China. business. Examples of such advanced service enterprises. 3% to 45%. Individuals carrying e. Deed tax establishment or place of Gross income out sole-proprietary business are subject to the progressive rates f. Land appreciation tax • Foreign tax credits are available. business include representative Qualified key software production from 5% to 35%. g. Real estate tax offices, factories, farms, places enterprises are eligible for a Inter-company transactions h. Urban and township • Qualified technology related where natural resources are reduced CIT rate of 10%. In principle, the CIT law requires • Double taxation relief is offered land-use tax enterprises are eligible for a exploited; places where labour an enterprise to conduct through credit, exemption or i. Resources tax reduced tax rate of 15% or services are provided; places business transactions with its reduction provided under j. Urban Construction and 10% upon approval. Other where contractor projects Tax reduction and exemption related parties in accordance national statutes and tax treaties. Maintenance Tax forms of tax incentives – tax (e.g. construction, installation, Enterprises carrying out the with the arm‘s length principle. k. Education Surcharge holiday, reduction of revenue, assembly, repair and exploration) following projects are eligible for If a related party transaction is l. Local Education Surcharge investment tax credit, etc – are undertaken. a certain period of tax holidays not conducted at arm‘s length m. Vessel tonnage tax are also available for enterprises upon approval; and there is a reduction of gross n. Arable land occupation tax that are engaged in encouraged For a non-tax resident a. Agriculture, forestry, animal- income or , o. Other surtaxes and levies industries or which invest in enterprise that has no husbandry and fishery the Chinese tax authorities research and development and establishment or place of projects; are authorised to make the specific equipment. business in China, or that has b. Specified basic infrastructure appropriate tax adjustment. 30 projects;

Capital gains, interest, Donation and expenses, taxes and losses, medical insurance for local • Bad or doubtful debts royalties and dividends debt forgiveness that are actually incurred by Chinese staff are deductible, Enterprises other than financial Capital gains, interest and royalty Unless otherwise prescribed in a tax resident enterprise and subject to caps stipulated by institutions are not allowed income derived by a tax resident the tax regulations, tax resident relevant to the generation of the government. to deduct bad debt provisions enterprise are taxable as ordinary enterprises should include income, are deductible. for CIT purpose. Financial income. Capital gains refers to donations received and releases Other staff welfare expenditure institutions may deduct bad the gains from the disposition from debt as their taxable income. Depreciation is deductible subject to a cap debt provision subject to a of property, including residential The straight-line method of of 14% of the total salaries cap for CIT purposes. Bad property, buildings, structures Non-taxable income depreciation has to be followed expenses of an enterprise. debt losses are deductible and attached facilities located in Fiscal appropriation, and there is a minimum only when the loss is actually China, and from the assignment governmental administration depreciation period for different Insurance premiums incurred and approved by the of land use rights and the charges and governmental types of fixed assets. Certain in-charge tax bureau. transfer of equity investments. funds that are collected and fixed assets, for example, fixed Premiums paid for commercial For any gain derived from the administered as treasury assets replacement due to insurance for investors or • Amortisation of transfer of land use rights, management of the state advancement of technology employees are generally not intangible assets buildings and premises and are non-taxable income under or fixed assets that are subject deductible with a few exceptions. The straight-line method is related facilities attached the CIT law. to constant vibration or severe allowed with a minimum thereto, a land appreciation corrosion, may be depreciated Payments to affiliates amortisation period of not less tax is also levied. Tax-exempt income over a shorter period or using than 10 years or pursuant to Tax-exempt income includes: accelerated depreciation methods. Management fees of a the useful life agreed in the Dividends paid between qualified interest on state treasury stewardship nature are not contracts. tax resident enterprises are CIT bonds; dividends paid between Interest deductible. However, service exempt under the CIT law. qualifying tax resident Interest on loans is generally fees paid for genuine services • Advertising and enterprises; dividends derived deductible. On borrowings from provided by affiliates in China promotional expenses Service fees by a non-tax resident enterprise non-financial institutions by or overseas, and charged at The deduction is limited to Service fees generated from that has an establishment a non-financial institution, the arm’s length, may be allowed 15% of the annual sales consultation, management, or place of business in deductible interest expense for deduction. Other payments revenue. Excess portion is training and other labour China from a tax resident cannot exceed the commercial to affiliates, such as royalties, allowed to be carried forward services by a tax resident enterprise (the dividends are interest rate. However, the are also tax-deductible provided and deducted in future years. enterprise are taxable as part of effectively connected with deduction of interest paid to that the charges are at arm’s worldwide income, irrespective the establishment or place of related parties is subject to the length. • Research and of the locality in which the business); and income derived thin capitalisation rule under the development (R&D) services are performed. by qualifying non-profit- CIT Law. The thin capitalisation Other deductions A tax resident enterprise that seeking organisations. ratio for the financial industry incurs qualified R&D expenses Exchange gains and losses is 5:1 and for other industries • Business entertainment for the development of new Exchange gains and losses Deductions is 2:1. expenses techniques, new products and incurred during business Only 60% of actual incurred new craftsmanship is entitled transactions and year-end Business expenses Staff welfare expenses business entertainment to an extra 50% deduction of translation in respect of assets In principle, unless specifically expenses are deductible. In the R&D spending. and liabilities denominated excluded under the CIT law Expenses incurred for basic addition, the total amount is in foreign currencies should and other tax regulations, social security contributions, capped at 0.5% of the total • Donations generally be accounted for in reasonable business supplementary pension sales (business) revenue of Donations to qualified charitable the current year. expenditures including costs, insurance and supplementary the given tax year. institutions are deductible up to 12% of the annual profit.

32

• Pre-operating expenses However, asset loss incurred Tax rates Tax reporting Assessments as certain utilities such as They can be deducted for CIT during ordinary business The resident enterprises are Enterprises are required to electricity, thermal power and purpose at the start-up of the operation is deductible and subject to the standard CIT Tax returns make provisional assessments gas, but the term excludes real business. approval is not needed. rate of 25% or a reduced The tax year for enterprises is and file CIT returns on a estate properties. VAT is also rate provided if the specified the calendar year. Tax resident monthly or quarterly basis. The levied on the import of taxable Non-deductible items Withholding CIT conditions are satisfied and enterprises are required to file returns are generally prepared goods into China unless the approved by the tax authorities. their annual income tax returns on a self-assessment basis and imports are specifically exempt The CIT law states that the Non-tax resident enterprises that Non-tax resident enterprises and annual financial statements the provisional payments are under special rules. items listed below are non- do not have an establishment which derive income effectively within five months after the end reconciled after the year-end deductible in calculating the or place of business in China, connected with their of a tax year, together with an in an annual return for final tax • Registration taxable income of a tax or those that have a permanent establishments or places audit report issued by a Chinese- settlement. Any tax discrepancy Enterprises that make sales resident enterprise: establishment or place of of business in China are registered CPA firm. Generally, must be paid within five months taxable for VAT purposes business but earn China sourced subject to the CIT rate of 25%. non-tax resident enterprises after the year-end and any tax in China should voluntarily 1. Payment of equity investment income such as dividends, with its establishment or place overpayment may be refunded register for VAT with the local returns to investors such as interest, rent and royalties, that Foreign tax credits of business in China must upon approval by tax authorities. tax authority. VAT payers are dividends are not effectively connected A tax resident enterprise perform the annual CIT filing generally classified into two 2. CIT payments with that establishment or that generates foreign source with required documents within Turnover taxes categories: general VAT payer 3. Tax surcharges place of business, will be income may deduct the five months after the end of and small-scale VAT payer. 4. Penalties, fines and losses due subject to withholding CIT foreign income tax paid from the calendar year. There are Key messages to the confiscation of property at a concessionary rate of the amount of CIT payable. exceptions that non-tax resident • Nearly all transactions in China • Rates 5. Donations to institutions 10% (though the statutory However, the deductible enterprise may not need to are subject to a turnover tax, General VAT payers are subject other than qualified charitable standard rate is 20%) on amount may not exceed perform the annual either value added tax (VAT) to the standard rate of 17% institutions such income sourced in China the amount of CIT otherwise CIT filings. or business tax (BT). Certain which applies to most taxable 6. Sponsorship expenditures unless reduced under a tax payable in respect of the categories of consumable goods and services and the 7. Provisions that have not treaty. Nevertheless, dividends foreign source income in China. There is a late payment goods are also subject to lower rate of 13% which applies been verified distributed by a foreign surcharge of 0.05% of the consumption tax (CT). to certain goods. Small-scale 8. Other expenditure that is investment enterprise out If the foreign tax paid exceeds unpaid tax balance for each day VAT payers are levied at the irrelevant to the generation of its pre-2008 profit are still the limit, the unrelieved balance the income tax is in arrears. If • The standard rate of VAT is rate of 3%. The sale of certain of income. exempted from withholding tax. of the foreign tax paid may be the taxpayer fails to file a return 17%; reduced rates and goods is exempted from VAT. offset against the tax payable or pay the tax due, an additional exemptions are available. Losses Tax computation in subsequent years, up to a fine may be assessed. • Basis of taxation maximum of five years. An • BT rates range from 3% VAT is levied and collected Tax losses Taxable income enterprise applying for a foreign Being withholding agents, the to 20%. on the basis of the value Tax losses incurred by a tax Taxable income is defined tax credit must submit the payers who make payments added to the taxable goods resident enterprise may be as the amount from the gross original tax receipts to support of dividends, interest, rent, Value-added tax (VAT) or services at each stage of a carried forward and deducted income in a tax year after its claim for a . royalties or other income to production chain, i.e. from the from the succeeding five years‘ deduction of non-taxable non-tax resident enterprises • Scope acquisition of raw materials taxable income. Tax carry-back income, tax exempt income, Consolidation are required to file a withholding The sale of taxable goods by producers to the purchase is not allowed. various deductions and A tax resident enterprise tax return, withhold the proper and the provision of labour of finished goods or services allowable losses brought should make combined CIT tax and remit the tax to the tax services in relation to the by consumers. At each stage, Asset losses forward from previous years. filings for its branches. Except authorities once payments to processing of goods and of VAT on sales (output tax) is Deductible if approved by the for rules otherwise prescribed non-tax resident enterprises are repair and replacement services collected by the seller from in-charge tax bureau. Examples Taxable income in foreign by the State Council, affiliated made or accrued as deductible within China are subject to the purchaser. include loss on equity and currency should be converted companies are not permitted expenses in the account of the VAT. ‘Taxable goods’ refers debt investment, loss on bad into RMB to come up with the to file consolidated returns on payers for CIT purposes. to tangible goods as well debt, extraordinary losses etc. tax payable. a group basis. 34 With the support of a valid • Registration or the sales volume depending iii. The remuneration is not borne VAT invoice, the general VAT Enterprises that provide on the goods concerned. by a permanent establishment payer can generally deduct the services or sell intangible or a fixed base which the VAT that has been paid on the assets or properties within the Individual income tax (IIT) employer has in China. purchase of goods (including scope of BT should voluntarily on employment income fixed assets) that are used for register for business tax with With effect from 1 October the taxable sales (input tax) and the local tax authority. The extent to which a foreign 2009, an employee or his account for the difference to individual is subject to IIT withholding agent (e.g. the authorities. • Basis of taxation depends on his domicile, the his employer) is required to Unlike VAT, business tax is not length of his stay in China, the perform the ‘record-filing' • VAT on a creditable tax and is generally source of his income, the entity with the in-charge tax bureau Exporters of goods from China levied on the gross income. which ultimately bears the to secure the above 183-day may be entitled to a refund Business taxpayers in certain salary costs and his connection exemption on his of input VAT incurred on the specified industries are allowed with any China establishment. employment income. exported goods. As the refund to compute BT liabilities on the An individual who is domiciled rates range from 0% to 17%, net income. in China is subject to IIT on Apart from employment income, exporters may not be able to his worldwide income. In IIT is also levied on other enjoy the full refund of input Pilot Programme in Shanghai general, a foreign individual is types of income. For example, VAT incurred and suffer a certain only liable to IIT on his China director’s fees and consultancy degree of VAT costs on exports. In order to mitigate the multiple source income (whether it is fees are income that are also taxation issue associated with paid inside or outside of China) assessable under IIT, and the Business tax (BT) goods and services, the State – rather than on his worldwide IIT treatment of which would Council resolved in 2011 to income – unless he resides require a detailed review of the • Scope introduce a Pilot Programme in in China for a full year after nature of income and the work BT applies to the provision the city of Shanghai to expand having resided in China for performed by the individual. of services (excluding the scope of VAT to cover five consecutive full years. processing services and repair selected industries that were China adopts a and replacement services, originally subject to BT. Under Under the current IIT laws and system whereby the payer (e.g. which are taxed under the VAT the Pilot Programme, enterprises regulations, a foreign individual the employer) is regarded as regime). It also applies to the providing the selected services would be exempt from IIT if the tax withholding agent and transfer of intangible assets in Shanghai are subject to VAT the Chinese tax authorities are is required to file monthly IIT such as goodwill, patents instead of business tax from satisfied that all of the following withholding returns, withhold and the sale of real estate 1 January 2012. three conditions are satisfied: and remit the IIT due to the properties in China. BT and Chinese tax authorities, normally VAT are mutually exclusive. Consumption tax (CT) i. The individual is present in within fifteen days after the end China for a period or periods of the month. Where the salary • Rates CT is imposed on 14 categories not exceeding 90 days in payment is made outside of BT rates are 3% or 5%, of goods, including cigarettes, aggregate during the calendar China, the regulations require except for the leisure and alcoholic beverages, certain year concerned (for a tax treaty that the Chinese affiliated entertainment industry which luxury and environmental resident, this 90-day threshold company (e.g., the WFOEs) or may attract a rate of up to 20%. unfriendly items. It is not is extended to 183 days within the Chinese establishment for It is not recoverable but may recoverable but is deductible a base period as specified in the offshore company bears the be deductible for income tax as an expense for income tax an applicable DTA); tax withholding obligations. purpose. purposes. CT is computed ii. The remuneration is paid by, or based on the sales amount and/ on behalf of, an employer who is not a resident of China; and 36 Audit and accountancy

Accounting requirements financial statements) dealing by HKICPA and laid before the with the state of affairs and company in the annual general Hong Kong incorporated results of the company and its meeting during their tenure companies are required to subsidiaries must be laid before of office. prepare financial statements the shareholders, unless certain that give a true and fair view. conditions for exemption under The first auditors of a company Such financial statements must the Companies Ordinance and may be appointed, by the be prepared and presented in HKFRSs are met. directors at any time before the accordance with Hong Kong first annual general meeting, to Financial Reporting Standards The Companies Ordinance hold office until the conclusion (HKFRSs) issued by the Hong also sets forth the disclosure of the meeting. Subsequently, Kong Institute of Certified requirements relating to the except for appointments to fill Public Accountants (HKICPA), balance sheet and the profit and casual vacancies, auditors are which are fully aligned with loss account (income statement) appointed by the shareholders International Financial Reporting set out in the financial in the annual general meeting Standards. HKFRSs comprise statements for a company. to hold office until the next all Hong Kong Financial annual general meeting. Reporting Standards, Hong Financial statements shall be Kong Accounting Standards presented at least annually. The auditors‘ report must be and Hong Kong Interpretations Except for the first accounting read before the company in approved by the Council of period after incorporation, the annual general meeting the HKICPA. the accounting period should and must state whether, in normally cover one year. The the opinion of the auditors, Under the Hong Kong accounting year end is not the accounts show a true and Companies Ordinance, fixed by statute and can be fair view and whether they the directors of every determined by the company. have been properly prepared company must lay before the in accordance with the relevant shareholders in the annual Requirements on provisions and standards. general meeting audited statutory audit financial st atements. The A Hong Kong branch of a first accounts must cover the The Companies Ordinance foreign corporation is not period since the incorporation specifies that every company subject to statutory audit of the company. Thereafter, incorporated in Hong Kong requirement under the the accounts must cover the must appoint one or more Companies Ordinance. period since the preceding independent auditors. An However, if the branch is doing accounts and must be made auditor must be a member business in Hong Kong, it is up to a date following not of the HKICPA and hold a required to file a profits tax more than six months or, in practicing certificate issued return annually, and the Inland the cases of a private company by the Institute. Revenue Department may and a company limited by require audited accounts of the guarantee, not more than nine Under the Companies foreign corporation to support months before the date of Ordinance the auditor is its profits tax return. the meeting. In the case of a required to report to the company having subsidiaries shareholders on the financial at the end of its financial year, statements under Hong Kong group accounts (consolidated Standards on Auditing issued 38 Human Resources and Employment Law

Key employment law but are still entitled to the The Employment of Young community on the necessity considerations rest of the basic protection Persons (Industry) Regulations to draw up legislation to govern under the Employment govern the employment conditions the maximum number of Ordinance such as payment of young persons aged 15 to 17 working hours in Hong Kong is mainly governed by the of wages, restrictions on in industrial undertakings. These with no decision yet made. Employment Ordinance, wages deductions, granting of young persons are not allowed Mandatory Provident Fund statutory holidays, etc. to work more than eight hours a Holiday and leave (‘MPF‘) Schemes Ordinance, day, 48 hours a week and 6 days Employees‘ Compensation Contract requirements per week. Overtime, night work, 1. Rest Day Ordinance, Occupational rest days and work on statutory Employees employed under a Safety and Health Ordinance A contract of employment is an holidays are prohibited. The continuous contract are entitled and four ordinances agreement on the employment maximum duration of continuous to not less than one rest day in implemented by the Equal conditions made between an work for them is 5 hours and must every period of seven days. Opportunities Commission. employer and an employee. be followed by at least half an hour The agreement can be made of meal or rest. 2. Statutory Holidays The Employment Ordinance orally or in writing. Employers All employees, irrespective governs employee rights, such and employees are free to Minimum wage of his length of service or as the payment of wages, negotiate and agree on the employment nature (continuous termination of employment terms and conditions of The average hourly wage of or non-continuous contract), contracts, sickness allowance, employment provided that they employee in respect of any are entitled to 12 days of maternity protection, rest days, do not violate the provisions wage period should not be less statutory holidays. paid annual leave, protection of the Employment Ordinance. than the statutory minimum against anti-union discrimination Verbal or written contracts must wage rate of HK $28 per 3. Public Holidays and long-service payments include: wages, wage period, hour. This is applicable to all In addition, the Government or severance payments. The length of notice required to employees except for persons announces the public holidays Employment Ordinance is terminate the contract and if to whom the Employment annually to be enjoyed by applicable to all employees the employee is entitled to an Ordinance does not apply civil servants. It is a common except for certain very limited end of year payment, the end (e.g. student interns). practice that ‘blue collar‘ categories of persons as of year payment or the employees (e.g. production defined under the Ordinance. proportion thereof and the Unless specified, wages include workers) enjoy 12 statutory payment period. all remuneration, earnings and holidays while ‘white collar‘ Employees who have been allowances. The calculation of employees (e.g. office staff) employed continuously by Restriction on local hires minimum wage excludes the enjoy the 17 days of public the same employer for four hours not worked (such as rest holidays which include the weeks or more, with at least The Employment of Children day pay, holiday pay, annual 12 days of statutory holidays. 18 hours worked in each Regulations prohibits the leave pay, maternity leave pay, week, are regarded as being employment of children sickness allowance, etc). 4. Paid Annual Leave employed under a continuous aged under 15 in all industrial Employees are entitled to contract. Such employees are undertakings. Subject to Working hours annual leave with pay after further entitled to benefits certain protective restrictions, having been employed under such as rest days, paid annual children aged 13 and 14 who Under Hong Kong‘s employment a continuous contract for every leave, sickness allowance, are attending school may take legislation, there is no provision 12 months and the entitlement severance payment and long- up part-time employment in the governing the maximum number increases progressively from service payment. Employees non-industrial sectors. of working hours for an seven days to a maximum of who are not employed under employee. There have 14 days according to his/her a continuous contract are not been discussions within the length of service. 40 entitled to the above benefits Legislative Council and in the Immigration

5. Sick Leave the old system’s graduating Immigration arrangements non-local graduates but possess • payment in lieu of any untaken • Mandatory Provident Employees can accumulate paid class) joining the labour market for non-local graduates special skills, knowledge or annual leave accumulated up Fund (‘MPF’) sickness days after having been this year. As a result, there is experience of value to and not to the termination date; All employers in HK are employed under a continuous increasingly high competition for Non-Hong Kong residents readily available in HK may apply • any outstanding sum of end required to make a mandatory contract. Paid sickness days positions. The unemployment who have obtained a degree to come to work under the of year payment; contribution of 5% of can be accumulated up to rate in Q1 2012 stood at 3.4%, or higher qualification in a Admission Scheme for Mainland • long-service payment (for employees’ relevant income a maximum of 120 days. and will likely rise further. On full-time and locally accredited Talents and Professionals. terminating employees who (i.e. basic salary and bonus), Employees are entitled to the other hand, the stability of programme in Hong Kong have been employed not up to a maximum of HK$1,250 sickness allowance if: the global economy remains (‘non-local graduates‘) may less than 5 years under a per month to the Mandatory • the sick leave taken is not less uncertain. Talent retention apply to stay or return and Working conditions continuous contract and not Provident Fund (MPF) scheme than four consecutive days; and the competition for good work in Hong Kong under the being terminated due to serious and employees are required to • the sick leave is supported candidates become crucially ‘Immigration Arrangements Role of unions/collective misconduct or redundancy) make a matching contribution. by an appropriate medical important for businesses looking for Non-local Graduates‘. bargaining etc or severance payment However, effective from certificate; and to grow, and effectively manage (if applicable); and 1 November 2011, employees • the employee has accumulated their people in a time of such General employment policy The Basic Law guarantees • other payments under the whose income is below sufficient number of paid uncertainty. that Hong Kong residents have employment contract, such as, HK$6,500 (previously sickness days. Non-Hong Kong residents freedom of association and gratuity, provident fund. HK$5,000) per month are Common recruitment channels who are not non-local graduates the freedom to form and join exempted from making 6. Maternity Leave used by employers from different but possess special skills, trade unions. The Employment If the terminated employee is the matched contribution A female employee employed sectors and industries are: knowledge or experience of Ordinance provides that every dismissed by reason of to the MPF. under a continuous contract value to and not readily available employee has the rights: redundancy, he/she will be immediately before the • Employment websites; in Hong Kong may apply to entitled to severance payment • Employee Compensation commencement of her • Newspaper and magazine come to work under the General • to be a member/an officer of if he/she has been employed Insurance maternity leave is entitled to a advertisement; Employment Policy (‘GEP‘). a trade union registered under not less than 24 months under The Employees‘ Compensation continuous period of 10 weeks • Private employment agencies; the Trade Unions Ordinance; a continuous contract. An Ordinance establishes a no-fault, maternity leave. and The Hong Kong Immigration • to take part in activities of employer can offset severance non-contributory employee • Extensive recruitment network Department will consider the trade union, to which the payment against the accrued compensation system under An employee is eligible for provided by the Labour the following in approving an employee is a member/an benefits derived from which individual employers maternity leave pay if she Department. employment visa: officer, outside working hours contributions the employer are liable to pay compensation has been employed under a or during working hours with the has made to the employee in for work-related injuries continuous contract for not less Non-Hong Kong residents must • whether the business being consent of the employer; and the Mandatory Provident or fatalities. The Ordinance than 40 weeks immediately obtain an employment visa in undertaken is beneficial to the • to associate with others in Fund scheme. requires all employers to before the commencement order to work in Hong Kong. economy, industry and trade forming or applying for the possess valid insurance policies of scheduled maternity leave. of Hong Kong; registration of a trade union. Employee benefits to cover their liabilities under • whether the employment the ordinance and common law. Recruitment of staff of the applicant is essential Termination of employment The Employment Ordinance to the business; and sets out minimum entitlements The Employee Compensation Since Hong Kong is in the • whether the position can easily Upon termination of for employees, such as statutory Insurance premium is transition period to implement be filled by a local individual. employment, the employee holidays, sick and maternity determined based on 3-3-4 education system (3 years will be entitled to the leave, severance and long- employees’ annual middle school, 3 years high Admission scheme for termination payment within service payments. It is up to remuneration, nature of work, school and 4 years university), Mainland China talents seven days of the termination the discretion of employers workplace location, etc. there are graduates from 2 and professionals date. Such payment includes: to provide additional benefits, classes (the new system’s such as overtime payment, graduating class, as well as Chinese residents of the • outstanding wages; medical plans and life insurance. Mainland China who are not • wages in lieu of notice, if any; 42 Trade

General trade and Restrictions on imports, exports and re-exports. than regular import/ Intellectual property commercial regulations foreign investment Licensing formalities are kept formalities, there are no special protection to a minimum, and import and regulations governing re-exports. The Hong Kong Government In general, no restriction export licences are required Hong Kong is a leader in has adopted a policy of applying specially to foreign only for dutiable commodities The appointment of a local agent Asia in the protection and minimum intervention towards investors is imposed and wholly and certain specified goods. is not mandatory, but can be enforcement of intellectual the regulation of the territory‘s foreign-owned companies are helpful. Other options of local property rights. Stringent laws business and industry, and allowed. The only exception Hong Kong has no major representation include retaining regulate patents, copyrights, this policy has contributed to is the restriction on foreign import restrictions. Prior import the services of local employees trade marks and registered the territory‘s attractiveness ownership of Hong Kong‘s licences or other certificates or salespersons or establishing designs. The Intellectual to foreign investors. licensed television/sound may be required for the a local sales subsidiary. Property Department broadcasters. import of certain categories Considerations will have to be monitors the Intellectual Every business in Hong Kong, of goods, including dutiable given to the business needs as Property regime and ensures whether carried on by an Foreign exchange commodities, arms and well as the tax implications of the enforcement of the relevant individual, a partnership or a administration ammunition, dangerous drugs, each of these options before laws and regulations. The corporation and whether locally pharmaceutical products, making a decision. Department is also responsible or foreign-owned, must be Hong Kong does not have textiles, and certain foodstuffs, for investigating complaints registered under the Business any foreign exchange control. etc. Other permits such as Price control and unfair against infringements and Registration Ordinance, which There is no restriction on Certificates of Origin may competition has extensive powers of is administered by the Inland entry or repatriation of capital also need to be obtained to search and seizure. Registration Revenue Department. There or remittance of profits from enable Hong Kong to fulfil The Hong Kong Government and protection of patents, are no other significant investments. Funds can be its international obligations does not have any direct control copyrights, trade marks regulations or restrictions freely remitted outside Hong and for health, safety or over prices. The only exceptions and registered designs imposed on conducting Kong by various means such security reasons. in this regard pertain to certain are each governed by business in Hong Kong, except as dividends, interest, royalties, organisations providing utilities a separate ordinance. in situations where there is service fees and branch Hong Kong is a free port services and to most forms a genuine need to fulfil profits, etc. imposing no customs duties of public transport. These obligations undertaken by Hong (import tariffs) on imported organisations must obtain the Kong to its trading partners, There is no government or goods. duties are levied government‘s prior approval for or to meet public health, safety other guarantees against only on tobacco, hard liquor, any price increases. or internal security needs. inconvertibility. methyl alcohol and hydrocarbon In a few specially regulated oil, whether imported or locally Currently, Hong Kong does not industries such as the banking, Import and export issues manufactured. Other taxes have competition law. The Hong securities, insurance and may also apply to items such Kong Government is committed telecommunication industries, The Hong Kong Government as automotives, on which a first to promoting competition to special legislations and is firmly committed to free registration tax is charged. enhance economic efficiency licensing requirements apply. trade and free enterprise. Re-exports represent a very and free trade, and introduced Consequently, relatively few significant component of Hong the Competition Bill into the controls are imposed over Kong‘s trade. In general, other Legislative Council in July 2010.

44 Banking in Hong Kong

Who we are Awards trade and supply chain, as grow a successful business for well as a comprehensive the benefit of our stakeholders. One of the world’s largest 4th Consecutive Year range of financing solutions. banking and financial services Best Trade Finance Bank in Our expanded RMB trade • We apply clear policies and organisations, the HSBC Hong Kong 2011, FinanceAsia. settlement services also processes to manage potential Group had its beginnings in facilitate the trading business social and environmental risk in Hong Kong 147 years ago and 5th Consecutive Year between mainland China and our lending and other financial Hong Kong remains one of Best Bank in Hong Kong, Hong Kong, paving the way for activities in sensitive sectors. its key markets and operating FinanceAsia Country Awards greater business success. centres today. for Achievement 2011. • We help our clients to seize the In addition, we provide one-stop opportunities presented by the Established in Hong Kong 7th Consecutive Year cross-border banking services shift to a low-carbon economy. in March 1865 and in Best SME’s Partner Award through International Banking Shanghai one month later, 2012, The Hong Kong Chamber Centres located in Hong Kong, • We try to reduce our own The Hongkong and Shanghai of Small and Medium the Mainland and Taiwan. environmental footprint and Banking Corporation is Business Limited. Customers can open accounts share good practice on this the founding member of from their local area, without with our clients and other the HSBC Group. It is the 7th Consecutive Year the inconvenience of travelling stakeholders. Group’s flagship in the Asia- Best Subscustodian in Hong directly to the region in which Pacific region and the largest Kong, The Asset Triple A they wish to open an account. • We focus our community bank incorporated in Hong Awards 2012. A Hong Kong and Taiwan team investment (philanthropic Kong. Known in Chinese as works on the Mainland, whilst a activities) on education Wayfoong (which translates 4th Consecutive Year Taiwan and mainland China team and the environment. as ‘focus of wealth’ or Best Internet Bank 2011, works in Hong Kong. ‘abundance of remittances’), Global Finance. Our education programmes the bank is also one of Hong We have the largest and most help to lift people out of Kong’s three note-issuing With our global experience extensive banking network/ poverty, build financial literacy , accounting for around and local knowledge, we channels in town. Products and promote environmental 62.5% of its banknotes. The can always connect you to a and services are distributed via awareness. Hongkong and Shanghai wealth of support, advices and branches, dedicated Business Banking Corporation Limited is services in Hong Kong, across Centres, tele-banking centre, Our environmental programme a wholly owned subsidiary of the Greater China as well as our award-winning Business focuses on the HSBC Climate HSBC Holding plc, the holding throughout the world. Internet Banking and the newly Partnership – a five-year company of the HSBC Group. launched Mobile Banking. environmental programme to One of the world’s largest Commercial Banking Automated banking machines reduce the impact of climate banking and financial services also enable cash and cheque change on people, forests, organisations, HSBC Group HSBC in Hong Kong serves deposits and cash transactions freshwater and cities. HSBC’s has around 6,900 offices in over 430,000 small and 24 hour a day. programme partners are carrying 84 countries and territories medium-sized enterprises. out original scientific research, serving around 60 million We provide a full range of Corporate sustainability developing demonstration customers worldwide. banking services to commercial projects, creating working customers including For HSBC, Corporate models, and proving clear multi-currency business Sustainability is about bringing solutions so that governments accounts, payments and social and environmental can enact legislation for the cash management, wealth issues together with financial adoption of low-carbon policies. management and insurance, performance to maintain and 46 Country overview

Capital city Hong Kong

Area and population Area of 1,104 sq km and population size of 7 million

Language Chinese and English

Currency

International dialling code +852

National Holidays Scheduled Public Holidays for 2013 New Year’s Day 1 January Lunar New Year’s Day 10 February The second day of Lunar New Year 11 February The third day of Lunar New Year 12 February The fourth day of Lunar New Year 13 February Good Friday 29 March The day following Good Friday 30 March Easter Sunday 31 March Easter Monday 1 April Ching Ming Festival 4 April Labour Day 1 May The Buddha’s Birthday 17 May Tuen Ng Festival 12 June Hong Kong SAR Establishment Day 1 July The day following Chinese Mid-Autumn Festival 20 September National Day 1 October Chung Yeung Festival 13 October The day following Chung Yeung Festival 14 October Christmas Day 25 December The first weekday after Christmas Day 26 December

Business and banking hours Normal office hours are 9am to 5pm or longer (depending on the kind of business) on weekdays, and 9am – 1pm on Saturdays. Major banks are open 9am – 4:30pm on weekdays, and 9am – 12:30pm on Saturdays. Closed Sundays and public holidays.

Stock exchanges

Political structure A Special Administrative Region of the People‘s Republic of China 48 Contacts

Cathy Jiang, Partner Tax & China Business Advisory Services

Tel: +852 2289 5659

Email: [email protected]

http://www.pwc.com/gx/en/worldwide- tax-summaries

Website: www..com.hk/ business

Phone: +852 2748 8288

3rd Edition: November 2012

Copyright

Copyright 2012. All rights reserved.

‘PwC‘ and ‘PricewaterhouseCoopers‘ refer to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm‘s professional judgment or bind another member firm or PwCIL in any way.

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