Any foreign incorporated company may be registered in Hong Kong (as Non-Hong Kong companies, also known as branch offices) but for those clients who simply wish to create a new Hong Kong entity then our recommendation would be to register a company in one of the offshore jurisdiction, such as British Virgin Islands. The procedure whereby a foreign company is registered in Hong Kong may result in considerable advantages over the equivalent procedure of incorporating a new Hong Kong company. Those advantages may be summarized as follows: –
Any transfer of shares in a Hong Kong incorporated company is subject to the normal level of Hong Kong stamp duty but most of the offshore jurisdictions do not impose stamp duty on share transfers. Any share transfer which takes place in a Part XI registered company would follow the procedures applicable in that offshore jurisdiction where a reduced amount of paperwork is required, and no stamp duty need be paid.
Offshore jurisdictions normally allow for easier administration of a company. Although Part XI imposes reporting requirements additional to those imposed by those offshore jurisdictions the actual administration of the company would largely follow the offshore jurisdiction procedures and it is therefore much easier and quicker to undertake the administrative procedures such as raising the share capital, transferring shares, appointing and resigning directors, amending the Memorandum and Articles of Association etc.
Subject to the Hong Kong Registrar accepting that the structure of the offshore company is equivalent to that of a Hong Kong private limited company, the Part XI company will be exempted from the requirement to file accounts with the Public Registrar and, if the offshore jurisdiction does not impose a requirement for accounts to be audited, the Hong Kong Inland Revenue Department may accept unaudited accounts.
It is possible to bypass many of the restrictions which would be imposed by the Registrar of Companies if you were to apply for the corporation of a Hong Kong company. For example, a Hong Kong incorporated company which wishes to use the word “trust” in its name would normally be required to have a higher paid up share capital whereas no such requirement would apply to an offshore company applying for registration under Part XI. In most of the offshore jurisdictions it is possible to incorporate a limited liability company without the requirement to use the word “Limited” or any derivative thereof as part of the name. A limited liability company may therefore register under Part XI without including the world “Limited” in its name. This procedure would not be available when incorporating in Hong Kong.
A Hong Kong company may not issue bearer shares but the some of the jurisdictions impose no such prohibition. Although the ability to issue bearer shares would prevent the company from obtaining the exemption from the requirement to file accounts at the Public Registry, registering an offshore company which can issue bearer shares under Part XI does allow you to create a Hong Kong legal entity without the restrictions on share capital imposed by the Hong Kong Companies Ordinance.
If a Hong Kong incorporated company wished to leave the register in Hong Kong then it can only do so by winding up and ceasing to exist. By contrast a company registered in some of the offshore jurisdictions which was registered in Hong Kong under Part XI may leave the Hong Kong register by a relatively simple procedure and continue to exist under the law of that offshore jurisdiction retaining the corporate history. Additionally, a offshore company would have the ability to redomicile itself in another jurisdiction.
A foreign company registered under Part XI is, potentially, given a more lenient tax treatment by the Hong Kong Inland Revenue Department than an equivalent Hong Kong incorporated company. IRD Practice Note No. 21, issued in November 1992, outlines what, in the opinion of the IRD, constitutes Hong Kong source income. In relation to trading transactions the Practice Note states that where either the contract for sale or the contract for purchase is affected in Hong Kong then the profits which result from the contract will be taxable in Hong Kong. However, it states that “where an overseas company sets up a branch in Hong Kong to act simply as a buying office (i.e. the branch only purchases goods and is not involved in their sale) no profits tax liability will arise”. It therefore seems as though an overseas company can effect contracts for the purchase of goods in Hong Kong without liability to Hong Kong tax whereas a Hong Kong incorporated company cannot enjoy this privilege.
An individual employed by a Hong Kong incorporated company would generally not be allowed to claim relief from Hong Kong salaries tax in respect of earnings accumulated while travelling abroad on business. An employee of a Part XI registered company who is able to show that his contract of employment was signed and negotiated while he was outside Hong Kong may be able to claim a time apportionment and gain relief from Hong Kong salaries tax in respect of earnings accumulated while outside Hong Kong.