Doing Business in Hong Kong June 2010

Doing Business in Hong Kong 2010

1

Contents

Page Foreword

2

Hong Kong business environment

3

Major business related organisations

5

Key features of Hong Kong

7

The government of Hong Kong

11

Legal and accounting environment

12

Control on foreign investment

13

Controls on normal business activities

14

Finance and incentives

15

Forms of business organisation

17

Taxation

20

Contact details

25

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Doing Business in Hong Kong 2010

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Foreword

This guide is designed to give an insight into doing business in Hong Kong, together with relevant background information which will be of assistance to organisations considering establishing a business there. The most common way of doing business in Hong Kong is through companies or branches of foreign companies, and this guide has been produced mainly with these entities in mind. Certain businesses, such as banks and insurance companies are subject to special regulations, which are not dealt with in this guide. It is essential to obtain advice from local professional sources before any business is undertaken. This guide contains only brief notes and includes legislation in force as of 31 May 2010. Grant Thornton

Grant Thornton International is one of the world's leading organisations of independently owned and managed accounting and consulting firms. These firms provide assurance, tax and specialist business advice to privately held businesses and public interest entities. Clients can access the knowledge and experience of more than 2,500 partners in around 100 countries and consistently receive a distinctive, high quality service where they choose to do business. The strength of each local firm is reflected in the quality of the international organisation. Experienced professionals combine invaluable local market knowledge with technically advanced systems to help businesses prosper in today’s highly competitive international markets. We focus on helping businesses reach their commercial goals by providing practical, customised solutions and identifying and pursuing business opportunities domestically and internationally. Grant Thornton in Hong Kong

Grant Thornton Hong Kong is a member firm of Grant Thornton International, employing around 600 people. The firm and its associates offer a full range of auditing and taxation services in Hong Kong, mainland China and round the globe. We also assist businesses in dealing with issues relating to trade regulations, banking and information technology, ensuring their commercial objectives are met, both locally and internationally. We can assist businesses in identifying and implementing strategies for expansion and acquisition, as well as exploring new markets and opportunities, including the raising of finance on the Hong Kong, or other international stock and capital markets.

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Doing Business in Hong Kong 2010

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Hong Kong business environment

Strategically located at the centre of Asia, the world's fastest growing economic region, Hong Kong emerges as a superb financial, trading and business centre with high degree of internationalisation and business-friendly environment. Its world-class performance is fully reflected by the top regional and global rankings in various areas: • world’s freest economy1 • world’s 12th largest trading economy • world’s 6th largest foreign exchange market • world’s 15th largest banking centre • world’s 2nd highest per capita holding of foreign exchange reserves • world’s 7th largest foreign exchange reserves holding • world’s 12th largest exporter of services • world’s most services-oriented economy • world’s 3rd busiest container port • world’s 7th and Asia’s 3rd biggest stock market • Asia’s 2nd best performing host economy for foreign direct investment2 More outstanding features that make Hong Kong even more attractive are listed below: • “big market, small government” promoted by HKSAR Government • world-class infrastructure, transport and communications • free trade, free market and free flow of information • no exchange control or restriction on foreign investment • simple tax structure and low tax rates • sophisticated and successful banking and financial sector • well-educated workforce and competent professionals • popular international corporate base that attracts 3,580 regional operations for foreign companies • clean government with small and efficient structure • stable and fully convertible currency • independent judiciary and trustworthy legal system

1

2009 Index of Economic Freedom, The Heritage Foundation World Investment Report 2008, United Nations Conference on Trade and Development (UNCTAD)

2

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Hong Kong is the most important gateway to mainland China, an increasingly affluent market of 1.3 billion people and now a full member of the World Trade Organisation. The latest development of the Close Economic Partnership Arrangement (CEPA) in May 2010 further open the mainland market to Hong Kong, especially in the fields of tertiary sector, trade and investment, and mutual recognition of professional certificates. Hong Kong is currently the largest foreign investment source of the mainland China, and mainland China as Hong Kong’s 2nd largest source of external investment. Hong Kong possesses a strong niche in the mainland China market as: • Hong Kong has solid China experience • CEPA opened up the liberalisation measures of 44 services sectors and expanded the business scope allowable in the mainland China • all products of Hong Kong origin, except for a few prohibited articles, can be imported tariff free to the mainland under the CEPA

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Doing Business in Hong Kong 2010

Major business related organisations

There are several organisations which enhance and support the business-friendly commercial environment in Hong Kong, these include: Hong Kong Trade Development Council (TDC) is a statutory body responsible for promoting and expanding Hong Kong's products and services in the world market, and for enhancing Hong Kong's standing as a business partner committed to free trade. (www.hktdc.com) InvestHK is a HKSAR governmental department that promotes Hong Kong's many advantages as an investment and business hub in Asia. It provides assistance to corporations planning to establish their operations or looking for direct investment opportunities in Hong Kong. (www.investhk.gov.hk) Trade and Industry Department is a governmental department responsible for conducting Hong Kong's international trade relations, implementing trade policies and agreements, as well as providing general support services for industries and small and medium enterprises. (www.tid.gov.hk) The Hong Kong Export Credit Insurance Corporation (ECIC) is a public body that provides insurance protection to exporters against bad debts overseas. (www.hkecic.com) Mandatory Provident Fund Schemes Authority is responsible for ensuring compliance with the Mandatory Provident Fund Schemes Ordinance; registering Mandatory Provident Fund schemes; approving qualified persons and companies to be approved trustees of registered schemes; and making rules or guidelines for the effective administration of Mandatory Provident Fund schemes etc. (www.mpfa.org.hk) Hong Kong Stock Exchange (HKEx) is the stock exchange of Hong Kong providing a comprehensive range of pre- and post-trade investment services. Its total market capitalisation ranked the third largest in Asia, and the seventh largest in the world. They had 1,319 companies listed on the stock exchange as of end of 2009, with a total market capitalisation of about HK$17,874 billion, and would continue to attract some of the largest Chinese companies to go public in Hong Kong. (www.hkex.com.hk) Hong Kong Securities and Futures Commission (SFC) is an independent non-governmental statutory body responsible for regulating the securities and futures markets in Hong Kong. They administer the laws governing the securities and futures markets, as well as facilitate and encourage the development of these markets. (www.sfc.hk)

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Doing Business in Hong Kong 2010

Hong Kong Monetary Authority (HKMA) is the government authority responsible for maintaining currency stability, promoting the safety and stability of the banking system, managing official reserves, and developing Hong Kong’s financial infrastructure. (www.info.gov.hk/hkma/) Hong Kong General Chamber of Commerce (HKGCC) is the largest business organisation in Hong Kong which has around 4,000 corporate members. It represents its members to advise the HKSAR Government on matters affecting businesses and the economy, provides members with business information and opportunities, and facilitates networking through a variety of Chamber activities. (www.hkgcc.org.hk) Major international Chambers of Commerce including: The Australian Chamber of Commerce in Hong Kong (www.austcham.com.hk) American Chamber of Commerce in Hong Kong (www.amcham.org.hk) The British Chamber of Commerce in Hong Kong (www.britcham.com) Canadian Chamber of Commerce in Hong Kong (www.cancham.org) The French Chamber of Commerce & Industry in Hong Kong (www.fccihk.com)

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Doing Business in Hong Kong 2010

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Key features of Hong Kong

General

Population:

7.00 million (2009)

Official languages:

English and Chinese (Cantonese-dominance)

Currency:

Hong Kong Dollar (HK$) Pegged to the US$ at approximately HK$7.8 to US$1

International airport:

Hong Kong International Airport

Climate:

Subtropical to temperate

Summer :

July - September

Winter :

January-March

Temperature range :

Below 10 °C – exceed 31 °C

Humidity :

78% (Average)

Rainy season:

April - September

Visas - Employment

All persons not holding a permanent identity card wishing to work, study, establish or join in any business or to reside in Hong Kong may require a visa or entry permit prior to entry. There are significant penalties for employers who employ persons without the proper visa requirements. Dependents such as spouse and unmarried children under the age of 18 who accompany the individual taking up employment in Hong Kong must apply for entry to join the individual on residence. Dependents may work in Hong Kong if their sponsors are (a) Hong Kong permanent residents; (b) persons who are not subject to a limit of stay; (c) persons who have been admitted for employment; and (d) entrants under the Capital Investment Entrant Scheme or the Quality Migrant Admission Scheme.

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The following nationalities are included in the list that are entitled to visa free access for the period stipulated: Up to 6 months

UK citizens Up to 3 months

Nationals of: Andorra, Anguilla, Antigua & Barbuda, Argentina, Australia, Austria, Bahamas, Barbados, Belgium, Belize, Bermuda, Botswana, Brazil, Brunei, Bulgaria, Canada, Cayman Island, Chile, Colombia, Republic of Cyprus, Czech Republic, Denmark, Commonwealth of Dominica, Ecuador, Egypt, Estonia, Falkland Islands & Dependencies, Faroe Islands, Fiji, Finland, France, Gambia, Germany, Gibraltar, Greece, Greenland, Guyana, Hungary, Iceland, Republic of Ireland, Israel, Italy, Jamaica, Japan, Kenya, Kiribati, Republic of Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malawi, Malaysia, Maldives, Malta, Mauritius, Mexico, Monaco, Montserrat, Namibia, Nauru, the Netherlands, New Zealand, Norway, Papua New Guinea, Pitcairn, Henderson, Ducie & Oeno Islands, Poland, Portugal, Romania, San Marino, Seychelles, Singapore, Slovak Republic, Slovenia, Spain, St. Helena, St. Kitts, St. Lucia, St. Vincent and the Grenadines, Sweden, Switzerland, Tanzania, The South Georgia and The South Sandwich Islands, the Sovereign Base Areas of Akrotiri and Dhekelia, Tonga, Trinidad & Tobago, Turkey, Turks and Caicos Islands, Tuvalu, Uruguay, the U.S.A., Vanuatu, Venezuela, Zambia, and Zimbabwe. Up to 30 days

Nationals of Bahrain, Bolivia, Republic of Cape Verde, Costa Rica, Dominican Republic, El Salvador, Honduras, Guatemala, Indonesia, Jordan, Kuwait, Morocco, Oman, Paraguay, Peru, Qatar, Western Samoa, Saudi Arabia, South Africa, Thailand, Tunisia, Uganda, the United Arab Emirates, and Republic of Yemen. Up to 14 days

Nationals of Algeria, Benin, Bhutan, Bosnia and Herzegovina, Burkina Faso, Central African Republic, Chad, Comoros, Croatia, Djibouti, Equatorial Guinea, Gabon, Guinea, Haiti, India, Lesotho, Macedonia, Madagascar, Mali, Republic of Marshall Islands, Mauritania, Federated States of Micronesia, Mongolia, Mozambique, Niger, Palau, the Philippines, Russian Federation, Rwanda, Sao Tome and Principe, Suriname, and Vatican City. 2

The visa free access does not grant the right to take up employments.

3

Travel document holders of the following nationality may not visit Hong Kong without first obtaining a visa: Afghanistan, Albania, Angola, Armenia, Azerbaijan, Bangladesh, Belarus, Burundi, Cambodia, Cameroon, Democratic Republic of Congo, Republic of Cote D’ivoire, Cuba, Eritrea, Ethiopia, Georgia, Ghana, Grenada, Iran, Iraq, Khazakstan, Democratic People’s Republic of Korea, Kyrgyzstan, Laos, Lebanon, Liberia, Libya, Republic of Moldova, Republic of Montenegro, Myanmar, Nepal, Nicaragua, Nigeria, Pakistan, States of Palestine, Panama, Senegal, Republic of Serbia, Sierra Leone, Solomon Islands, Somalia, Sri Lanka, Sudan, Syria, Tajikistan, Togo, Turkmenistan, I-Tuvalu, Ukraine, Uzbekistan and Vietnam.

The Immigration Department has published comprehensive guidelines specifying visa requirements. Information can be obtained at www.immd.gov.hk

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Doing Business in Hong Kong 2010

Economy

Per capita GDP: HK$233,060 in 2009 Major industries:

Trade and logistics, tourism, financial services, and professional services and other producer services. Major imports:

Goods: foodstuffs, consumer goods, raw materials and semi-manufactures, fuels and capital goods. Services: transportation, travel, trade-related Major exports:

Goods: apparel and clothing accessories, miscellaneous manufactured articles, electrical machinery, apparatus, appliances, and electrical parts, plastics, textile yarn, fabrics, made-up articles, metalliferous ores and metal scrap. Services: finance and business, travel, transportation, trade-related Principal trading partners: Exports of goods (as of April 2010):

Mainland China

54.0%

European Union

11.0%

United States

10.0%

ASEAN

7.0%

Japan

4.0%

Imports of goods (2009):

Mainland China

46.4%

Japan

8.8%

Taiwan

6.5%

Singapore

6.5%

United States

5.3%

Republic of Korea

3.8%

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Doing Business in Hong Kong 2010

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Workforce

Total workforce: 3,657,300 (as of March 2010) Employment

Total employment: 3,496,700 (as of March 2010) As of the end of 2009, employment distribution in major economic sectors is: Import/export trade, wholesale, retail, accommodation and food services

39.4%

Financing, insurance, real estate, professional and business services

22.4%

Social and personal services

15.9%

Transportation, storage, postal and courier services, information, communications

9.3%

Civil service

5.9%

Manufacturing

4.7%

Construction sites

2.0%

Other

0.4% Total 100%

General office hours and rest days:

Monday-Friday Saturday

9.00 am - 5.00 pm 9.00 am - 1:00 pm

Office hours may vary depending on nature of different businesses, demands and habits of their clientele as well as relevant operational considerations. Minimum 7 days of paid annual leave entitlement per annum 12 days of statutory holidays Information can be obtained at www.labour.gov.hk Five-day week: Starting from 1 July 2007, the HKSAR government has entered its final phase of switching to five-day week. All suitable government offices, except emergency services, are operated under new work pattern, with office hours extended during weekdays and offices closed on Saturday. Information can be obtained at www.info.gov.hk/info/5day/eng/index.htm

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The government of Hong Kong

The Hong Kong Special Administrative Region (HKSAR) Government is headed by the Chief Executive who is responsible for implementing the Basic Law, signing Bills and budgets passed by the Legislative Council, promulgating laws, making decisions on government policies and issuing executive orders. The Basic Law is the written constitution of Hong Kong. The Executive Council advises the Chief Executive on policy. All members are appointed by the Chief Executive. The Legislative Council is responsible for the enactment of new bills and the examination on government policy. Council members are elected partly by geographical constituencies and partly by functional, occupation-based constituencies. The Judiciary is independent from the legislative and executive branches of government, with the courts showing no bias. The Court of Final Appeal is the highest appellate court and is headed by the Chief Justice.

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Legal and accounting environment

Legal System

The legal system is firmly based on the rule of law and the independence of the judiciary. Under the principle of 'one country two systems', the HKSAR legal system is different from that of mainland China, and is based on the British common law system. The constitutional framework for the legal system is provided, at the international level, by the SinoBritish Joint Declaration, which was signed in December 1984. At the domestic level, the constitutional framework is provided by the Basic Law. The Court System comprises the Court of Final Appeal (the highest appellate court in the HKSAR), the High Court (which includes the Court of Appeal and the Court of First Instance), the District Courts, the Magistrates’ Courts, the Lands Tribunal and various Tribunals. The courts make their own judgements, whether disputes before them involve private citizens, corporate bodies or the government itself. The court system is bilingual, in which either or both of the official languages can be used. Accounting Requirements

Disclosure requirements for financial statements are set out in the Companies Ordinance, the Hong Kong Financial Reporting Standards and, for companies listed in Hong Kong the regulations of the Hong Kong Exchanges and Clearing Limited (HKEx). Principles follow the Hong Kong Financial Reporting Standards (HKFRS) issued by the Hong Kong Institute of Certified Public Accountants (HKICPA). The HKFRS are in all material respects converged with International Financial Reporting Standards. All Hong Kong incorporated companies are required to have their financial statements audited in accordance with the Hong Kong Standards on Auditing issued by the HKICPA. This is a statutory requirement under the Companies Ordinance and cannot be waived unless the company is totally inactive and has applied for dormant status with the Company Registrar under S344A.

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Control on foreign investment

Exchange Controls

None. The Hong Kong dollar is pegged to the US dollar. Government approval or consent is not a prerequisite for the flow of money into or out of Hong Kong. The HKSAR Government welcomes and encourages foreign investment. There is no restriction on foreign ownership in Hong Kong. As an international financial centre with sophisticated communications and infrastructure, a low rate of taxation and an open economic policy, Hong Kong attracts substantial foreign investment.

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Controls on normal business activities

Some licensing requirements in respect of imports and exports exist to enable Hong Kong to fulfill international obligations and to monitor the flow of these goods through Hong Kong. A Certificate of Origin system exists to enable the origin of goods exported by Hong Kong to be established in order to meet the requirements of various importing authorities. Hong Kong, a strong supporter of World Trade Organisation (WTO), follows the principles of the Anti-dumping Code. Consumer-protection controls do exist but with little associated trade practices legislation. There is protection of commercial and industrial rights through patents and trademarks law. The securities industry is regulated under the Securities and Futures Commission (SFC) and the Hong Kong Exchanges and Clearing Limited (HKEx). Regulations governing development and use of land exist. Environmental regulations are constituted by the Government and monitored by the Environmental Protection Department.

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Finance and incentives

The Banking System comprises: • Licensed Banks • Restricted Licence Banks • Deposit-taking companies Licensed Banks are commercial banks, which provide savings and current account services, lending and international trade financing services. Restricted licence banks are principally engaged in merchant banking and capital market activities. They may accept deposits of any maturity in amounts exceeding HK$500,000 and interest rates are unrestricted. Services provided by deposit-taking companies range from conventional lending and foreign exchange to funds management and investment advice. Other sources of finance include insurance companies, the local capital markets - trading mainly in certificates of deposit and commercial paper - HKEx, GEM, merchant banks and investment banks. There is no central bank in Hong Kong, however, the Exchange Fund (within the Hong Kong Monetary Authority) acts as a lender of last resort, providing the backing for the issue of notes and coins and the bulk of foreign currency assets. Currency

HSBC, Standard Chartered Bank and the Bank of China are currently the only three note-issuing banks in Hong Kong. The Hong Kong Dollar seeks to maintain a peg with the US Dollar and fluctuates within a narrow band. The exchange rate is approximately HK$7.8 =US$1. Regulations & Regulatory Bodies

The Hong Kong Monetary Authority (HKMA) seeks to maintain currency stability, ensure stability and safety of the banking system, supervise authorised institutions, and promote the efficiency, integrity and development of the financial system. Principles established by the Basel Committee on Banking Regulations and Supervisory Practices are followed.

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The SFC and HKEx are responsible for the independent supervision of the securities, financial investment and commodities futures industry. The Commissioner of Insurance is responsible for supervision of the insurance industry in Hong Kong - the Commissioner has wide interventionary powers to safeguard the interests of policy holders and claimants.

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Forms of business organisation

The most common types of business structure are: • Sole Proprietorship • Partnership • Company Tax implications vary according to the structure and professional advice is essential before commencing business. Company

A company can have only one member, who doesn't need to be a Hong Kong resident. The main types of company are as follows: • limited company- limited by shares or guarantee • unlimited company- with or without share capital • private company • public company Documents required for registration: i

Memorandum of Association signed by at least 1 subscriber; Articles of Association signed by at least 1 subscriber (if no articles are filed, articles set out in Table A of the Companies Ordinance will apply); and

ii

Statement of compliance with the Companies Ordinance.

General Features of Hong Kong Companies: Minimum number of subscribers Maximum number of subscribers Minimum number of directors

Private 1 50 1

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Public 1 No limit 2

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Requirements common to Private and Public companies

• a registered office in Hong Kong must be retained; • a company secretary must be appointed and may be either of the following: i

an individual ordinarily residing in Hong Kong; or

ii

a corporation having its registered office or place of business in Hong Kong.

• the Companies Ordinance places no special qualifications on a company secretary, however, the Stock Exchange Listing Rules require secretaries of listed companies to be an individual possessing certain qualifications • directors and subscribers need not reside in Hong Kong; • an annual return must be filed; • an annual general meeting (AGM) must be held each calendar year with the exception of the first AGM which must be held within 18 months of incorporation; • meetings of Directors and shareholders need not be held in Hong Kong; • statutory record keeping and filing requirements must be observed • auditors qualified under the Professional Accountants Ordinance must be appointed • audited accounts must be prepared annually in accordance with requirements of the HKICPA • capital duty of 0.1% with a cap of HK$30,000 is payable on the authorised share capital • documents and information required to be filed must be all in English or Chinese • a corporation may act as director of a Hong Kong company provided that the company satisfies the following two requirements: i

it is a private company; and

ii

it is not a member of a group of companies which includes a listed company.

• audited accounts of a private company having a share capital are not filed with the Companies Registry, although they are lodged with the Hong Kong Inland Revenue Department in support of the tax computation. • public companies must file a copy of the prospectus, or statement in lieu of the prospectus, with the Companies Registry. This requirement also applies to a private company converting to public status. Listing

A company listed on the Stock Exchange must comply with the Stock Exchange's listing requirements, the rules and regulations under the various ordinances, codes and guidelines, enforced by the SFC. Legislation regulates disclosure of dealings by directors in shares or debentures of listed companies and associated corporations; that requires the keeping of certain registers, which must be made available for public inspection. Legislation has been enacted to establish an Insider Dealing Tribunal and impose penalties on offenders. Takeovers and Mergers are regulated by a code providing guidelines for companies and their advisors. © 2010 Grant Thornton. All rights reserved. Grant Thornton is a member firm within Grant Thornton International

Doing Business in Hong Kong 2010

Foreign companies

A company incorporated outside Hong Kong may establish and register a branch in Hong Kong under Part XI of the Companies Ordinance. Within one month of establishing a business in Hong Kong, the company must comply with the filing requirements of the Companies Registry. Once those requirements have been met, the company will be issued with a Certificate of Registration. At least once each calendar year a company so registered must file an annual return together with the audited accounts of the foreign company, if applicable. All documents filed must be in English or Chinese, or accompanied by a certified translation into English or Chinese.

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Taxation

General

Hong Kong levies three direct taxes under the Inland Revenue Ordinance on company profits and the income of individuals and partnerships. The three separate and distinct taxes levied are as follows: • Property tax charged on rent received by owners of real estate located in Hong Kong • Salaries tax charged on all income arising in or derived from Hong Kong from an office, employment or pension • Profits tax charged on profits arising in or derived from Hong Kong from a trade, profession, or business carried on in Hong Kong Hong Kong’s taxes are based on a territorial concept and the above taxes apply only to income arising in or derived from Hong Kong. For most purposes residence or domicile is not a determinant of liability to Hong Kong tax. Provisional tax is payable in respect of the above three taxes and is usually based on the assessable income of the previous year. Profits tax losses may be carried forward indefinitely – subject to anti-avoidance regulations on the change of ownership of a company. Tax Depreciation allowances are available for expenditure on plant and machinery, industrial and commercial buildings. Anti-avoidance legislation is aimed at transfer pricing arrangements between residents and nonresidents who are closely connected, leveraged leases, utilisation of tax losses and payment of royalties to an overseas affiliate. There is no tax on dividends or capital gains. But “Capital gains” arising from the regular trading of Hong Kong property or other Hong Kong assets may be treated as trading profits subject to Profits Tax. © 2010 Grant Thornton. All rights reserved. Grant Thornton is a member firm within Grant Thornton International

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Hong Kong has signed thirteen Comprehensive Double Taxation Agreements (CDTAs) up to 22 June 2010. These are with mainland China, Belgium, Thailand, Luxembourg, Austria, Brunei, Hungary, Indonesia, Ireland, Kuwait, the Netherlands, the UK and Vietnam. Negotiations are well advanced with a number of other jurisdictions for the finalisation of other CDTAs, in line within the Government's stated intention of establishing a network of CDTAs. In addition, Hong Kong has a series of limited double tax agreements relating to shipping income with countries including the USA, the UK and the Netherlands. Hong Kong also has Air Services Agreements regarding the taxation of airline profits with countries such as the Republic of Korea, New Zealand, Canada, the Netherlands, Germany, the UK, Belgium, Israel, Mauritius, Denmark, Norway, Sweden and Bangladesh.

Types of taxes Profits tax – tax on business profits 2010/11 16.5% 15%

Corporations Persons other than corporations Tax year: 1 April - 31 March of the following year

Relief for losses:

1

Carried forward indefinitely, subject to anti-avoidance provisions on the change of ownership of a company, for set off against subsequent years’ assessable income.

2

Set off against any other taxable income in the same assessment year if personal assessment is elected (for individuals and partners).

3

No group loss relief available.

Depreciation Allowances Industrial Buildings: • Initial allowance • Annual allowance Commercial Buildings: • Annual allowance Building Refurbishment: Environment-friendly installations ancillary to buildings: Manufacturing machinery, Computer hardware and software, environmentfriendly machinery and plant or vehicle: Other Machinery or Plant: • Initial allowance • Annual allowance

Withholding Tax:

Thin Capitalisation:

Rate 20% of capital expenditure incurred on construction 4% of construction expenditure 4% of construction expenditure 20% of capital expenditure per annum (for five years) 20% of qualifying expenditure per annum (for five years) 100% of capital expenditure in year of acquisition

60% of capital expenditure 10%, 20% or 30% on reducing value according to classification Royalties and licence fees paid to non- residents: • Assessable income is 30% of amounts paid by Hong Kong payers to unrelated recipients. • Royalties and licence fees paid to related persons will be 100% taxable unless certain conditions are satisfied No rules apply

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Property tax – tax on rental income

Rate:

15% of net assessable value of the property for 2010/11.

Salaries tax – imposed on employees in respect of income from employment

Tax is payable based on the lower of:i

The standard rate of 15% for 2010/11 of net assessable income after allowable deductions; or

ii

Net assessable income after allowable deductions and personal allowances, charged at the following rates for 2010/11: 2010/11 First Second Third Balance

HK$ 40,000@ 40,000@ 40,000@

2% 7% 12% 17%

Personal allowances are:-

Personal allowance (single) (married) Single parent allowance Child allowance (each) Child allowance year of birth (each) Allowance for dependent parent/grandparent aged 55 to 59 Additional allowance for dependent parent /grandparent aged 55 to 59 Allowance for dependent parent/grandparent aged 60 and above Additional allowance for dependent parent/ grandparent aged 60 and above Disabled dependent allowance Dependent sibling allowance

2010/11 HK$ 108,000 216,000 108,000 50,000 50,000 15,000 15,000 30,000 30,000 60,000 30,000

Other taxes

Inheritance and Gift Taxes There are no Inheritance or Gift Taxes in Hong Kong. Estate Duty was abolished in February 2006. Wealth Tax There is no Wealth Tax in Hong Kong. Stamp Duty and other Indirect Taxes

Stamp Duty: Charged on transactions in respect of the conveyance on sale or lease of immovable property in Hong Kong, instruments for the sale, purchase or other transfer of Hong Kong stock and Hong Kong bearer instruments.

Chargeable to Stamp Duty Conveyances of Immovable Property Lease of more than 3 years Transfers of shares

Maximum Duty 4.25% of the consideration over $20,000,000 1% of annual rent 0.1% of the amount of consideration or of its value on every sold note and every bought note.

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Other indirect taxes include the following: • Property Rates • Duty on Imported Hydrocarbon Oils • Duty on Tobacco • Motor Vehicle First Registration Tax • Football Betting Duty • Betting Duty on exotic horse racing Capital Gains There is no Capital Gains Tax in Hong Kong. "Capital gains" are not taxable unless they arise from the carrying on of a trade in which case they are treated as revenue items subject to Profits Tax. Turnover Tax Rate: Nil Taxation of companies

Companies carrying on business in Hong Kong are subject to profits tax on profits arising in or derived from Hong Kong. A company will be carrying on business in Hong Kong if: • its central management is located in Hong Kong, or business activities are carried out in Hong Kong. • its business activities are conducted through an agent in Hong Kong where the agent has, and habitually exercises, a general authority to negotiate and conclude contracts on behalf of his principal or has a stock of merchandise from which he regularly fills orders on his behalf.. If the source of a company's profit is outside Hong Kong, no profits tax liability arises. The law governing this area is very specific and professional advice should be sought. Income having its source both inside and outside Hong Kong may be apportioned in certain circumstances. There are withholding taxes on royalties payable to non resident recipients. The payer is required to withhold tax and to pay tax as the agent for the non resident recipient. The following receipts are not taxable:• dividends • capital gains Assessable profits are generally ascertained on an accruals basis.

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Assessable profits of the following are ascertained by special provisions: • • • • •

partnership life and non-life insurance corporations resident and non-resident ship or aircraft owners clubs and trade associations financial institutions

Taxation of individuals

Assessable income includes income derived in Hong Kong from an office, employment, pension and income from real estate, which are subject to salaries tax and property tax respectively. The definition of income includes not only wages, salaries, leave pay, commissions, bonuses and allowances but also perquisites (or benefits-in-kind) if they are provided as a reward for services. The Inland Revenue Ordinance (IRO) deals specifically with the tax treatment of four benefits-inkind - housing, holiday journey benefits, stock options and education allowances. The provision of properly implemented and controlled housing benefits can lead to significant tax savings. The IRO provides that other benefits-in-kind are taxable if they fall within one of the following two categories: a

benefits capable of being converted to money's worth by the recipient

b

amounts paid by an employee to discharge the personal liability of the employee

Visitors to Hong Kong who render services in Hong Kong during visits not exceeding 60 days in a tax year are not subject to salaries tax on the income received. Visits for this purpose include all days not just business days. Personal allowances are available to taxpayers liable to salaries tax or individuals who elect for personal assessment, which have the effect of reducing net chargeable income. Hong Kong Resident Individuals may become subject to all three direct taxes and have the option, in such circumstances, to elect for personal assessment. Personal assessment, under which liability is calculated on a taxpayer's total income after deducting the appropriate personal allowances and mortgage interest for rental property, may be more beneficial than separate assessments under each tax levied. A non-resident who receives royalties or license fees from Hong Kong or who is an entertainer or sportsman who performs in Hong Kong is assessed to profits tax in the name of any person who pays or credits him or her with payments from Hong Kong.

The tax legislation is complex – you are strongly recommended to seek professional advice before undertaking business transactions in Hong Kong.

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Doing Business in Hong Kong 2010

Contact details

For any enquiries, please contact Grant Thornton Hong Kong at: Ringo Chiu Partner T (852) 2218 3174 E [email protected] Hong Kong 6th Floor Nexxus Building 41 Connaught Road Central Hong Kong T + 852 2218 3000 F + 852 3748 2000 E [email protected]

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