Introduction
Hong Kong is a territory located in Southern China in East Asia, bordering the province of Guangdong to the north and facing the South China Sea to the east, west and south. It has a population of 7 million people, but with only 1,108km2 of land, making it one of the most densely populated areas in the world. Chinese and English are the official languages.
Renowned for its expansive skyline and natural setting, Hong Kong is one of the world’s leading financial capitals, a major business and cultural hub, and maintains a highly developed capitalist economy. Its identity as a cosmopolitan centre where east meets west is reflected in its cuisine, cinema, music and traditions, and although the population is predominantly Chinese, residents and expatriates of other ethnicities form a small but significant segment of society.
Human activity on Hong Kong dates back over five millennia and there were early influences from northern Chinese stone-age cultures. The British East India Company made the first successful sea venture to China in 1699, and Hong Kong’s trade with British merchants developed rapidly soon after. After the Chinese defeat in the First Opium War (1839-42), Hong Kong was ceded to Britain in 1842 under the Treaty of Nanking. In the late 19th century and early 20th centuries, Hong Kong developed as a warehousing and distribution center for U.K. trade with southern China.
After the end of World War II and the communist takeover of Mainland China in 1949, hundreds of thousands of people fled from China to Hong Kong. Hong Kong became an economic success and a manufacturing, commercial, finance, and tourism center. On July 1, 1997, China resumed the exercise of sovereignty over Hong Kong, ending more than 150 years of British colonial rule. Hong Kong is a Special Administrative Region of the People’s Republic of China with a degree of autonomy in all matters except foreign and defense
Business Environment
Hong Kong is the world’s eleventh largest trading entity with the total value of imports and exports exceeding its gross domestic product. Much of Hong Kong’s exports consist of re-exports, which are products made outside of the territory, especially in mainland China, and distributed via Hong Kong. Even before the 1997 handover, Hong Kong had established extensive trade and investment ties with mainland China, and its autonomous status now enables it to serve as a point of entry for investment flowing into the mainland. At the end of 2007, there were 3.46 million people employed full-time, with the unemployment rate averaging 4.1%, the fourth straight year of decline. Hong Kong’s economy is dominated by the service sector, which accounts for over 90% of its GDP, while industry now constitutes just 9%. Inflation was at 2% in 2007, and Hong Kong’s largest export markets are mainland China, the United States, and Japan.
Bankers, accountants, lawyers, and other professionals who serve multinational firms have thrived in a community of local firms that has become increasingly transnational since the opening of the Mainland to foreign trade and investment in the late 1970s. This deep-rooted local familiarity with the needs of international business makes Hong Kong an easy place in which to find joint-venture partners and to find expatriate professionals. Local staff can easily be recruited from local companies which have a ready familiarity with the dispersed operating needs of a multinational business.
Hong Kong is unsurpassed in the extent to which it brings local and overseas firms together into a single business community. The constant interaction between thousands of overseas firms and local businesses in a supercharged business environment generates growth opportunities for both sides in setting up international networks, entering new lines of business, finding new sources of supply and new markets and linking up with business partners from Hong Kong, China and elsewhere.
Economic Environment
Hong Kong is one of the world’s leading financial centres. Its highly capitalist economy is perhaps the freest in the world. The Index of Economic Freedom has ranked it as such for 15 consecutive years. It is an important centre for international finance and trade, with one of the greatest concentration of corporate headquarters in the Asia-Pacific region, and is known as one of the Four Asian Tigers for its high growth rates and rapid industrialization between the 1960s and 1990s The Hong Kong Stock Exchange is the sixth largest in the world, with a market capitalization of US$2.97 trillion as of October 2007, and the second highest value of initial public offerings, after London.
Hong Kong enjoys a number of economic strengths, including a sound banking system, virtually no public debt, a strong legal system, ample foreign exchange reserves and an able and rigorously enforced anti-corruption regime. Hong Kong’s liberal economic system enables it to respond quickly to changing circumstances. It continues to take measures designed to improve its attractiveness as a commercial and trading center, especially after China’s entry into the World Trade Organization (WTO), and is continually refining its financial architecture. The government is deepening its economic interaction with the Pearl River Delta in an effort to maintain Hong Kong’s position as a gateway to China. These efforts include the conclusion of a free trade agreement with China, known as “the Closer Economic Partnership Arrangement” (CEPA), which applies zero tariffs to all Hong Kong-origin goods and preferential treatment in 40 service sectors. Hong Kong, along with the Macau SAR, is also participating in a new pan-Pearl River Delta trade block with nine Chinese provinces, which aims to lower trade barriers among members, standardize regulations, and improve infrastructure. U.S. companies have a generally favorable view of Hong Kong’s business environment, including its legal system and the free flow of information, low taxation, and infrastructure. The American Chamber of Commerce’s annual business confidence survey, released in December 2007, showed 99% of respondents had a “good” or “satisfactory” outlook for 2008. Survey results indicated a positive economic outlook through 2010.
Banking
The currency used in Hong Kong is the Hong Kong dollar, which has been pegged to the U.S. dollar since 1983.
Hong Kong has one of the largest representations of international banks in the world: 71 of the world’s 100 largest banks have a presence there. Hong Kong is the world’s 9th largest international banking centre in terms of the volume of external transactions, and the second largest in Asia after Japan. The banking sector plays a vital role in establishing Hong Kong as a major loan syndication centre in the region.
The banking sector, being the major participant of the Hong Kong foreign exchange market, contributes to Hong Hong’s status as the world’s 7th largest foreign exchange centre.
In December, 2007, there were 142 licensed banks, 29 restricted license banks and 29 deposit-taking companies in business. These 200 authorized institutions operate a comprehensive network of local branches. In addition, there are 79 local representative offices of overseas banks in Hong Kong.
The banking system in Hong Kong is characterized by its 3-tier system, which is formed by 3 types of banking institutions, namely licensed banks, restricted licensed banks and deposit-taking companies, which are authorized to take deposits from the general public. The 3-tier of deposit-taking institutions operate under different restrictions. Only licensed banks and restricted licensed banks can be called banks.
Offshore Banking
Offshore banking in Hong Kong is popular due to Hong Kong’s excellent reputation as a financial and banking centre. Hong Kong attracts many wealthy clients who require offshore banking services in a secure jurisdiction in Asia. Its offshore banking sector is legally governed according to terms of The Banking Ordinance which clearly dictates that each bank requiring a license to operate has paid in capital and net assets representing hundreds of millions of dollars which is of great comfort to many seeking secure offshore banking institutions.
The one aspect of Hong Kong offshore banking that prospective account holders should be aware of is the number of private banking institutions who market themselves as such but which are in reality more like investment houses using the bank front end to attract client’s money which they can then invest. There is nothing wrong with such an entity in practice – but they should at least make it more obvious to clients that they offer few useful banking services but many useful investment services!
Taxation
Many countries consider Hong Kong an ‘offshore’ jurisdiction; the attitude of the Government however is that the territory is not an offshore centre in the traditional sense of the word but rather a low tax area which levies tax according to the territorial principle. The tax laws of Hong Kong are extremely simple compared to other onshore jurisdictions and the fiscal advantages of operating there could be summarized as follows:
• Tax rates are extremely low by OECD standards. Taxation case law is minimal since the low tax rate means that the costs associated with challenging a decision of the revenue authorities usually outweigh any monetary gain.
• Taxes are levied according to the “territorial principle” meaning that taxes are only levied on income “derived from or arising in” Hong Kong and not on income sourced outside the Territory.
• A number of taxes that exist in most jurisdictions do not exist in Hong Kong. Thus there are no capital gains taxes, no withholding taxes, no sales taxes, no VAT, no annual net worth taxes and no accumulated earnings taxes on companies which retain earnings rather than distribute them. In the long term it is intended to completely phase out stamp duty on the sale and issue of shares and securities and to reduce direct taxes further.
Offshore Profit Claims (Hong Kong entities only)
Hong Kong has a simple scheduler system of tax, in which only specified types of income, namely profits, salaries and property rental income are taxable.
Profit tax and tax exemption
For corporations the profits tax rate for profits arising from trade, profession or business carried on in the territory is currently 16.5%. However as indicated only income and profits derived from Hong Kong are subject to tax.
Every year once the Hong Kong Corporation has been audited, the tax return has to be filed with the Hong Kong Inland Revenue Department. As a company does not have to pay tax in the territory on income derived from outside Hong Kong, a 0% tax rate may apply for so called ‘offshore businesses. In order to justify such ‘offshore business’ the Hong Kong entity should consider the following requirements:
• the Hong Kong entity shall not have any employees in Hong Kong
• the Hong Kong entity shall not issue any invoices to and from other Hong Kong companies
• the Hong Kong entity shall not ship any goods through Hong Kong
• business decisions shall be made outside of Hong Kong
Once the Hong Kong entity filed the ‘offshore business’ tax exemption claim, the Hong Kong Inland Revenue Department requests more detailed information about the profit derived from outside Hong Kong.
