Introduction of the Re-Domiciliation Regime for Foreign Businesses in Hong Kong

On 31 March 2023, the Financial Secretary published the “Consultation Paper on Proposed Company Re-domiciliation regime in Hong Kong” which introduces the re-domiciliation regime (the “Regime”) for companies incorporated outside of Hong Kong’s jurisdiction.  The purpose of the Regime is to attract and facilitate non-Hong Kong enterprises and talents, allowing businesses to leverage Hong Kong’s special networks with Mainland China and global businesses and professional services.  To facilitate this aim, the Regime is designed to ensure a seamless process that does not affect the relevant businesses’ property, rights, obligations, liabilities, and contractual and legal processes currently in place.

Hong Kong has already had similar implementations in 2021, that is the fund re-domiciliation mechanism for Open-Ended Fund companies and Limited Partnership Funds to facilitate foreign business operations in Hong Kong.  To further build on the success from this experience, the HKSAR government hopes to provide streamlined process for companies without any complex and cost-ineffective procedures, or any court-sanctioned schemes of arrangement.  Commentaries from stakeholders have been closed from 31 May 2023.

For some background on the Regime, re-domiciliation of foreign companies would mean that the company retains the same legal identity, its corporate history, management structure, assets, intellectual property and other property rights, and existing contractual relationships.

With regards to the Company Ordinance (Cap. 622) (the “CO”), the Regime shall apply to companies which fall within these five categories, or their comparable types in the original jurisdiction:

1. private companies limited by shares;
2. public companies limited by shares;
3. companies limited by guarantee with a share capital;
4. private unlimited companies with a share capital; and
5. public unlimited companies with a share capital.

Application requirements

The eligibility criteria for companies to achieve a “good standing” status in their applications (the “Application”) are briefly outlined below:

1. General

• The proposed types of company after re-domiciliation should be the identical or substantially the identical in the original jurisdiction;
• Compliance with the laws of the original jurisdiction for the transfer of its incorporation should be ensured; and
• Companies should have existed for at least one financial year from the date of the Application.

2. Integrity

• Companies should comply with the requirements under CO subject to the incorporation of a local company; and
• Companies that operate with an unlawful purpose, or purposes that are contrary to public interest or that are endangering national security should disqualify.

3. Member and Creditor

• Applications are conducted in good faith and not intended to defraud existing creditors of the company; and
• If members of the company are not required to consent on the re-domiciliation beforehand by its original jurisdiction, then:
• Re-domiciliation are considered consented if a resolution provided is passed by with at least 75% of member votes; and
• at least 21 days’ notice were given of the proposed resolution and the meeting.

4. Solvency

• Companies that show the ability to repay debts that fall due during the period of 12 months after the date of the Application;
• Companies are not in liquidation or being wound up, nor are those processes ongoing or pending in action;
• There are no receiver(s), or receiver(s) and manager(s), in possession of, or have control over, any property of the company and no ongoing or pending relevant proceedings; and
• There are no compromises or arrangements made between companies and others being administered and no ongoing or pending relevant proceedings.

5. Discretion of the Registrar of Companies

The Registrar of Companies (the “Registrar“) is also empowered to impose any other conditions on a case-by-case basis.

Application process

The Regime is designed to be accessible and accommodating for companies looking to re-domicile, regardless of their origin or size. The Registrar is responsible for approving applications, with a focus on ensuring that applicants have a “good standing,” as outlined in the “Application Requirements” section. The process is designed to minimize disruption to a company’s property, rights, liabilities, and internal operations, enabling smooth transitions and business continuity, particularly for parties involved in transactions.

Upon a successful application, the company will be registered in Hong Kong and will receive a certificate of re-domiciliation. To complete the process, the company must then de-register in its original jurisdiction within 60 days. Although the general procedure has been established, certain transitional matters, such as tax obligations, may require further attention and potential amendments.

Tax implications

Under the Regime, companies that re-domicile in Hong Kong are not affected in terms of chargeability of profit tax since profit tax exposure does not vary based on the company’s location. Under the Inland Revenue Ordinance (Cap. 112) (the “IRO“), profit tax exposure is determined by whether companies conduct business in Hong Kong and whether any profits are derived from those trades. However, it should be noted that there are potential benefits for companies re-domiciling to Hong Kong due to its preferential tax treatments, including the two-tiered profit tax rates system and Hong Kong’s extensive network of Double Taxation Agreements (“DTAs”).

Conclusion

Benefits of Re-domiciliation in Hong Kong

The Regime offers several advantages for companies considering re-domiciliation to Hong Kong:

1. Strategic location: Hong Kong serves as a gateway to Mainland China and the Asia-Pacific region, providing companies with access to one of the most dynamic and fastest-growing markets in the world.
2. Business-friendly environment: Hong Kong has a well-established legal and regulatory framework, with a strong emphasis on the rule of law and transparency. Companies operating in Hong Kong can expect efficient and transparent business processes.
3. Robust intellectual property protection: Hong Kong has a robust intellectual property protection regime, ensuring the security of companies’ valuable assets.
4. Simple and low tax regime: Hong Kong’s simple and low tax regime, including the two-tiered profit tax rates system and extensive network of DTAs, can provide significant tax benefits for companies.
5. Access to skilled workforce: Hong Kong has a highly skilled and diverse workforce, providing companies with access to talent across various industries and sectors.
6. Strong financial infrastructure: Hong Kong has a well-developed financial infrastructure, including a mature capital market and a wide range of financial services, providing companies with access to capital and financing options.

The Regime offers an attractive option for foreign companies seeking to establish a presence in Asia.  By providing a streamlined process for companies to retain their legal identity and corporate history while taking advantage of Hong Kong’s strategic location, business-friendly environment and preferential tax treatments, the Regime aims to attract more foreign businesses and investment to Hong Kong.

Companies considering re-domiciliation should closely monitor developments in the Regime, consult with legal and tax advisors and assess the potential benefits and risks associated with the process.  Please contact us if you wish to discuss this topic in further detail.