(5 min. read)
Introduction
Hong Kong is a dynamic city that serves as the perfect platform into Mainland China and Asia. Its ideal location in Asia enables businesses to tap into the multitude of opportunities in the Guangdong-Hong Kong-Macao Bay Area and throughout the rest of the region.
There are many reasons why Hong Kong is good for business (InvestHK, 2021), including:
- A government supportive of enterprises (see key initiatives announced in the 2021-22 Budget and 2021 Policy Address);
- Premier business hub and financial centre in Asia;
- Open business environment for business activities and commerce;
- Low, simple and competitive tax system;
- Multi-cultural and multi-lingual talent pool;
- Vibrant city-living; and
- World-class infrastructure.
In this article, we provide an overview of some of the practical aspects of starting a business in Hong Kong.
1. Corporate structure
The most common business entity is a Hong Kong company limited by shares. A private company limited by shares is an independent legal entity which is responsible for its own liabilities, up to any amount unpaid on the shares held by the shareholders.
A private company limited by shares is owned by shareholders who are generally not personally liable to the business. This separate corporate legal personality helps separate the risks and liabilities of the business from the personal liability of founders and shareholders.
A private company limited by shares can have a single person as its sole shareholder and director. This is the most common form of company for a Hong Kong-based startup given its flexibility in ownership transfer and capital raising.
As a business grows, a founder may restructure the business in order to have a simple holding company (parent) and subsidiary structure. This may be applicable when the founder faces a first or new round of investment into the business. The holding company may often be an offshore holding company, given certain taxation benefits, the flexibility of relevant corporate law and regulations and general investor preference.
2. Setting up a company
There are generally no restrictions on foreign ownership of Hong Kong companies, except approvals may be required for a few specific industries. Therefore, non-residents can incorporate a business in Hong Kong even if they are short-term visitors on a visitor visa or entry permit.
A Hong Kong company must appoint at least one person as its director (who can be a non-resident) and a company secretary to attend to general corporate and compliance matters with the Hong Kong Companies Registry (who needs to be a Hong Kong resident or registered company).
A Hong Kong company can be set up through the Companies Registry directly within three to five days by paper application. The time can be shortened to less than 24 hours if registered via e-registration with an online account. The Companies Registry fee is currently HKD1,730.
Certain personal information will need to be provided to the Companies Registry as part of the process, including:
- Identity of shareholder(s);
- Identity of director(s);
- Identity of ultimate beneficial owner (if held by nominee shareholder); and
- HKID card or passport and residential addresses, of these parties.
Alternatively, company service providers (holding a Trust and Company Service Provider license) that help with incorporation may recommend choosing a shelf company to set up a company urgently and thereafter amend the company’s details (e.g. name, registered address and directors, etc.).
3. Bank accounts
As with a personal account, it is generally straightforward to open a business bank account in Hong Kong. However, a common requirement of banks is for the person applying for a business bank account (usually a director) to be physically present in Hong Kong.
Hong Kong residents may stand a higher chance in successfully opening a bank account without visiting a branch in certain cases via remote account opening, although each case will be considered individually.
Alternatively, founders may consider opening accounts with (a) international banks with branches in Hong Kong that are able to facilitate remote account opening (for those not in Hong Kong) and/or (b) virtual banking platforms.
4. Mandatory benefits to employees
Hong Kong law provides that certain mandatory requirements have to be complied with when hiring employees. These include the following:
- Employee rights: The Employment Ordinance (Cap. 57) and Employment (Amendment) Ordinance 2020 set out basic statutory rights of employees, e.g. holidays, sickness allowance, maternity and paternity leave and others.
- Employees’ compensation insurance: The Employee’s Compensation Ordinance (Cap. 282) requires Hong Kong employers to take out employees’ compensation insurance. See section 40 of and Schedule 4 to the Ordinance for the minimum amounts of insurance coverage required.
- Minimum wage: Pursuant to the Minimum Wage Ordinance (Cap. 608), employers are required to pay their employees minimum wage. The current statutory minimum wage is HKD37.5 per hour for non-domestic helpers.
- Mandatory Provident Fund (“MPF”): Pursuant to the Mandatory Provident Fund Schemes Ordinance (Cap. 485), employers and employees are both required to make mandatory contributions of 5% of the employee’s relevant income into the employee’s MPF’ account, subject to the minimum and maximum relevant income levels (currently HKD7,100 and HKD30,000, respectively).
5. Income tax
One of Hong Kong’s key advantages is its simple and competitive tax regime. Income or profit is taxed on residents and non-residents alike if derived from Hong Kong. A Hong Kong resident may therefore derive profits from oversees without Hong Kong tax liability.
Based on the two-tired profits tax regime, a company carrying on a business in Hong Kong will generally be taxed at 8.25% for the first HKD2 million of profits and 16.5% on profits thereafter.
Hong Kong does not have any capital gains tax. This is advantageous when it comes to dividend distributions to shareholders, as well as gains received in the disposal of assets or businesses by shareholders.
When a shareholder sells his/her shares in a Hong Kong company, stamp duty will need to be paid on the transfer. Stamp duty is currently charged at 0.1% of the amount of consideration for the transfer (or market value of the shares, whichever is higher) on each bought and sold note of the transfer.
6. Licensing, registrations and approvals
After a company has been incorporated and registered, it is required to apply for a Business Registration Certificate from the Inland Revenue Department for each place of business in which it operates, within one month from the date of commencement of business.
The Business Registration Certificate may be obtained by application in person same day (with prior online booking) at a small fee of HKD250. This certificate needs to be renewed annually.
Some businesses (e.g. F&B businesses; travel agencies; employment agencies; money lenders; financial services intermediaries, etc.) require specific licenses or approvals from governmental bodies, agencies and/or regulators prior to commencement of business.
7. Startup funding
Local startups are usually funded by the founder’s personal funds or through loans and investments from friends and family at the outset.
Startups may also consider applying for funding schemes from government bodies or private entities. These are often industry-specific and aim to support entrepreneurial activity within such industry. For example:
- The Innovation and Technology Fund (e.g. the Innovation and Technology Venture Fund; Enterprise Support Scheme)
- The Patent Application Grant
- Hong Kong Science and Technology Parks’ incubation programmes (e.g. Incu-Bio; Incu-Tech; Incu-App)
- The Innovation and Technology Fund for Better Living
- The CreateSmart Initiative
- The Social Innovation and Entrepreneurship Development Fund
- SME Funding Schemes from the Trade and Industry Department
Further down the startup financing cycle, bootstrapped founders may raise seed capital from angel investors and accelerators, and thereafter early stage venture capital (e.g. Series A and B financing).
During the process, for convenience parties may like to use the sample simple agreement for future equity (“SAFE”) introduced by Y Combinator in 2013 (as amended and updated in 2021):
- SAFE: Valuation Cap, No Discount (Singapore)
- Pro Rata Side Letter (Singapore)
These require review and tailoring to ensure compliance with Hong Kong law and regulations. We are happy to guide you through any fundraising process and can advise on the following documents in connection with investment into startups, including:
- Term Sheet
- Subscription Agreement
- Shareholder Agreement
- Restated Articles of Association
- SAFE or Future Equity Agreement
- Convertible Loan Note
- Disclosure Letter
- Director Indemnification Deed
- Reverse Vesting Deed
- IP Assignment and Protective Covenants Deed.
8. Incubation and acceleration programmes
There are a number of incubators and accelerators in Hong Kong that support individual startups. StartmeupHK, an initiative by InvestHK aimed at helping founders of innovative and scalable startups set up or expand in Hong Kong, maintains a list of these programmes – see link. These include:
- Booost
- Brinc
- Cocoon x Google for Startups: 92 Express
- Cyberport Incubation Programme
- Design Incubation Programme
- FinTech Innovation Lab Asia-Pacific
- Founder Institute
- HKAI LAB
- Hong Kong Science and Technology Park’s Incubation Programmes
- Hong Kong Youth Innovation and Incubation Development Foundation
Contact us if you wish to discuss any of the topics in further detail or how we can support you. We look forward to growing your business together.
This article is provided for informational purposes only. It is not intended to be, nor should it be substituted for, legal advice, which turns on specific facts.