The Legal 500

Twitter Logo Youtube Circle Icon LinkedIn Icon

Nixon Peabody CWL

5TH FLOOR, STANDARD CHARTERED BANK BUILDING, 4-4A DES VOEUX ROAD CENTRAL, HONG KONG
Tel:
Work +852 2521 0880
Email:
Web:
www.nixonpeabodycwl.com

Legal 500 Doing Business in Hong Kong

Contributed by Nixon Peabody CWL

Doing Business in Hong Kong graphic

The following is a summary discussion of the law concerning, and certain aspects relating to, the establishment and maintenance of Hong Kong private companies limited by shares. It is based on law and practice as at 1 August 2017 and rates of taxation for the year of assessment 2017/2018. It may not be considered or relied upon as legal advice.

INTRODUCTION

Hong Kong is a Special Administrative Region of the People's Republic of China (PRC). Since Hong Kong’s sovereignty was resumed by the PRC in 1997, Hong Kong has reinforced its position as the most significant global financial centre in East Asia. Hong Kong is strategically located on the Pearl River Delta, which is one of the world’s leading regions for international finance, trade and technology. Hong Kong is considered the freest economy in the world, consistently ranking first1 in The Index of Economic Freedom since its creation by The Heritage Foundation and The Wall Street Journal in 1995. Hong Kong is fiscally strong with reserves of more than US$400 billion2. Its currency, the Hong Kong dollar, is fully convertible with no exchange controls at a range-pegged rate to the US dollar.

Doing Business in Hong Kong graphic

Rule of Law

Under the “one country, two systems” principle, the Basic Law of Hong Kong (Basic Law) came into effect on 1 July 1997. The Basic Law provides that that the legal system in Hong Kong will continue for 50 years to give effect to the “rule of law”, by providing that the laws previously in force in Hong Kong (that is, the common law, rules of equity, ordinances, subordinate legislation and customary law) will be maintained, save for any that contravene the Basic Law and subject to subsequent amendment by the Hong Kong legislature.

The rule of law is one of the three pillars required for a progressive and stable society, the other pillars being a strong and modern government and accountability. Equality before the law and legality are the two fundamental principles of the rule of law. Equality before the law means that all persons, regardless of race, rank, politics or religion, are subject to the laws of Hong Kong. Legality requires that the power of the Hong Kong government is derived solely from law as set out in legislation. It follows that the rule of law requires that the courts are independent of government, especially when deciding on the legality of acts of government. The Hong Kong courts have also developed guidelines relating to the substance and the procedures relating to the exercise of executive power. The rule of law has been critical in maintaining Hong Kong as a respected jurisdiction with a trusted legal system.

The Basic Law also provides that Hong Kong may maintain and develop relations and conclude and implement agreements independently with foreign states, regions and international organisations in matters relating to economic affairs and trade, finance and monetary affairs. Hong Kong is a member of the World Trade Organisation and the Asia-Pacific Economic Co-operation. Further, it has in place double taxation agreements with a large number of other jurisdictions.

Dispute Resolution Centre

In addition to its relative political stability, a unique competitive edge of Hong Kong is its recognised and reliable legal system suitable for international dispute resolutions. Apart from litigation, Hong Kong stands out as one of the leading arbitration jurisdictions worldwide. Its arbitration laws and infrastructure are well developed. The Hong Kong International Arbitration Centre (HKIAC) administers arbitration, adjudication and mediation. An increasing number of companies in the region, especially from mainland China, have been coming to Hong Kong in the past decade for their commercial disputes to be dealt with by arbitration. HKIAC awards have a strong record of enforcement in China. The legal sector in Hong Kong therefore also plays an important role in the resolution of multi-jurisdictional disputes.

Tax Friendly

Hong Kong operates a user friendly tax system. Only Hong Kong sourced income or profit is taxable. The standard salaries or profits tax rate is 15% for individuals and 16.5% for companies. There are no taxes (withholding or otherwise) on payments of interest or of dividends or other distributions. There is no tax on capital gains and no inheritance tax or estate duty. Stamp duty is levied on transfers of shares in Hong Kong companies and on conveyances and leases of real estate.

Intellectual Property

Intellectual property is protected by local legislation, case law and international conventions such as the Berne Convention and Universal Copyright Convention. Trade marks may be registered with the Hong Kong Trade Mark registry provided that they satisfy the criteria of being a sign, capable of distinguishing the goods and services of one undertaking from those of other undertakings and being represented graphically in respect of specified goods and services. Under copyright law, a work must be original, recorded, and fall within one of the subject matters in the Copyright Ordinance. Copyright works created in Hong Kong will usually last for the lifetime of the author plus 50 years. For patent registration, an invention must be new, inventive and industrially applicable, and not belong to certain excluded classes of inventions. A standard patent will be valid for a maximum of 20 years while a short-term patent will be valid for a maximum of 8 years.

Establishing a Business Presence in Hong Kong

A foreign entity which only intends to undertake marketing and promotional work in Hong Kong may open a representative office. A representative office needs registration only under the Business Registration Ordinance.

If a foreign entity wishes to carry on business in Hong Kong, it may do so by incorporating a Hong Kong company or, if it is a foreign company, by establishing a Hong Kong branch as its place of business. Within one month after establishing a place of business in Hong Kong, a branch office must be registered with the Hong Kong Registrar of Companies (the Registrar) as a non-Hong Kong company under the Companies Ordinance and with the Business Registration Office under the Business Registration Ordinance. The branch office will have certain obligations under the Companies Ordinance, including filing annual returns and potentially, subject to certain exemptions, its financial statements.

Companies incorporated in Hong Kong may be:

  1. private or public companies limited by shares;
  2. private or public unlimited companies with a share capital; or
  3. guarantee companies without a share capital and whose members’ liability is limited to the amount that they undertake to contribute to the assets of the company in the event of winding up.

Public companies may be listed on the Hong Kong Stock Exchange. Guarantee companies are typically set up by non-profit organisations.

Most companies in Hong Kong are private companies limited by shares. The liability of each member of a company limited by shares is limited to the amount (if any) unpaid on the shares held by that particular member. Accordingly, if the company becomes insolvent and is wound up, a member in such capacity whose shares are fully paid up is not under any obligation to make any further contribution to meet the company’s liabilities.

INCORPORATION OF PRIVATE COMPANIES LIMITED BY SHARES

A company may be incorporated as a private company if its constitutional documents (known as articles of association (Articles)):

  1. restrict its members’ rights to transfer shares;
  2. limit the number of its members to 50 (excluding employees);
  3. prohibit any invitation to the public to subscribe for any of its shares or debentures.

In order to incorporate a private company, the initial shareholder or shareholders would submit to the Registrar:

  1. an incorporation form (NNC1) setting out the particulars of the proposed company i.e. the first directors, the founder members, the company secretary, the share capital, and the address of the company’s registered office;
  2. its Articles;
  3. a “Notice to Business Registration Office” (IRBR1); and
  4. the requisite application fee.         

Applications for incorporation may be made electronically or in hard copy form. A Certificate of Incorporation and a Business Registration Certificate (the Certificates) in respect of the newly incorporated company will be issued by the Companies Registry and the Inland Revenue Department. The Certificates are issued in electronic form for electronic applications and in hard copy form for hard copy applications. Certificates in electronic form or hard copy form have the same legal effect. Electronic Certificates are normally issued within one hour after submission of the electronic application. Hard copy Certificates are normally ready for collection in person within four working days after delivery of the hard copy application.

A Hong Kong company is, on incorporation, simultaneously registered under the Companies Ordinance and under the Business Registration Ordinance.

Name

A company can be incorporated with any name except for a name which is the same as an existing company’s name and certain names that are prohibited. The Registrar may require a company to change its name, including where the name gives so misleading an indication of the nature of the company’s activities in Hong Kong as to be likely to cause harm to the public or it is too like another name of an organisation established in Hong Kong under any ordinance at the time of registration. A company may be incorporated with either a Chinese name or an English name or both. Where a company is incorporated with a Chinese and an English name, both names appear on the certificate of incorporation and the two names together constitute the official name of the company.

Registered Address

A company must have a registered office address to which all official communications and notices may be sent. This may be different from the company’s business address.

Shareholders

There must be at least one registered shareholder on public record who may be an individual or a corporation of any nationality or domicile. There is no requirement that a shareholder be resident in Hong Kong. Any legal entity can be a shareholder in a company, including a company, receiver, liquidator or sole proprietor.

Articles of Association

The Articles are the single constitutional document of the company that govern the relationship between and among the company and its members. They may be in the form of the Model Articles (set out in the Explanatory Notes issued under the Companies Ordinance) or be customised to exclude the Model Articles and contain all the regulations in the Articles themselves, or they may be a combination of both.

Generally, it is optional for a company to state its objects in its articles. However, if objects are included, they will be treated as limiting the company’s powers and shareholders may restrain the company in acting outside of the scope of such objects. Companies incorporated to promote charitable and similar objects that have been authorised to dispense with the use of the word “Limited” in their name must provide a description of their objects and powers.

Articles may include special provisions to meet individual situations, such as different classes of shares and pre-emption rights on the issue or transfer of shares. There are certain mandatory articles which must be included.

Initial share capital

The concepts of authorized capital and nominal share capital have been abolished for Hong Kong companies. There is no minimum share capital requirement. Share capital can be denominated in any currency and there are no legal prohibitions on a company having a multi-currency capital structure, although in practice this can be quite cumbersome. The share capital may be divided into different types or classes of shares, including preference shares. At least one founder member’s share must be issued on the incorporation of a company, and the share capital can be further increased in accordance with the company’s capital requirements.

Shares may be allotted for cash, services or other consideration such as the transfer of property. There is no minimum price for the issuance of shares. If a company’s Articles permit, shares may also be issued as redeemable shares but there must always be at least one non-redeemable share in issue.

Directors

Directors can be individuals or corporations of any nationality or residence, but all companies must have at least one director who is a natural person.

Company Secretary

All companies must have a company secretary. The company secretary must either be another company with its place of business in Hong Kong or an individual ordinarily resident in Hong Kong.

Financial statements and auditing requirements

A company must keep accounting records, and prepare financial statements that give a true and fair view of the financial position of the company. The financial statements must be audited once a year. The auditors must be a firm of Hong Kong accountants.

Annual return

A company is required to file an Annual Return each year setting out the certain particulars of the company as at a specified date, normally being the anniversary of the company’s incorporation. This is in addition to a separate obligation of the company to update the Companies Registry when any changes to the company particulars occur.

Management

The directors are responsible for the management of the company and have a duty to exercise reasonable care, skill and diligence. The directors may authorise a company’s actions through resolutions passed at board meetings or written resolutions signed by all the directors (if permitted by the company’s Articles). There is no statutory requirement for board meetings to take place in Hong Kong or for all directors to be physically present at a board meeting.

Certain matters must be authorized by the shareholders of a company at a general meeting. These decisions are implemented by the passing of an ordinary resolution (requiring a 50% majority) or, in some cases, a special resolution (requiring a 75% majority). The passing of such resolutions may take place at the company’s annual general meeting or at specially convened general meeting. Shareholder resolutions may be passed as written resolutions signed by all the members of the company. Companies may also dispense with the requirement to hold annual general meetings by passing a unanimous resolution to that effect.

EMPLOYMENT VISAS

A foreign national who intends to enter and stay in Hong Kong for employment or investment purposes must apply to the Hong Kong Immigration Department for the appropriate employment or investment visa. An applicant for an employment visa should possess a special skill, knowledge or experience of value which is not readily available in Hong Kong. An applicant seeking an investment visa should be in a position to make a substantial contribution to the economy of Hong Kong.

Sponsor

Every applicant for an employment or investment visa will require a sponsor. In the case of an employment visa, the applicant should be sponsored by the employing company in Hong Kong. In the case of an investment visa, the applicant must nominate a local sponsor which may either be a company or an individual. The role of the sponsor is to assure the Immigration Department that if anything happens to the applicant, the sponsor will take responsibility for the applicant’s repatriation to their country of origin. It is therefore the duty of the sponsor to inform the Immigration Department of any changes to the applicant’s stay in Hong Kong, for example, a change in employment status. The holder of a working visa must in turn submit an application to the Immigration Department if they wish to change their sponsor.

Dependants

Spouses and children under the age of 18 may enter Hong Kong as dependants under a foreign national’s working visa and, subject to certain exceptions, may take up employment or study in Hong Kong.

LABOUR LAW

The Employment Ordinance is the principal legislation in Hong Kong setting out the rights, benefits and protection for employers and employees. Contracting out of such statutory rights, benefits and protections in an employment contract is not permitted. However, the protection afforded to an employee under labour laws in Hong Kong is generally less onerous than in other jurisdictions.

As a basic right, all employees, regardless of work hours, are entitled to payment of wages, restrictions on wage deductions (subject to exceptions) and statutory holidays. Additionally, all employees employed under a continuous employment contract are entitled to:

  1. one rest day every 7 days;
  2. 7 to 14 days paid annual leave (depending on length of service); and
  3. paid sickness leave (accruing at the rate of 2 paid days for the first 12 months of employment and 4 paid days for each month thereafter (up to a maximum of 120 days)) if the employee has been absent due to sickness for more than 4 consecutive days.

Severance payment

An employee who has been employed for not less than 24 months is entitled to severance payment if they are dismissed by reason of redundancy or they have been laid-off. The amount of severance pay is ⅔ x 1 month’s wages for each year of employment, or ⅔ x HK$22,500, whichever is less, up to a maximum of HK$390,000. The amount of any gratuity or retirement scheme payment paid by the employer, based on length of service, is deductible from the amount of severance pay entitlement.

Long service payment

An employee who has been employed under a continuous contract for 5 years or more and ceases to be employed for any reason other than redundancy or misconduct is generally entitled to long service payment on termination of employment. The calculations and deductions are the same as for severance payments.

Termination

An employee on probation may be terminated from employment without notice during the first month of the probation period, and by not less than seven days’ notice after the first month of the probation period.

In all other circumstances, unless summarily dismissed, an employee is generally entitled to at least one month’s notice of termination where the contract does not provide for the length of notice to terminate the contract, and seven days or the agreed period, whichever is longer, where the contract does provide for the length of notice to terminate the contract. A contract of employment can also be terminated without notice by payment in lieu of notice equal to the amount of wages that would have accrued during the requisite period of notice.

Mandatory provident fund

The Mandatory Provident Fund Schemes Ordinance requires both the employer and employee to contribute 5% of the employee’s salary in to a mandatory provident fund scheme. This is subject to a maximum level of contribution of HK$1,500 paid by both the employer and the employee, based on a maximum relevant income level of HK$30,000 a month.

NIXON PEABODY CWL

Doing Business in Hong Kong graphic

Nixon Peabody CWL is the Hong Kong arm of Nixon Peabody LLP, an international firm of lawyers. Nixon Peabody CWL comprises approximately 40 lawyers and legal professionals in Hong Kong. In addition to advising on a full spectrum of Hong Kong legal issues, Nixon Peabody CWL is a hub for clients throughout the Asia-Pacific region including mainland China, Singapore, Malaysia, Indonesia, Australia, Japan, Korea, Myanmar, Thailand and Vietnam. Our presence in one of the world’s most dynamic economic centres allows us to provide seamless legal service to clients whether in the Pacific Rim or around the world.

We represent Hong Kong and international clients, including public companies, private enterprises, PRC businesses, private equity, venture capital, hedge funds, investment banks, entrepreneurs, high-net-worth individuals and company directors. We provide a broad range of legal solutions and advise clients on, among other things, inbound and outbound M&A and investment transactions, Hong Kong IPOs and corporate finance, intellectual property, investment fund formation, media and entertainment matters and legal disputes, including construction disputes.

We are associated with JunZeJun Law Offices (君泽君律师事务所) (founded in 1995) which is one of the oldest and largest partnership law firms in mainland China with approximately 50 partners and 300 practising lawyers. JunZeJun has offices in Beijing, Shanghai, Shenzhen, Hong Kong, Chengdu, Nanjing, Tianjin, Guangzhou and Changsha.

CWL Secretarial Services Limited is a corporate secretarial company operating under Nixon Peabody CWL. It provides corporate secretarial services to clients in relation to companies incorporated in Hong Kong, the Cayman Islands and the British Virgin Islands, and for non-Hong Kong companies registered in Hong Kong. Its services include providing registered office facilities and on-going secretarial services.

1. 2017 Index of Economic Freedom
2. Hong Kong Monetary Authority Press Release, July 2017

Legal Developments in Hong Kong

Legal Developments and updates from the leading lawyers in each jurisdiction. To contribute, send an email request to