Legal Aspects of Hong Kong Foreing Investment

These are the highlights if you want to know Legal Aspects of Hong Kong Foreing Investment.  This entry was drafted by Charltons. Link to e-IURE Network.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case Charltons is an excellent option in Hong Kong”

1.   Hong Kong’s foreign investment climate

The Hong Kong Special Administrative Region (“HKSAR” or “Hong Kong”) is receptive to foreign investment and does not discriminate between foreign and domestic investors.  Attracting foreign investment is a priority of the government and is widely considered beneficial, even crucial, for Hong Kong’s economic stability.  It is quite common to have 100 per cent foreign investment in certain industries.

Hong Kong’s predictable business environment, rule of law, stable and low tax regime, free flow of information and capital, good infrastructure and proximity to the People’s Republic of China (“PRC”) make it a desirable platform for investors. Hong Kong was named number one in the 2017 Index of Economic Freedom, compiled by The Heritage Foundation and The Wall Street Journal with a score of 89.8.

Foreign direct investment flows into Hong Kong exceeded US$108 billion in 2016.   Hong Kong currently ranks fourth globally in terms of foreign direct investment inflows, after the United States, the United Kingdom and the PRC, and was second only to the PRC in Asia.

2.   Hong Kong Basic Law regarding foreign investment

The Basic Law of the HKSAR has provisions safeguarding Hong Kong’s free enterprise system and liberal investment regime.

Among other things, the Basic Law upholds the principles of a low tax policy, free convertibility of the Hong Kong dollar and free flow of capital.

3.     Business Entities available to foreign investors

1. Types of business structures

No distinction is made between foreign and domestic investors in terms of the types of business structures that may be used to carry on business in Hong Kong. Foreign investors may make use of all available forms of Hong Kong business entities.

Overseas companies that intend to establish an office in Hong Kong that do not wish to create a Hong Kong-incorporated subsidiary may register as non-Hong Kong companies under Part 16 of the Companies Ordinance (Cap. 622) (the “Companies Ordinance”).  Hong Kong registered foreign corporations, with the exception of certain provisions, are not governed by the provisions of the Companies Ordinance. While the Companies Ordinance governs the formation and dissolution of Hong Kong companies, the creation and dissolution of a foreign corporation are governed by the law of its place of incorporation.

Within one month after establishing a place of business in Hong Kong, an overseas incorporated company must register as a non-Hong Kong company under Part 16 of the Companies Ordinance by registering certain documents with the Registrar of Companies and must obtain a business registration certificate from the Inland Revenue Department.

A non-Hong Kong company registered under Part 16 of the Companies Ordinance must report to the Registrar of Companies any subsequent changes to its name, directors, secretaries, authorised representatives, memorandum and articles of association, the address of its principal place of business and registered office, each within one month of the change by submitting the prescribed forms. The creation of a charge on property situated in Hong Kong and any existing charge on acquired property situated in Hong Kong must be registered with the Registrar of Companies. Every year, a non-Hong Kong company must submit to the Registrar of Companies an annual return and a copy of its annual accounts (if applicable). Such obligations will cease if the company ceases to have a place of business in Hong Kong.

1. Directors

Under the Companies Ordinance, a director can be of any nationality as long as he has attained the age of 18 and has not been disqualified from acting as a director.  He can also be resident in Hong Kong or overseas. Therefore, he does not have to reside in Hong Kong when he is acting as a director. When a company appoints a director, the company must send a specific form to the Registrar of Companies of such appointment setting out the director’s name and usual residential address and the number of his identity card or passport, and including a statement signed by the director that he accepts the appointment and has attained 18 years of age.

Directors of companies owe a number of duties, which are based on the principle of showing the utmost good faith toward the company.  Generally, directors’ duties are owed only to the company itself; directors have been held to owe fiduciary duties to individual shareholders only in limited circumstances.  Fiduciary duties of directors, which are generally based on equitable principles, mainly include:

• a duty to act in good faith in the interests of the company;
• a duty to exercise powers for a proper purpose for the benefit of members as a whole; and
• a duty to avoid actual or potential conflicts of duty and interest.

Directors also owe a duty of reasonable care, skill and diligence to the company, which is codified in the Companies Ordinance.  The Companies Ordinance requires a director to exercise reasonable care, skill and diligence, meaning the care, skill and diligence that would be exercised by a reasonably diligent person with:

• the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company (an objective test); and
• the general knowledge, skill and experience that the director has (a subjective test).

In addition to the general duties listed above, “A Guide on Directors’ Duties” issued by the Companies Registry also includes the following general directors’ duties:

• a duty not to delegate powers except with proper authorisation and a duty to exercise independent judgement;
• a duty to exercise care, skill and diligence;
• a duty not to gain advantage from the use of a position as a director;
• a duty not to make unauthorised use of a company’s property or information;
• a duty not to accept personal benefit from third parties conferred because of a position as a director;
• a duty to observe the company’s constitution and resolutions; and
• a duty to keep proper accounting records.

Directors of companies listed on the Stock Exchange of Hong Kong Limited (the “Exchange”) must also comply with their duties and obligations as directors of a listed company under the Exchange’s Listing Rules and the Corporate Governance Code in Appendix 14 of the Listing Rules.  Directors who breach their duties and obligations as a director may be liable to civil or criminal proceedings and may be disqualified from acting as a director.

4. Foreign investment incentives

There are no specially enacted incentives for foreign investment. However, all foreign companies benefit from the Hong Kong government’s policy of providing an appealing climate for investment.  It promotes fair competition and does not discriminate between foreign and domestic investors.

Hong Kong generally has lower rates of tax than most other Asian jurisdictions and its tax environment is relatively simple.  In particular, there is:

1. no tax on capital gains;
2. no tax on profits arising in or derived from outside Hong Kong;

• no tax on dividends; and

1. no estate duty.

There are three separate direct taxes which are levied under the Inland Revenue Ordinance (Cap. 112) (the “IRO”). The three taxes are: profits tax, salaries tax and property tax. The ambit of the IRO is limited territorially and it is only income with a Hong Kong source which, by and large, is subject to tax.

1. Profits tax

Persons, including corporations, partnerships, trustees and bodies of persons carrying on any trade, profession or business in Hong Kong are chargeable to profits tax on the assessable profits arising in or derived from Hong Kong from such trade, profession or business.  No distinction is made between residents and non-residents. A resident may therefore derive profits from abroad without being subject to tax; conversely, a non-resident may be chargeable to tax on profits arising in or derived from Hong Kong.  Whether a business is carried on in Hong Kong and whether profits are derived from Hong Kong are largely questions of fact.  However, some guidance on the principles applied can be found in cases which have been considered by the courts in Hong Kong and in other common law jurisdictions.

1. Tax rates

The tax rate for profits tax is 16.5% for corporations and 15% for unincorporated businesses.

1. Tax incentives and allowances

In terms of tax incentives and allowances available in Hong Kong, no distinction is made between residents and non-residents. Foreign investors may make use of all types of tax incentives and tax allowances available in Hong Kong.

The tax incentives include (but are not limited to):

• Immediate writing-off is allowed for capital expenditure on plant and machinery specifically and directly related to manufacturing processes, and on computer hardware and software.

• Capital expenditure on refurbishment of business premises is allowed to be written off over five years of assessment.

• There is an exemption from payment of tax on interest derived from any deposit placed in Hong Kong with an authorised institution (but this is not applicable to interest received by or accrued to a financial institution).

• Accelerated deduction for capital expenditure on specified environmental protection facilities from year of assessment 2008/09 onwards. For machinery or plant, 100% deduction will be allowed for the capital expenditure incurred. For installations forming part of a building or structure, 20% deduction will be allowed for each year in five consecutive years.

• 100% deduction for capital expenditure on specified environmental-friendly vehicles from year of assessment 2010/11 and onwards.

Generally, all outgoings and expenses are deductible to the extent that they have been incurred in the production of chargeable profits.  They include (but are not limited to):

• Rent paid by any tenant of buildings or land occupied for the purpose of producing the assessable profits.

• Bad and doubtful debts (subject to certain rules).

• Repairs of premises, plant, machinery, implements, utensils or articles used in producing profits (other than the cost of improvements).

• Expenditure for registration of a trademark, design or patent and expenditure on the purchase of patent rights or rights to any know-how for use in Hong Kong in the production of assessable profits.

• Expenditure on research and development (subject to certain rules).

(6)       Donations of an aggregate of not less than HK$100 made to approved charities with the restriction that such donation shall not exceed 35% from year of assessment 2008/09 onwards of the adjusted assessable profits.

5. Foreign investment restrictions

As previously discussed, Hong Kong does not generally subject foreign investments to special regulatory regimes or requirements.

However, there are restrictions in certain areas.  For example,  there are restrictions on voting control by non-Hong Kong residents and corporations in the broadcasting sector.  The Hong Kong government considers that such restrictions are justified as the media has an extensive reach and the potential to influence a large proportion of the population.

1. Television broadcasting restrictions

Pursuant to the Broadcasting Ordinance (Cap.562) (the “BO”), an ‘unqualified voting controller’ (that is, a person who alone or with others, directly or indirectly, has the ability to control the exercise of the right to vote, who has not been ordinarily resident in Hong Kong for a period of seven years) is prohibited from  holding or acquiring specified thresholds in aggregate of the total voting control of a domestic free television programme service licensee without the prior written consent of the Broadcasting Authority.

There are no equivalent restrictions on voting control by non-residents for domestic pay television programme service licensees or non-domestic television programme service licensees.

1. Sound broadcasting restrictions

Pursuant to the Telecommunications Ordinance (Cap. 106) (the “TO”), the aggregate of the voting shares in a sound broadcasting licensee in which ‘unqualified persons’ (that is, persons not ordinarily resident in Hong Kong for seven years) have, directly or indirectly, any right, title or interest, must not exceed 49 per cent of the total number of voting shares in the licensee.  Under the TO, a licence will only be granted to or held by a “corporation that is:

• a company formed and registered in Hong Kong under the Companies Ordinance;
• not a subsidiary; and
• empowered under its articles of association to comply fully with the provisions of the TO and the terms and conditions of its licence.”

6.     Investment as Entrepreneur

Hong Kong maintains an Investment as Entrepreneur visa scheme to facilitate the entry for residence by persons who want to establish or join a business in Hong Kong, and are in a position to make a substantial contribution to Hong Kong’s economy.

Applicants are required to (i) have a good education background, as well as proven professional abilities and/or relevant experience and achievements, (ii) have no record of serious crime, and (iii) be in a position to make a substantial contribution to Hong Kong’s economy.

The Hong Kong authorities consider several factors in determining economic contribution, including but not limited to, a two-year business plan, business turnover, financial resources, investment sum, number of jobs created locally and the introduction of new technology or skills.  The Hong Kong Immigration Department requires detailed documentation to support these factors.

Notably, there are no prescribed minimum investment requirements.

An essential requirement is that the applicant be supported by a local sponsor, which may be an individual or a company.  Individuals who are sponsors must be over 18, a bona fide Hong Kong resident and acquainted with the applicant.

7. Exchange controls

There are no restrictions on foreign exchange transactions, capital movement or repatriation of funds, nor special approval or notification requirements for foreign investments in Hong Kong.