Low tax regime, a spring-board to the Mainland China market, world-class infrastructure, a free economy are some of the many factors that are attracting increasing number of foreign investors and entities to setup their business presence in Hong Kong.
A subsidiary company, branch office and representative office are the three business structures available for foreign companies who wish to establish a presence in Hong Kong. The choice of the specific business structure will depend on the foreign company’s business plans and goals. Most of the small to midsize companes opt for a subsidiary or a representative office, while large corporations opt for setting up a branch office.
This guide provides a comparative overview of the three business structures and links to the detailed guides for each.
Your options:
A subsidiary is essentially a private limited company incorporated in Hong Kong. Hong Kong allows 100% foreign ownership of companies, which implies that you can set up a wholly-owned subsidiary company in Hong Kong.
Setting up a subsidiary is the most common and preferred option for most foreign companies, as it provides limited liability and numerous tax advantages. A subsidiary is a separate legal entity from its foreign parent company therefore the liabilities of the subsidiary company do not extend to the parent company. Additionally, locally incorporated companies can gain preferential access to the Mainland China markets and benefit from the free trade agreement with China.
The basic requirements for registering a subsidiary company are: approval of company name, local registered address, at least one director and shareholder, a local resident company secretary and an auditor. The company must have share capital but there is no minimum requirement. For taxation purposes, a subsidiary is treated as a Hong Kong resident company and is eligible for tax exemptions and incentives applicable to local companies.
A branch office like a subsidiary is a legally incorporated entity except that a branch office is treated as an extension of the foreign parent company and is not a separate legal entity in its own right. This makes the foreign parent company accountable and responsible for all the debts and liabilities of the branch office. Like a subsidiary company, a branch office must be registered with the Hong Kong’s Companies Registry.
The basic requirements to set up a branch office are: company name approval, a local resident authorized representative and an established place of business in Hong Kong. Generally, branch offices are subject to the same legal and tax consequences as companies incorporated in Hong Kong. Branch offices have to adhere to the ongoing compliance requirements like filing annual returns, filing tax returns and are required to execute other public disclosure requirements.
Foreign companies that wish to gain market insight, exposure and a better understanding of the Hong Kong business environment before setting up a full-fledged office can opt for establishing a representative office first. A representative office cannot engage in profit making activities and is not treated as a legal entity. It cannot sign or enter into any contracts, sign deals on behalf of the company, raise invoices or letters of credit nor engage in trading activities. The representative office has to restrict itself to promotion and liaison activities, undertaking market research and co-ordinating activities on behalf of the parent company.
Since a representative office has no legal standing, the parent company bears implicit liability for its activities. A representative office usually has foreign managerial personnel and locally appointed support staff. There are no registration requirements with the Companies Registry, no minimum capital requirements and no compliances like filing tax returns nor maintaining accounts etc. The only requirement is to register with the Inland Revenue Department and obtain a Business Registration Certificate.
Which option to choose?
If you plan to engage in profit making activities, you have a choice between a subsidiary company or a branch office. From a taxation perspective, there is very little difference between them as both of them are subject to same tax regime and tax rates. In case of branch office, there may be sometimes practical difficulties in terms of determining assessable profits and your opinon may differ from that of tax authorities. Moreover, liabilities of a branch office extend to its parent company whereas in case of the subsidiary, the liabilities are limited to the subsidiary company iteself. Consequently, most foreign companies prefer to establish a subsidiary company in Hong Kong and not a branch office.
If however, you wish to test the Hong Kong business climate before making large scale investments you can opt for setting up a representative office. Take note that you can run only as a cost centre and not a profit-making entity.
Tabulated below is a comparative analysis of a branch vs subsidiary vs representative office.
| Branch | Subsidiary | Representative Office | |
|---|---|---|---|
| Legal entity | Yes | Yes | No |
| Liabilities extend to parent company | Yes | No | Yes |
| Company name must be the same as parent company | Yes | Can be same or different | Yes |
| Activities the company can engage in | Same as parent company | Same or different from parent company | Can only conduct promotion, liaison, marketing, research and other non-profit bearing activities |
| Registration Timeline | 14 working days | 4-7 working days | 1-2 working days |
| Taxed as a locally incorporated entity | Yes | Yes | Not applicable |
| Filing annual returns with Companies Registry | Yes | Yes | Not Applicable |
| Filing Profits tax return with Inland Revenue Department | Yes | Yes | Not Applicable |
| Filing audited accounts with tax return | No (Subject to conditions) | Yes | Not Applicable |
| Can open a bank account in Hong Kong | Yes | Yes | Yes |
| Appointment of Officers | 1 authorized representative (local resident) | 1 company secretary (local resident), 1 director (local or foreigner), 1 shareholder (local or foreigner) | 1 manager/chief representative who must be relocated from the parent company |