Pros and Cons of Doing Business in Hong Kong

For entrepreneurs looking to establish a foothold in the Asia Pacific market, Hong Kong is often a top choice. It acts as a crucial gateway to the Pearl River Delta, offering businesses easy access to this expansive and lucrative region.

In addition to its strategic location and stable economy, Hong Kong is renowned for its business-friendly policies that promote the growth of new ventures. However, there are also notable challenges to conducting business in Hong Kong that should be carefully considered before setting up.

In this article, we explore 8 pros and cons of starting a company in Hong Kong to help you make an informed decision.

Benefits of Setting Up a Company In Hong Kong

1. Free Economy and Free Trade

Hong Kong is a popular choice for business due to its vibrant economy, driven by free market and free trade principles. Entrepreneurs enjoy the freedom to engage in any legal business activities without restrictions on inward and outward investments. There are no foreign exchange controls, allowing the free convertibility of the Hong Kong dollar, and the government imposes no restrictions on foreign ownership of companies.

The World Bank’s Doing Business 2020 Report highlighted Hong Kong’s improved ranking in ease of doing business, placing it third globally among 190 economies, a one-place improvement from the previous year.

2. Ease of Access to the Chinese Market

Incorporating a company in Hong Kong is advantageous for those looking to expand into the Chinese market.

Hong Kong and China have a free trade agreement known as the Closer Economic Partnership Arrangement (CEPA). Through CEPA, businesses can export products to Mainland China by establishing a Wholly Foreign Owned Enterprise (WFOE) or a joint venture (JV) company in Hong Kong. A WFOE is entirely foreign-owned, while a JV involves a partnership between Chinese and foreign investors.

Goods manufactured in Hong Kong that meet the origin criteria benefit from zero tariffs when imported into China. Additionally, service providers that qualify as Hong Kong Service Suppliers under CEPA receive preferential treatment when offering services in Mainland China.

3. Independent Legal System

Hong Kong’s competitive economy and free market are bolstered by its independent legal system, which is based on common law principles. Contract enforcement is both efficient and cost-effective, with applicants only needing to pay a nominal filing fee for court company registration Hong Kong, unlike other jurisdictions where litigants must pay a percentage of the claim amount as court fees.

The legal system also supports alternative dispute resolution methods such as arbitration and mediation. Hong Kong is a favored location for arbitration, and it is rare for courts to refuse the enforcement of an arbitral award, whether made locally or internationally.

As a Special Administrative Region, Hong Kong has numerous mutual arrangements with Mainland China for recognizing and enforcing court judgments and arbitral awards in civil and commercial disputes. In December 2020, Hong Kong entered into a supplemental arrangement with Mainland China for mutual enforcement of arbitral awards, allowing for parallel enforcement in China if enforcement in Hong Kong is unsuccessful.

4. Hong Kong Government Support for Business Improvement and Growth

The Hong Kong government has established various programs to support business growth. For instance, the Hong Kong Trade Development Council assists foreign companies interested in doing business in Mainland China and other parts of Asia, and helps Hong Kong companies find new markets.

The Hong Kong Productivity Council, a multi-disciplinary organization, helps companies operate more efficiently by providing advice on improving business performance and reducing operating costs. Businesses can also consult The Support and Consultation Centre for SMEs for information on available funding schemes.

Additionally, Hong Kong’s strict anti-corruption regime enhances its business-friendly reputation. The Independent Commission Against Corruption investigates corruption cases in both the public and private sectors.

5. Cost-efficient Business Operation

Entrepreneurs are drawn to Hong Kong for its straightforward and inexpensive business registration process, which can be completed within a week without the need for a minimum share capital.

Incorporating a Private Limited Company (PLC) with up to 50 individual shareholders in Hong Kong is streamlined. The two-tier profits tax regime offers incentives: the first HKD 2 million of assessable profits are taxed at 8.25% for incorporated businesses and 7.5% for unincorporated businesses, while remaining profits are taxed at 16.5% and 15% respectively.

Compared to other Southeast Asian countries with corporate tax rates between 17-30% (e.g., Vietnam at 20% and Singapore at 17%), Hong Kong’s rates are competitive. Its progressive salary tax system increases with income levels, and there are various allowances to potentially lower assessable income.

Furthermore, owner-occupied properties are exempt from property tax, no withholding tax is imposed on dividend payments to residents and non-residents, and there are no capital gains tax, value-added tax (VAT), goods and services tax (GST), or export taxes in Hong Kong.

Challenges of Doing Business in Hong Kong

Here is a closer look at some of the challenges of doing business in Hong Kong:

1. Strict Financial Regulations

While Hong Kong generally facilitates ease of doing business, financial companies face a different scenario. These firms must comply with numerous stringent regulations and restrictions, often more stringent than those in China. Depending on their activities, financial firms must obtain relevant licenses from either the Hong Kong Monetary Authority or the Securities and Futures Commission. These regulations can negatively impact capital raising efforts, limiting their business operations.

2. High Cost of Living

Hong Kong has become one of the most expensive cities to live in. Housing rental costs alone average at least HKD 15,000 per month. Office rentals are also costly due to high demand and limited supply. Central Hong Kong is the priciest area for office space, with total occupancy costs reaching HKD 2025 per square foot per year. Even in more affordable areas like East Hong Kong, occupancy costs are about HKD 852 per square foot annually. Entertainment and leisure activities are also expensive, with a drink at a bar costing at least HKD 80 per glass. Consequently, higher wages are necessary to support employees’ living costs.

3. Complicated Bank Account Setup Process

Opening a bank account in Hong Kong can be a challenging task. Traditional banks require significant time and expense, with no guarantee of approval. Additionally, all company directors must be physically present in Hong Kong to open an account. A Hong Kong company must provide extensive documentation, including:

  • Resolution by the board of directors
  • Corporate chart
  • Incorporation documents
  • Business registration certificate
  • Audited financial statements or business plan
  • Registered office address and contact information of the owners

Banks also require certified documents, necessitating the hiring of a company secretary before other tasks can be addressed. Alternatively, virtual business accounts offer a quicker solution, taking less than three days to set up without the hassles of traditional banks. However, substantial initial deposits are required, and there is a risk of application rejection without explanation. This complex process can be a significant disadvantage for business owners.

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