Are you planning to launch your business/company in China?
You’ll be wondering whether to establish a Hong Kong business or a Mainland Chinese company to do so, whether you’re like most entrepreneurs.
These jurisdictions have completely different legal structures and methods of doing business, but they are both common choices for entrepreneurs planning to join the Chinese and international markets.
Getting a Hong Kong business does not mean that and likewise, you should work in the same manner as a Mainland Chinese corporation. So, for your company, which choice makes the most sense?
Now let us compare the forming of companies in Mainland China versus the formation of companies in Hong Kong and see which choice makes the most sense for your business.
Hong Kong Company Formation
The Special Administrative Region of China is Hong Kong, and the differences in the legal and economic systems used throughout the two countries have played an iconic part in the growth of the two regions. Today, the investor advantage of Hong Kong and its openness to international trade are two important features that determine investors’ choice of a Special Administrative Region rather than Mainland China.
The requirements for company formation in Hong Kong are essentially different from China, an essential part being that foreign investors in Hong Kong can set up any type of company while in China only certain types of companies are allowed full foreign ownership.
Hong Kong is well known for its simplicity of doing business, and the World Bank currently ranks third in the world. Here’s how it contrasts with the establishment of a corporation in Mainland China.
Types of companies that exist in Hong Kong
Unlike Mainland China, when it comes to the types of commercial architecture foreigners may implement, there are no limitations in Hong Kong. Hong Kong has no rules on foreign ownership, indicating that if you’re not a citizen of Hong Kong, you’re not restricted to only a few business systems.
Popular/Common business systems include:
- Limited Liability Company (Limited by Guarantee or by Shares)
- Sole Proprietorships
Limited Liability Company (LLC)
For most businesses, LLC is the typical company form. In addition to securing your resources, whether you are trying to expand beyond a one- or two-person team, integrating into a limited liability partnership would give your brand more legitimacy and integrity, as well as make your organization more appealing to partners and investors.
Benefits of opening a company in Hong Kong
It is fast and inexpensive to establish a Hong Kong business
Generally, incorporation does not take more than a week and can be completed online. Incorporation fees are relatively small, which we can discuss more in the next portion.
To create a business, you don’t need to visit Hong Kong.
You won’t need to invest the time or money to visit (assuming you don’t already stay there) if you want to compete in Hong Kong. This is allowed by just a few countries and cities
Hong Kong has one of the finest corporate tax regimes.
Owing to low taxes, several foreign businessmen are starting up companies in Hong Kong. For the first HKD 2 million in assessable income, the corporate tax is merely 8.25 percent. For 16.5 percent, earnings over HKD 2 million are taxed. Besides for gains earned outside of Hong Kong, you do not need to pay tax. (You’ll want to contact a competent accountant, however since various conditions can arise with different companies.)
Functioning a WFOE from a Hong Kong corporation in China
One of the advantages of incorporating into Hong Kong in terms of entering the Chinese market is that you can run your WFOE from your Hong Kong business. While using your Hong Kong business as WFOE’s parent company, you gain from:
An orderly and systematic way to do business.
So many times, Hong Kong has been named as one of the best places to do business in the world.
As described, up to HKD 2 million and 16 percent after that the benefits tax is 8.25 percent compared to China’s 25 percent. What’s more, if you reimburse money there, Hong Kong gets a preferential rate when it comes to withholding taxes, just 5 percent, relative to the 10 percent levied on every other jurisdiction.
You can set it up in a very short time.
The Chinese authorities need the records of the parent company when setting up a WFOE. These have to be legalized, which is expensive and time-consuming and takes at least one month. However, documentation that only requires a week or two and which are appropriate to Chinese authorities for Hong Kong businesses are notarized. It is also cheaper, faster and also has the bonus of being performed in English as well as in Chinese.
Removed/No fees for local transactions.
Several Mainland Chinese providers in Hong Kong have accounts and handle USD transfers. As such, if you have a company bank account in Hong-Kong, you will also avoid paying local fees.
Cost to open a company in Hong Kong.
If you want to incorporate in Hong Kong, relying on your service provider, the fee may vary from roughly USD 300 to USD 1,000 and rarely reaches USD 1,000.
The costs are approximate as follows if incorporated individually:
- Opening a Bank account service fee: USD 123
- Documents and company registry package (seal, stamp, and so forth): USD 263
- E-registration service fee: Around USD 38 per officer (applies for e-registrations)
- Company registration: USD 220 (government fee)
- Provision for the registered office address: USD 255
- Business Registration Certificate: USD 32 (government fee)
- Provision for the company secretary: USD 445
Total time to open a company in Hong Kong.
It would not take more than a week in total. The Hong Kong Government states that the processing of online applications will typically take one hour, although paper applications take approximately four days. In comparison, it takes at least a month to start a business in China.
That said while Hong Kong’s incorporation process is very simple, most entrepreneurs still want the assistance of a corporate service provider to handle all the necessary paperwork, regulations, and measures.
Mainland China Company Formation
Since the late 1970s, China has moved to a market-driven economy that plays a significant global role. China has steadily introduced changes that have led to efficiencies that have led to a GDP growth of more than ten times since 1978.
Reforms have begun with the phaseout and extension of collectivized farming to include incremental price liberalization, fiscal decentralization, growing state-owned autonomy, private sector growth, stock market creation and a new banking system, and opening up foreign trade and investment.
Still, China’s per capita income is below the world average.
Here are the structures of the business that foreigners in mainland China may choose. You will also realize how long it takes, the advantages, the drawbacks, and the costs.
Types of companies that exist in Mainland China
In mainland China, foreign investors have three company structures available:
- Joint Venture (JV)
- Representative Office (RO)
- Wholly-Foreign Owned Enterprise (WFOE)
Other business systems (like state-owned corporations and individual-owned companies) are also available in mainland China, but they are only available to domestic businesses.
Joint Venture (JV)
For foreign investors, a joint venture (JV) is the second most common choice. The key difference between a WFOE and a JV is that all Chinese and international partners own and manage it.
Advantages of establishing a joint venture include:
- Collaborating with a local Chinese partner would be helpful as they can have a long history of doing business in Mainland China and exploiting their network
- As they understand the framework and the language fluently, your Chinese partner will handle most aspects of the JV applications and registration.
- For particular industries that are classified in the Negative List, the Chinese government recognizes only JVs and Chinese institutions. Often when incorporated into Mainland China, foreign investors only have JV as an alternative.
One of the big pitfalls of opening a JV, though is that if you don’t already have one in mind, it may take a long time to find the correct Chinese partner. Such founders either do not want to share their intellectual property or want to retain their company’s full ownership.
Representative Office (RO)
Representative offices are still fairly common, referred to as rep offices. In very particular situations, they are available, since they provide a small framework for running only a few nonprofit producing events, such as quality control management, market research, advertisement, and corporate meetings.
Setting up a representative office to learn more about the market and to extend the network can be helpful. Yet you are unable to sign corporate contracts, manufacture supplies, local business invoices, or warehouse goods. This won’t be the structure for you if you’re trying to develop a company and benefit from it in Mainland China.
Cost to open a company in Mainland China.
Furthermore, it depends on the structure of the market and which sector you work in. Additional fees will be applied if you need to register for permits (which you will do if you are importing and exporting).
While fees may vary, in general, according to your industry, you should be prepared to pay at least USD 2,200-8,000 to open a WFOE. A government fee of USD 3,000 can be added for manufacturing WFOEs.
The service fee for registering a joint venture is similar, costing, along with other government fees, approximately USD 6,000-7,000 for the first year.
Wholly-Owned Foreign Enterprise (WFOE)
The highly regarded company structure among foreign investors is Wholly-Owned Foreign Enterprise (WFOE). WFOEs are solely owned by non-Chinese investors, as you can tell by the name. This means that to set up the WFOE (which is required for most other company structures, such as Joint Ventures (JV)), or hire a Mainland Chinese director, you don’t need to partner with a local Mainland Chinese company. Most WFOEs are usually owned by a foreign parent corporation.
Advantages of establishing a WFOE include:
- In general, WFOEs offer more opportunities for foreign companies as the activities are not as limited as other structures and you can compete on a level playing field with domestic companies.
- You can sell directly to Chinese consumers and develop a profit-making business, unlike the representative office structure.
- Profits can be sent back to the parent company outside of Mainland China.
Total time to open a company in Mainland China
Opening a WFOE takes about 2 to 4 months and relies on the service provider. For a joint venture, according to your company, your sector, and the service provider, once you have a partner selected, you will typically require 4 to 6 months to open a JV.
Mainland China or Hong Kong where should you open your company?
If you decide to run a more global business, the Hong Kong business will make much more sense for your venture. For instance:
- Corporate law in Hong Kong is modern, versatile, and commercially focused.
- Territorial tax structure in which only income derived in Hong Kong are taxable
- Strong geographic proximity to China and other big economies in Asia
- Compared to Chinese firms, the Hong Kong business development process is quick.
- Extensive market funding and assistance supported by the government of Hong Kong
Office in Hong Kong
Address: Office room 77, 7/F, Woon Lee Commercial Building, 7-9 Austin Ave, Tsim Sha Tsui, Kowloon, Hong Kong