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Doing Business in Hong Kong
 

 





The World's Freest Economy
Hong Kong is one of the most open, externally orientated economies in the world, built on free enterprise and free trade. It has been rated as the world’s freest economy by the Heritage Foundation of the United States annually since 1995; and by the Cato Institute/Fraser Institute since 1996.
 
Hong Kong continues to be the world's freest economy according to the 2010 "Index of Economic Freedom," published annually by The Wall Street Journal and The Heritage Foundation. It's the 16th straight year that Hong Kong has earned the number-one ranking. No other economy has ever surpassed it. The Index reflects data compiled in 10 key categories and tells a crucial story. Economic freedom is vital.  
  
Hub for International Business
Hong Kong’s level playing field for business, its prime location and its free and open markets are a magnet for international corporations. Low taxes, the free flow of information, political stability and security, a corruption-free government, and communications, transport and other infrastructure are all important factors in attracting and retaining international business to Hong Kong. As at June 2010, there were 1,285 regional headquarters, 2,353 regional offices and 2,923 local offices in Hong Kong representing their parent companies located outside Hong Kong.  
  
Gateway to Mainland China
Hong Kong’s proximity to, and close and unique relationship with, Mainland China, has made it the gateway to Mainland China for business for more than 150 years. Hong Kong’s business influence across China is extensive and deep. Hong Kong provides almost half of the Mainland’s inward investment, while the Mainland is the city’s largest trading partner.

Hong Kong is the key city on China’s southern coast and adjacent to China’s biggest and most productive manufacturing region – the Pearl River Delta, known as the factory of the world. Thousands of overseas companies involved in China trade have established their beachheads in Hong Kong because of the city’s strategic location and international business environment. To minimise their business risk, international firms tend to place their highest-value activities in Hong Kong including international corporate, management, procurement, distribution, finance, information and professional services.
 
The Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) is a free trade agreement which grants easier access to Mainland China markets for Hong Kong-made products and Hong Kong-based service companies. Importantly, CEPA is non–nationality specific. As long as the company satisfies the CEPA criteria, the benefits apply.
 
China’s entry to the WTO provides more opportunities for Hong Kong’s economy especially in the increasingly affluent Pearl River Delta. Hong Kong enjoys excellent competitive edges in many areas. An expansion of trade between China and the rest of the world, as well as the further inflows of foreign investment into China, will bring about an increasing demand on the services offered by Hong Kong. Hong Kong will definitely be able to capitalize on the boundless opportunities ahead through closer co-operation with the Pearl River Delta to create one of the largest and most vibrant economic regions in this part of the world.

Low and Simple Tax Regime
According to the Forbes’ Tax Misery Index 2009, Hong Kong has the lowest tax misery in Asia Pacific and 3rd lowest in the world.The city only imposes three direct taxes – on profits, salaries and property – and has no sales tax, no withholding tax, no capital gains tax, no tax on dividends and no tax on an individual’s estate.
 
The tax rate in Hong Kong is comparatively low. Currently profits tax is levied under the Inland Revenue Ordinance at 16.5% of the "assessable profits" of corporate entities, partnerships and trusts and at 15% of the "assessable profits" of sole proprietorships. Profits tax is levied according to the "territorial principle" i.e. profits tax is only imposed on a person who is carrying on a trade, professional or business in Hong Kong and has accrued profits from that trade, business or profession which are Hong Kong sourced. The basic principles for determining the locality of profits have been summarized by the Inland Revenue in its Departmental Interpretation & Practice Notes No. 21 "Locality of Profits" as follows:

1. The question of locality of profits is a hard, practical matter of fact. No universal rule will cover every case. Whether profits arise or are derived from Hong Kong depends on the nature of the profits and the transactions giving rise to them.
2. The board guiding principle is that one looks to see what the taxpayer has done to earn the profits in question and where he has done it. In order words, the proper approach is to ascertain what were the operations which produced the relevant profits and where those operations took place.
3. The distinction between Hong Kong profits and offshore profits is made by reference to gross profits arising from individual transactions.
4. In certain situations, where gross profits from an individual transaction arise in different places, they can be incorporated as arising partly in and partly outside Hong Kong.

This unique "territory concept" has provided an opportunity for tax planning as the assessable profits must be earned or derived from Hong Kong. Accordingly, a person may further lower the effective tax rate by careful tax planning.  
  
No Exchange Control
There is no exchange control in Hong Kong. Funds can be freely remitted into and out of Hong Kong without any restriction.
  
Government
Hong Kong has a stable government and independent judiciary, functioning with a high degree of autonomy as a Special Administrative Region of China. The HKSAR Government is well known for its efficiency, transparency and fairness. It readily lends a helping hand to business people and companies under the guiding principle of ‘market leads, government facilitates’. The Government’s primary role is to provide the most business-friendly conditions.  These include the fundamental ‘software’ of personal liberty, the rule of law, a clean and efficient administration and a level playing field for all businesses, as well as land and infrastructural ‘hardware’ such as schools and roads vital to Hong Kong’s growth.  
  
World Class Infrastructure
The Hong Kong International Airport (HKIA) is the fifth busiest international passenger airport with 85 airlines servicing over 150 destinations, including major cities in the Asia Pacific, North America, Europe and the Middle East and to about 40 destinations in mainland China. Cross-boundary ferries provide speedy sea transport to and from six mainland ports and the coach service covers more than 90 PRD cities and towns. The HKIA is often ranked as the 'Best Airport in the World' and consistently receives accolades and awards. Hong Kong is also a focal point of all maritime activities in southern China and is one of the major ports of the world in terms of tonnage of shipping using its facilities, cargo handled and the number of passengers carried.

Hong Kong has taken endless measures to continuously upgrade its infrastructure in order to meet the growing demands of businesses. It is said to have one of the Best Airports and Busiest Ports in the world. Transportation services are efficient and cheap connecting all major centres. Hong Kong is also the preferred Exhibition and Convention Centre for most businesses in the region. The Hong Kong Exhibition and Convention Centre has received several awards and accolades. It is often voted as the 'Best Convention and Exhibition Centre in Asia Pacific'. Hong Kong is home to world-class industrial/business parks like Cyberport and the Hong Kong Science and Technology Parks. These parks provide integrated infrastructure in one region that help reduce the per-business expense, and also help companies operate in a highly conducive, environment friendly setting.

Hong Kong’s telecommunications infrastructure is one of the most technically advanced in the world. Broadband coverage is available to virtually all commercial and residential buildings. Hong Kong’s open market ensures there are several competitive mobile phone and Internet service providers. Broadband Internet connection is available to over 98% of households in Hong Kong. 
  
Efficient & Skilled Workforce
Hong Kong’s labor force is often described as dedicated, competitive, hardworking, and adaptable. For a region with very few natural resources, Hong Kong’s talent pool plays a crucial role in the economy. Like Singapore, Hong Kong attracts a number of foreign professionals from all over the world. A recent ‘Global Professionals on the Move Report 2011’, commissioned by the Hydrogen Group, ranked Hong Kong as the sixth most popular global destination to relocate to. Some of the reasons for Hong Kong’s popularity are its low crime rates, tax system, cosmopolitan lifestyle, and opportunities for personal development. Hong Kong’s foreign talent is complemented by a motivated and highly educated local talent pool – one that is well versed with the business culture in the fast-growing Mainland cities. Moreover, the government periodically undertakes measures to enhance workforce skills, which in turn improves the quality and productivity of businesses.
 
English is the usual language of business, while many in Hong Kong speak English, Cantonese and Mandarin. Hong Kong thrives on its strong work ethic, efficiency and can-do attitude. Industrial action is extremely rare.
  
Financial Center
According to the recently released Global Financial Centers Index March 2010, Hong Kong is ranked No. 3, just 10 points behind New York and 16 points behind London as one of the top cities for banking and financial services. Hong Kong’s competitiveness as a financial center can be attributed to factors such as its financial regulatory policy, quality of finance professionals, low tax rates, excellent IT and support infrastructure, and market access.
 
Apart from low tax rates and an excellent business environment, proximity to China is a major reason for global financial services firms to incorporate company in Hong Kong. With China becoming the second largest trading nation and economy, specifically with external trade surpassing US$3 trillion in 2010 and direct investment activities also growing significantly over the past decade, the use of Renminbi (RMB) in cross-border transactions is likely to expand very rapidly in the future. In perspective, this is a promising development for Hong Kong as it is an ideal place to serve foreign financial institutions and corporate houses that are expected to have continually expanding trade and investments links with China in the coming years. Furthermore, the mainland China government strongly supports Hong Kong’s development into an offshore RMB settlement center and an international assets management center.
 
Owing to its growing prominence as a financial center, Hong Kong is witnessing a global shift of banks and finance professionals from the West to the East. According to a report by Credit Suisse, 75 of the world’s top 100 hedge funds are likely to set up Asian divisions, and Hong Kong is the top choice for location.  

Banking System
Hong Kong has a sophisticated banking system that provides a full range of financial services. It maintains a three-tier system of deposit-taking institutions,namely, licensed banks,restricted licence banks,deposit-taking companies.They are collectively known as authorized institutions.
 
Hong Kong has one of the highest concentration of banking institutions in the world. Seventy of the largest 100 banks in the world have an operation in Hong Kong. At the end of December 2010, there were 146 licensed banks, 21 restricted licence banks and 26 deposit-taking companies. These 193 authorized institutions operate a comprehensive network of 1,413 local branches. Of these 193 authorized institutions, 176 are beneficially owned by interests from 29 countries. In addition, there were 67 local representative offices of overseas banks in Hong Kong at the end of December 2010.
 
Because of time differences, business can be conducted in Hong Kong outside of business hours in London and New York. Hong Kong also has an active and soundly regulated stock exchange for raising capital for investment projects.  

Rule of Law
The rule of law, enshrined in Hong Kong’s legal system and providing a secure environment for individuals and organizations, is undoubtedly a crucial factor in the city’s success as an international commercial and financial center. The city’s independent judiciary is the firm foundation of the rule of law, and its judges are trusted not just by the people but also by the international business community. First-class practitioners also provide key support, with keen and healthy competition from overseas law firms.  The result is a sophisticated legal sector with a cross-fertilization of experience.   
 
Hong Kong’s legal profession possesses a wide spectrum of expertise in areas such as capital markets, corporate finance, securities, banking, intellectual property, information technology and maritime law. While outlining the government’s effort in promoting effective and efficient alternative dispute resolution (ADR) services in Hong Kong, is “a flexible and more client-oriented process, which has the potential of reaching settlement at lower costs and saving business relationships. The government is constantly updating laws to provide an even better business environment.
 
Even though Hong Kong is part of China, it remains also a mature international city and a special economic region operating under a separate legal system and in accordance with the best international commercial and financial best practices. Hong Kong is acutely conscious of its strength as a global finance and business center, run on a separate common law system with a high degree of autonomy.
 
Hong Kong also has been active in international collaboration on many fronts to ensure that it remains a world city, actively participating in the affairs of the globe and contributing to the well-being of the international community. 
  
Closer Economic Partnership Arrangement (CEPA)
The Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) is the first free trade agreement ever concluded by the Mainland of China and Hong Kong. The main text of CEPA was signed on 29 June 2003.
 
CEPA opens up huge markets for Hong Kong goods and services, greatly enhancing the already close economic cooperation and integration between the Mainland and Hong Kong.
 
CEPA adopts a building block approach, and the two sides have been working closely to introduce further liberalization measures continually. The agreed liberalization measures for various phases of CEPA are stipulated in the CEPA Legal Text. 
 
CEPA is a win-win agreement, bringing new business opportunities to the Mainland, Hong Kong and all foreign investors. For Hong Kong, CEPA provides a window of opportunity for Hong Kong businesses to gain greater access to the Mainland market. CEPA also benefits the Mainland as Hong Kong serves as a perfect "springboard" for Mainland enterprises to reach out to the global market and accelerating the Mainland's full integration with the world economy. Foreign investors are also welcome to establish businesses in Hong Kong to leverage on the CEPA benefits and join hands in tapping the vast opportunities of the Mainland market.

CEPA covers 3 broad areas:   
Trade in goods - All goods of Hong Kong origin importing into the Mainland enjoy tariff free treatment, upon applications by local manufacturers and upon the CEPA rules of origin (ROOs) being agreed and met. 
 
Trade in services - Hong Kong service suppliers enjoy preferential treatment in entering into the Mainland market in various service areas. Professional bodies of Hong Kong and the regulatory authorities in the Mainland have also signed a number of agreements or arrangements on mutual recognition of professional qualification. 
 
Trade and investment facilitation - Both sides agreed to enhance co-operation in various trade and investment facilitation areas to improve the overall business environment.