Why Set Up a Holding Company in Hong Kong?

The Hong Kong Companies Registration Office (HKCRO) has introduced the concept of holding companies for people who have their business registered with the HKCRO but are not based in Hong Kong.

What is a Holding Company?

A holding company is a separate legal entity.

Unlike other companies, a holding company usually does not directly engage in producing goods or services; a holding company owns and govern other companies, commonly referred to as subsidiary companies. 

The relationships between companies are defined by terms such as subsidiary, associate, and branch based on their ownership structure:

A subsidiary company, also known as an operating company, is one that is majority-owned (usually over 50%) by the holding company.

An associate is a company in which another company holds a significant but not controlling interest (usually between 20% and 50% ownership).

A branch, on the other hand, operates as an extension of an existing company in a different location, lacking its own legal identity and reporting directly to the parent company.

Ordinary Company vs. Holding and Operating Companies

The key difference between a holding company and a regular company is that while a regular company conducts its own business activities, sells products or services, and earns profits directly, a holding company primarily owns shares in other companies, known as subsidiaries, and doesn't engage directly in business operations. 

Instead, it oversees and controls these subsidiaries.

A holding company gains control over its subsidiaries by owning their shares. 

This control allows it to appoint directors, influence major decisions, and receive profits (dividends) from the subsidiaries. 

The holding company may also issue its own shares to raise funds.

Although a holding company may be subject to taxes on its profits, there are potential tax benefits, such as exemptions on dividends received from subsidiaries under certain circumstances. 

While the holding company doesn't directly pay taxes on its subsidiaries' profits, these profits can be distributed as dividends, which are then taxed at the holding company level.

Registering a Holding Company in Hong Kong

There's no separate license required for operating as a holding company in Hong Kong. 

You follow the standard company registration process with the HKCRO.

Also, selling shares in a holding company usually follows standard company regulations.

Common Reasons Holding Companies Are Set Up In Hong Kong

There are several reasons why you might wish to set up a holding company:

To Protect Intellectual Property

A holding company setup can help safeguard intellectual property (IP) assets like patents, trademarks, and copyrights. By placing the IP under a separate subsidiary, the holding company can reduce the risk of losing it in case the subsidiary encounters legal or financial issues.

To Protect Yourself Against Insolvency

Many countries require individuals to hold at least one share in each company they run.

In some cases, this requirement applies even if the individual owns only a small amount of stock.

For example, in Canada, it is illegal for anyone without a minimum level of ownership to take part in the management of a corporation.

As a result, if someone becomes bankrupt, creditors can seize his assets.

In most jurisdictions, a well-structured limited liability company (LLC) already offers strong protection between personal assets and business liabilities.

By forming a holding company, you can ensure that your personal assets are protected.

To Limit Liability

Most jurisdictions impose strict rules on how directors of companies can be held liable for any financial losses caused by their actions.

These rules often make it difficult to sue directors for negligence. Setting up a separate entity allows directors to act independently of the company and limits their liability.

Directors can still be personally liable in cases such as fraud/misconduct or breach of fiduciary duty.

If directors engage in fraudulent activities or intentional misconduct that cause financial losses, they can be held personally liable.

Also, directors must act in the best interests of the company and its shareholders.

Breaching this duty through negligence or reckless decisions could lead to personal liability.

To Manage Multiple Businesses

There are many advantages to having more than one business entity. You can use them separately or together.

One of the key advantages of establishing a holding company is the ability to manage multiple businesses efficiently.

For example, you may choose to run your retail business during the day while running a different type of business in your home office at night.

Or you may decide to open a second shop near your existing store. This way you can increase your sales and develop new markets.

To Trade Internationally

Having a holding company gives you the opportunity to trade internationally.

If you plan to trade internationally, you should consider whether you need to register your company under the laws of the country where you are planning to trade.

In most countries, including Hong Kong, there are restrictions on trading outside the country where the company was originally registered.

When setting up a holding company, you should bear in mind that certain aspects of your business operations may change because of the structure of the holding company.

For example, the holding company must account for all of the income and expenses of its subsidiaries.

This means that the holding company needs to keep records of these transactions.

If you have already started operating your business, you may find it convenient to continue using your current corporate structures.

The following sections discuss the main options available when setting up a holding company.

Ensuring Your Holding Company Is Compliant

Operating a holding company requires adhering to local regulations.

In Hong Kong, registering as an incorporated company is the primary method for establishing a holding company.

Limited partnerships are less common for this purpose.

The holding company and its subsidiaries must still comply with all relevant Hong Kong regulations for their business activities.

This might involve areas like taxation, licensing, and reporting requirements.

Registering as an Incorporated Company

You can form a Hong Kong incorporated company through the Companies Registry.

This will give you full control over the company's affairs.

However, you will lose some flexibility and face additional costs.

The benefits of incorporating include:

• Full control over the company's finances and activities. Incorporation enables you to oversee and decide on the holding company's valuable assets, including business assets transferred from its subsidiaries.
• Incorporation offers limited liability. Protecting personal assets from the company's debts.
• A ready-made credit history. As a registered company, you will appear on the list of approved creditors. This makes it easier to obtain loans.
• Better access to government services. Many government departments require that companies are incorporated before they provide public assistance.
• Easier access to capital. Investors will be willing to invest in a well-known brand.

However, incorporating is not always necessary.

There are other ways to protect yourself against personal liability.

For instance, if you want to operate your own business but do not want to take on the responsibility of being a director, you could set up a company as a sole trader instead.

Why Set Up A Holding Company In Hong Kong?

Holding companies offer a centralized structure for managing multiple businesses under one entity. 

This can be advantageous because it streamlines all subsidiaries' administration, reporting, and decision-making. 

In addition, there are several reasons why people set up their own businesses in Hong Kong.

The Tax Regime

Hong Kong has one of the lowest tax rates in Asia. You only pay 16.5% corporation tax on profits made from your business.

This low rate attracts international investors who would otherwise prefer to invest in Singapore or Malaysia.

Entrance Into the China Market

Starting a new business in Hong Kong allows you to enter the Chinese market without having to start at square one. You can use the advantages of the existing infrastructure and experience gained while operating locally.

Setting up a company in Hong Kong is relatively easy.

The process involves filling out forms and paying fees. After this, you can start trading.

Corporate Structure Benefits

A holding company gives you more freedom than a normal company.

In addition, a holding company offers greater protection against corporate insolvency.

For example, a company cannot go bankrupt unless all of its directors agree to liquidate.

If you set up a holding company, then you can appoint an administrator to manage the company's assets.

This person will be able to deal with the company's liabilities.

Incorporation Cost and Requirements

The registration fee varies depending on how large your company is. It ranges between HK$700 and HK$20,000.

Another requirement is registering the company's name. This must be done within 30 days after formation.

If you decide to register your company under a different name, you will need to apply for a change of name certificate.

The time taken to complete the entire process depends on the number of shareholders. Normally, it takes about 1 month.

However, this may vary according to the complexity of the application.

Double Taxation Arrangement Between China and Hong Kong

To attract foreign investment, Hong Kong introduced special arrangements to encourage multinationals to establish operations there.

One such scheme is known as the Double Taxation Agreement (DTA).

Under this agreement, the two jurisdictions have agreed to treat each other's income equally.

They also share information regarding taxes paid by residents of both countries.

Stay Compliant with Local Hong Kong Taxes and Laws

You should be aware that any form of business activity in Hong Kong requires you to comply with the relevant legislation and regulations.

For example, you must obtain a license before carrying out certain activities.

These include selling alcohol, gambling, money laundering, prostitution, drug trafficking, and fraud.

You must also comply with the Anti-Money Laundering Ordinance.

This means that you must ensure that transactions involving cash are properly recorded.

You must also keep proper records of all transactions.

These records must be kept for a minimum period of 3 years.

Annual Return Filing Dates to Take Note of for New Business Owners

Hong Kong has 2 filing dates: April 15th and June 30th.

April 15th – Annual return date for companies incorporated prior to July 1st, 2006

June 30th – Annual return date if you incorporate after July 1st, 2006

General Characteristics of Holding Companies in Hong Kong

Holding Companies in Hong Kong offers many advantages. For instance, they allow you to avoid double taxation.

Furthermore, they provide greater protection from corporate bankruptcy.

In addition, they give you additional flexibility when it comes to dealing with the government.

However, there are some downsides to using them. You should be aware of these before setting up one.

Limited Liability Protection

One drawback of using a holding company is that it limits your personal liability.

In fact, you do not even need to pay any tax on profits made by the company.

This does not mean that your personal assets are safe.

You still have to pay taxes on dividends received from the company.

Tax Savings

As mentioned earlier, a holding company enables you to save on taxes.

In particular, you can claim deductions against your earnings without having to declare the source of income.

Dividends and Interest Earned By the Company Are Exempt From Tax

This exemption applies to dividends and interest paid during the first 5 years of incorporation.

It is important to note that dividends must be declared at least once every year.

Any dividends that are accumulated over more than 12 months are taxed at 20%.

Conclusion

A holding company is useful for several reasons. However, it has limitations.

Therefore, make sure that you fully understand the pros and cons before deciding whether or not to set one up.

Need help with company registration? Contact Air Corporate today, and let us help you ensure a smooth registration experience.