8 Pros and Cons of Doing Business in Hong Kong

For entrepreneurs keen to establish their presence in the Asia Pacific market, doing business in Hong Kong is a preferred choice. Hong Kong serves as a key gateway to the Pearl River Delta, providing businesses with convenient access to this vast and profitable market.

Besides its strategic location and stable economic environment, Hong Kong is known for its business-friendly policies that encourage new businesses to flourish. On the flip side, there are also significant challenges to doing business in Hong Kong that one must consider before setting up.

In this article, we look at 8 pros and cons of setting up a company in Hong Kong to help you make an informed choice.

Benefits of Setting Up a Company In Hong Kong

Here's why it is good to do business in Hong Kong:

1. Free Economy and Free Trade

Hong Kong is a preferred destination for doing business due to its dynamic economy, which is guided by the free market and free trade principles. You enjoy the freedom to practice trade and can run any business type as long as it is legal.

No restrictions are imposed on inward and outward investments. There are no foreign exchange controls applicable, allowing free convertibility of Hong Kong dollar. The government also doesn't impose any restrictions on foreign ownership of companies.

According to the World Bank's Doing Business 2020 Report, Hong Kong's ranking in ease of doing business saw a notable enhancement in 2019, securing the third position globally among 190 economies. This marks a one-place advancement from the previous year.

2. Ease of Access to the Chinese Market

Incorporating a company in Hong Kong is beneficial if your expansion plans include having a presence in the Chinese market.

The governments of Hong Kong and China have entered into a free trade agreement called Closer Economic Partnership Arrangement (CEPA). Under CEPA, you can export products to the Mainland China market by setting up a Wholly Foreign Owned Enterprise (WFOE) or joint venture (JV) company in Hong Kong. The ownership of WFOE is 100 percent foreign-owned, whereas a JV is set up through a partnership between Chinese and foreign investors.

Goods and products manufactured in Hong Kong enjoy zero tariffs on imports to China as long as they are of Hong Kong origin. Businesses trading in services can also enjoy benefits under CEPA if they meet the eligibility requirements of a Hong Kong Service Supplier. Such suppliers can receive preferential treatment while providing services in Mainland China.

3. Independent Legal System

The competitive economy and free market offered by Hong Kong for businesses are strengthened by its independent legal system based on common law principles.

The enforcement of contracts is efficient and cost-effective. Apart from paying a nominal filing fee for registering the case with the appropriate court, the applicant doesn't have to pay any upfront fees. This is a departure from jurisdictions where litigants have to pay a percentage of the total amount of the claim as court fees.

The legal system also recognizes alternate modes of dispute resolution, such as arbitration and mediation. Hong Kong is a popular choice as the seat of arbitration. it is extremely rare for courts to refuse enforcement of an arbitral award, whether made in or outside of Hong Kong.

As a Special Administrative Region, Hong Kong is also the only jurisdiction that has numerous mutual arrangements with Mainland China that recognize and enforce court judgments and arbitral awards of civil and commercial disputes.

In December 2020, Hong Kong also entered into a supplemental arrangement with Mainland China for mutual enforcement of arbitral awards. Under the terms of this arrangement, the winning part of the arbitration can apply for parallel enforcement in China if the enforcement in Hong Kong is not successful.

4. Hong Kong Government Support for Business Improvement and Growth

Over the years, the Hong Kong government has established several programs to support the growth of your business.

For example, the Hong Kong Trade Development Council assists foreign companies that are keen to do business in Mainland China and other parts of Asia. Hong Kong companies also receive assistance in finding newer markets.

Similarly, the Hong Kong Productivity Council, a multi-disciplinary organization, helps companies in Hong Kong to do business more efficiently. Companies receive advice for upgrading their business performance and lowering operating costs.

Businesses can also reach out to The Support and Consultation Centre for SMEs to receive information about various funding schemes available.

In addition to the above, a strict anti-corruption regime also help strengthen Hong Kong's image as a business-friendly jurisdiction. The government has set up the Independent Commission Against Corruption, which is authorized to look into corruption cases in both the public and private sectors.

5. Cost-efficient Business Operation

One of the main reasons entrepreneurs consider Hong Kong to set up a company is the straightforward business registration. It is quick and fairly inexpensive. You can complete the incorporation process within a week's time. There are no requirements for holding a minimum share capital.

Compared to some other jurisdictions, the process of incorporating a Private Limited Company (PLC) with a maximum of 50 individual shareholders in Hong Kong is streamlined. A limited company is the most common company structure in Hong Kong.

You also enjoy tax incentives for your business in Hong Kong. Companies are subject to a two-tier profits tax regime. For the first HKD 2 million, assessable profits of incorporated and unincorporated businesses are taxed at 8.25% and 7.5%, respectively. The remaining profits of incorporated businesses are taxed at 16.5%, while for unincorporated businesses, the tax rate is 15%.

Other countries in Southeast coast of Asia have higher corporate tax ranging from 17-30%. Vietnam's rate is 20% and Singapore is at 17%.

In terms of salary tax, Hong Kong employs a progressive tax system, wherein the tax rate increases with higher income levels. If you are subject to salaries tax assessment or have opted for personal assessment, you have the right to receive a basic allowance and can potentially claim additional allowances that might lower your overall assessable income.

Meanwhile, a property used by the owner for personal occupancy is exempt from property tax since no rental income is generated from that property. Also, no withholding tax applies on dividend payments declared by a Hong Kong company to residents and non-residents. Additionally, there is no capital gains tax, value-added tax (VAT), goods and services tax (GST), or other export taxes payable 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

Even though Hong Kong offers ease of doing business for most industries, the situation is different if you are operating a financial company.

Financial firms have to comply with several regulations and restrictions, some of which are even stricter in comparison to China.

Based on the type of activities performed, firms need to obtain relevant licenses from either the Hong Kong Monetary Authority or the Securities and Futures Commission.

Capital raising exercises of financial firms may be adversely impacted on account of the regulations, restricting their business operations.

2. High Cost of Living

Over the years, Hong Kong has become one of the most expensive cities to live in.

On average, you should be prepared to shell out at least HKD 15,000 monthly to cover housing rental costs alone. Office rentals also don't come in cheap as the demand is high, but the supply is low.

Central Hong Kong occupies the top position as the most expensive office area, with total occupancy costs going up to HKD 2025 per square foot per year. More affordable areas in East Hong Kong still work out to be rather expensive, with an occupancy cost of HKD 852 per square foot every year.

And it doesn't stop with rental costs alone. Entertainment and leisure activities also cost a fair bit for Hong Kong residents. Having a drink at a bar after work can set you back by at least HKD 80 per glass. As a result, you need to pay higher wages to your employees to cover their living costs.

3. Complicated Bank Account Setup Process

Although it may seem that opening a bank account is one of the easier tasks to strike off your to-do list when setting up a company in Hong Kong, it isn't exactly the case.

If you wish to open an account with a traditional bank in Hong Kong, the cost and time spent are high without any guarantee that the bank will approve your application. Moreover, banks require all directors of the company to be physically present in Hong Kong for account opening.

A Hong Kong company also needs to provide a mountain of paperwork in support of the account opening application, such as :

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

Since banks also need the documents to be certified, hiring a company secretary takes priority before you can focus on other things on your agenda.

Alternatively, if you're looking to get your business up and running quickly, you may want to opt for a virtual business account. It takes less than 3 days to open a business account in Hong Kong and you can also skip all the hassle traditional banks offer.

Additionally, you also need to make a substantial initial deposit, and there is a chance that your application may be rejected without any explanation from the bank. As a business owner, dealing with a complex account opening process can be a huge disadvantage.

Wrapping Up

There is no denying that there are several benefits to setting up a business in Hong Kong. However, there are also significant challenges involved that cannot be ignored.

You should weigh the pros and cons to decide whether doing business in Hong Kong is the right choice for your company.

Need help in figuring out if Hong Kong is the ideal location to move your business? Register with Air Corporate today, and we'll help you figure out exactly what you need to get your business started.