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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.
A company can be set up as a subsidiary, associate, or branch of another company, and these are known as ‘holding companies’.
The main difference between a holding company and an ordinary company is that it does not own any shares in its subsidiaries and therefore cannot control them.
It also does not issue any dividends or pays any tax on profits made by its subsidiaries.
Instead, it receives all the profits from its subsidiaries and pays income tax on them.
In order to form a holding company, you must first register your company with the HKCRO. You then need to apply for a license to operate as a holding company.
This will allow you to conduct activities such as issuing shares in your subsidiaries, making investments in other companies, and opening bank accounts.
However, if you want to sell shares in your holding companies, you will need to obtain approval from the HKCRO before doing so.
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 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.
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 legal entity allows directors to act independently of the company and limits their liability.
To manage multiple businesses
There are many advantages to having more than one business. You can use them separately or together. 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
One advantage of setting up a holding company is that it helps you comply with local regulations.
It also provides additional protection against bankruptcy.
In Hong Kong, there are two ways to set up a holding company:
1) Registering as an incorporated company, and 2) Forming a limited partnership.
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.
- Protection from creditor claims. When you incorporate, you become personally responsible for any debts incurred by the company.
- 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?
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 15% corporation tax on profits made from your business.
This low rate attracts international investors who would otherwise prefer investing 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 offer 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.
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%.
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.
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