Why do business in Hong Kong?
Hong Kong is often described as one of the easiest places in the world to set up a new business and enjoy successful trade. Hong Kong has a stable economy and a prime location for trading with other nations. Local authorities also make life simple to do business.
Be aware that this makes competition fierce when trading in Hong Kong. Almost 10,000 foreign companies are operating out of the country already. Ensure you present a detailed business plan and be prepared to pay high salaries to skilled employees. If you do not, one of your competitors will.
Do not let this deter you from opening a business in Hong Kong, though. The ease of doing business, appealing business tax rates and encouragement of free enterprise ensure that Hong Kong is a genuine hub of thriving business opportunity.
World Bank Ease of Doing Business Ranking (1-190)
Tax rates 2020
How to set up payroll in Hong Kong
Once you decide to set up a business in Hong Kong, decide what kind of company would suit your needs best. Most business owners opt for a Limited Liability structure. This will take around 8 weeks to complete.
Choose a company name and register your company. To do so, you will need the following:
- Incorporation Form
- Company’s Articles of Association
- Notice to Business Registration Office (IRBR1)
- Local bank account
When it comes to setting up a payroll, ensure that your potential hires have the legal right to work in Hong Kong. If not local, the employee will likely need a GEP visa. These can be applied for from the Immigration Department of Hong Kong.
Naturally, your employees will also need to pay income tax. This is a sliding scale between 2 and 17% of an annual salary. As with all nations, you will need to withhold income tax contributions from an employee salary and file these with the Inland Revenue Department. Income tax rates are:
- Salary up to HK$50,000 – 2%
- Salary between HK$50,001 and HK$100,000 – 6%
- Salary between HK$100,001 and HK$150,000 – 10%
- Salary between HK$150,001 and HK$200,000 – 14%
- Salary over HK$200,000 – 17%
These rates look quite generous but be aware that employees tend to attract high salaries in Hong Kong. In terms of cost of living, Hong Kong is comparable to London. Employees will expect this to be reflected in a salary offer. Thankfully, as we will discuss in a moment, social security contributions from the employer are low so you will not need to pay much above a salary.
Hong Kong employment law & HR considerations
Hong Kong employment law is governed by the Employment Ordinance. Benefits for employees do not typically kick in until a year of service has been completed. Employees in Hong Kong are entitled to the following mandatory benefits:
- 7 days of paid holiday per year after completing one year of service. This holiday allowance is increased to 8 days after 3 years of service. Holiday allowance continues to rise each year until it is capped at 14 days
- 4 days of paid sick leave accrued per month of service (2 days per month of service for the first year), capped at 120 days in any single sickness episode
- Up to 14 weeks of paid maternity leave (rate of pay will depend upon the length of service)
- Up to 5 days of paternity leave (rate of pay will depend upon the length of service)
- At least one day off per week, though most employers in Hong Kong operate a five-day week
In terms of social security, employers must pay 5% of any employee’s salary into the Mandatory Provident Fund (MPF) – Hong Kong’s public pension fund. The employee must match this contribution with funds withheld from their salary. You are welcome to pay more if you wish (and can afford it!)
Employers are not legally required to provide a private pension scheme or health insurance policy in Hong Kong, though some businesses will do so. A tax-free housing allowance of up to 10% of an annual salary is also a popular optional benefit for foreign workers.
Although these benefits are not obligatory, they are advisable. As discussed, there are plenty of businesses vying for the best talent in Hong Kong. Your company will need to make itself as attractive as possible.
Setting up a subsidiary entity in Hong Kong
If you’re keen to get cracking with trading in Hong Kong, opening a branch of an existing business is the easiest way to establish yourself. A branch can be up and running in less than 14 days, and the tax implications are almost identical to a subsidiary entity.
A Limited Liability Company takes longer to set up, and you’ll need to submit a bit more paperwork. This is worthwhile in the longer term, though. An LLC is seen as reputable and respectful in Hong Kong. To ensure ongoing legal compliance and accurate filing of disclosure requirements with Companies Registry, it may be advisable to consider employing a local representative.
The corporate tax rate in Hong Kong is between 7.5 and 16.5%, depending on the business structure and annual profit margin. In a nutshell, expect to pay the following in business tax:
- 7.5% – an unincorporated business that earns below HK$2 million in a calendar year
- 8.25% – a corporate business that earns below HK$2 million in a calendar year
- 15% – an unincorporated business that earns above HK$2 million in a calendar year
- 16.5% – a corporate business that earns above HK$2 million in a calendar year
As you’ll see, whatever bracket your business falls into, Hong Kong offers extremely appealing business tax rates. This is why it is so popular as a trading base for overseas companies.
If you have read this far, you will realise that Hong Kong is hugely welcoming to overseas investors and business leaders. The local authorities will not blind you with paperwork and red tape, and the financial rewards are potentially great. You can start a business with 100% foreign ownership, and if you decide to take your business public, it is not complicated to sell shares and grow your company this way.
In terms of business etiquette, Hong Kong typically follows Cantonese traditions. Always shake hands with an associate – and anybody with them – when opening and concluding a meeting. Use a light handshake. While a firm grip is seen as confident in the west, in Hong Kong it is considered needlessly aggressive.
It is considered polite to enquire as to the health of your associate and their family, and to address people by title and surname until invited to use first names. A small gift will also be appreciated. Avoid red or white flowers and clocks, however – these are associated with death and mourning in Hong Kong.
On a corporate level, the attitude in Hong Kong is comparable to the USA – namely, time is money. While you’ll need to be polite, don’t waste too much time with small talk. Look to conclude meetings and pitches quickly, focussing on the financial advantages that can be gleaned from working together. It may take a few meetings to conclude a deal and forge a relationship, but it will happen. A handshake is considered as binding as a contract in Hong Kong. Never promise something verbally that you plan to retract later.
When it comes to your business space, be aware that Hong Kong natives can be superstitious. Bring in a feng shui professional to arrange and decorate your workplace. Some potential partners will refuse to do business in a location that has not undergone this process, as they consider it bad luck. Do not mention death, illness, business failings or financial difficulty in a meeting. Finally, dress to impress in Hong Kong. A good suit and an expensive watch will be noticed and mark you out as a serious professional.
Setting up in Hong Kong FAQsHow long does it take to set up a Hong Kong entity?
Expect to wait around eight weeks for your new business in Hong Kong to be fully operational. It may take around a month after this before you can make your first hire.What are the most common business structures in Hong Kong?
The most common business structures in Hong Kong are:
• Branch or representative office of an existing business, with the overseas parent company maintaining legal liability
• Partnership – for a business with two or more owners, all of whom share legal liability
• Limited Liability Company – a legal entity that is kept separate from its owners
• Public Limited Company – as above, but open to ownership from up to 50 public shareholders
• Sole Proprietorship – for SMEs with a single owner, who holds all legal liability
Due to the absence of personal responsibility in the event of adverse circumstances, a Limited Liability Company is the most popular choice of entity. These businesses take a little longer to set up and have more compliance regulations than other business types. The protection offered makes this additional administration worthwhile, though.
What is the statutory sick leave in Hong Kong?
For the first year of employment, employees are entitled to 2 paid sick days per month of employment. Once a year of service has been completed, this doubles to 4 days per month. Employees can take up to 120 days of paid sick leave in one block if they have accrued enough days.
Can a business be 100% foreign-owned in Hong Kong?
Yes, Hong Kong welcomes overseas investment and entrepreneurship. A subsidiary business registered in Hong Kong can be 100% foreign-owned.
What initiatives are there to attract foreign investment to Hong Kong?
Hong Kong welcomes and encourages foreign direct investment (FDI). To make Hong Kong as appealing as possible for international businesses, corporate taxation is kept to a minimum and bureaucratic red tape is avoided wherever possible. There are no fees or costs involved when registering a company in Hong Kong, and there is no legal mandate to bring in a resident director or representative.
How much must employees and employers contribute to social security in Hong Kong?
Employers and employees of a Hong Kong business each pay 5% of a salary into the Mandatory Provident Fund (MPF). These mandatory contributions are capped at HK$30,000. This is the extent of an employer’s mandatory commitment to social security payments in Hong Kong.
What is a common probationary period for employees in Hong Kong?
Due to low social security financial commitments, the total cost of a new hire in Hong Kong is just 1.05 times an annual salary. This is a relief, as base salaries tend to be a little higher in Hong Kong than in other Asian territories.
What is the minimum share capital required to establish an entity in Hong Kong?
There is no minimum share capital mandated by law to open a subsidiary entity in Hong Kong. However, it is recommended to open a local bank account with no less than HK$1,000 (around £95).
Do you need to set up a local bank account in Hong Kong?
Yes, you will need to open an account with a bank in Hong Kong to do business in this country.
What is the standard working week in Hong Kong?
Standard working hours in Hong Kong and 9am to 6pm, Monday to Friday. Employees must have at least one rest day per week.
What are common supplementary employee benefits in Hong Kong?
It is not mandatory to arrange a company pension in Hong Kong – employer responsibility does not exceed payments to 5% of salary to the Mandatory Provident Fund – so some businesses offer a retirement fund as a supplementary benefit to employees. Alternatively, you could just pay a higher percentage to the MPF.
As Hong Kong is often looking to attract overseas talent, a housing allowance is also often offered to foreign employees. This is a tax-free additional payment – usually 10% of a salary – to help finance accommodation in the country.
Can employment contracts be terminated at will by the employer in Hong Kong?
The right to terminate employment in Hong Kong depends upon the contract of employment. Usually, if an employee has less than two years of service, they can be terminated without fuss by giving seven days’ notice. Employees with longer service records have the right to claim wrongful dismissal through a tribunal.
What is the standard annual leave entitlement in Hong Kong?
Once an employee has completed one year of service, they are entitled to 7 days of paid annual leave. After completing 3 years of service this increases to 3 days, continuing to rise by an additional day after each year of service. Annual leave is capped at 14 days after 9 years of service. Hong Kong also observes 12 annual holidays per year.
Can you establish a branch of your company in Hong Kong?
Yes, opening a branch of an established parent company is possible for foreign businesses looking to trade in Hong Kong. It offers less protection than forming a Limited Liability Company, though the corporate tax rates are similar.
What are the main options for setting up payroll in Hong Kong?
There are four options for operating a payroll for Hong Kong employees:
• Remote Payroll – You can release payments to your staff from outside of Hong Kong. This could be done by a parent company in the UK or through an external company outside of Hong Kong
• Local Payroll Administration – A payroll company in Hong Kong will pay your employees and file your tax returns, but your business will remain liable for asserting legal compliance in new hires
• Fully Outsourced Payroll – If you lack the time or inclination to concern yourself with payroll, pay for a fully outsourced service. A local business in Hong Kong will handle staff payments, legal compliance of new hires, withholding and filing taxes – everything you need
• Internal Payroll – Use the HR or payroll department of a UK parent business to manage the Hong Kong payroll, or handle it within your Hong Kong subsidiary. This will not cost your business any money in external services, but it is a large time and labour investment
What are the different types of work permits and visas in Hong Kong?
Foreign nationals that wish to work in Hong Kong will need a visa. The options include:
• Visa under the General Employment Policy (GEP)
• Visa under the Admission Scheme for Mainland Talents and Professionals (ASMTP)
• Visa under Immigration Arrangements for Non-Local Graduates (IANG)
• Visa under Capital Investment Entrant Scheme (CIES)
The GEP the most common visa for overseas employees in Hong Kong. All others are considered more niche, and only typically used for particular roles or industries.
An application for a GEP can be made to the Immigration Department of Hong Kong. A justification for bringing in a foreign national will be required – typically, proof that the employee holds relevant skills and qualifications that will benefit Hong Kong.