Hong Kong company formation | Hong Kong compaies formation

hong kong companies formation
FAQ FOR HONG KONG COMPANIES FORMATION  
Please find below the questions concerning the formation and operation of a Hong Kong Company: -

Q. What is the difference between tailor made and ready-made company?
Q. Is there any risk in buying a ready-made company?
Q. Can I change the company name or share capital of the company bought?
Q. What is the difference between authorized share capital and issued share capital?
Q. What is nominee shareholder?
Q. What is nominee director?
Q. How to use company chop and common seal?
Q. Who will hold the ultimate controlling power of a limited company?
Q. What is the Power of Directors?
Q. Why accounting work is required?
Q. What kind of documents you have to provide us for preparing the accounting work and audit?
Q. What kind of documents you can receive after the accounting work and audit?
Q. When the Hong Kong Company has to file the Profits Tax Return?
Q. Why the offshore income of a company is not taxable in Hong Kong?
Q. How to apply for Offshore Operation Tax Exemption?
Q. Examples for offshore income claim
Q. How to sell the shares of a Hong Kong company to other investors?
Q. How to close a Hong Kong company?



Q. What is the difference between tailor made and ready-made company?
Ready-made means the company is formed and put in list for purpose of selling. We have our Founder Member to hold 1 share when incorporating the company. Instead of forming a brand new tailor made company, we arrange to transfer this 1 share to new shareholder. The company can be used instantly and saves time of at least 7 days.
Other than saving time, sometimes you may need a company with incorporation date several months ago. This helps for management to "ratify" (or "inject") certain business transaction into a company.

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Q. Is there any risk in buying a ready-made company?
No. It is definitely no need to worry about buying a ready-made company from us and taking over any unknown responsibility. We issue “Letter of Guarantee and Indemnity Letter” to buyer stating that no business has ever been carried out by the company. The original Founder Member is the one responsible for all financial liability before the date you bought the company.

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Q. Can I change the company name or share capital of the company bought?

Change Company Name
Yes. You can change the name of a limited company. However name search has to be carried out to ensure the new name is still available.  It takes around 8 days.

Once the name change is approved, a "Certificate of Incorporation on Change of Name " will be issued by the government.

Contracts with old company name need not be signed again. However, new name need to be used for all new transactions and therefore new set of company chop will be made.

Authorized share capital
Yes. You can increase (or even decrease) the authorized share capital.

The standard authorized share capital is HK$1,000 splitting into 1,000 shares. For every HK$1,000 authorized share capital, you need to pay HK$1 duty fee.

This means you have to pay HK$1,000 duty fee to increase authorized share capital of HK$1 million. There is no limit on the maximum amount of authorized share capital. After the increase, you can freely allot them to shareholders.

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Q. What is the difference between authorized share capital and issued share capital?

Authorized share capital
Authorized share capital is the maximum amount of shares that a company is allowed to issue.
For example, the ready-made company that we are selling comes with HK$1,000 authorized share capital splitting into 1,000 shares. This is the maximum amount of shares that we can sell. However, this does not mean that we can only raise HK$1,000 as share capital.

Some people may pay you a premium to buy a share. This depends on how well the new shareholder is valuing your company. Even though he is paying HK$1,000 for a share of your company, HK$999 of it is premium. He is buying only 1 share and entitle to 1 voting right only.
Issued share capital
Existing shareholders are free to pick new investors. They can "issue" (or "allot") shares to new investors. The shares can be issued at par or at premium. Only issued share capital is considered paid up capital.

Stamp duty is levied in increasing authorized share capital, but not in issuing (allotting) shares. When old shares (shares already issued) are transferred to other parties, stamp duty also needs to be paid.

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Q. What is nominee shareholder?

Nominee shareholder is having another person appearing in the government record as the shareholder. The identity of real owner is hidden.

The benefit of the real shareholder can be protected by preparing Declaration of Trust and pre-signed share transfer documents. In case of necessity, the shares can be transferred back to real owner. The real owner is regarded as owning the shares from the very beginning. Not from the date of transferring back.

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Q. What is nominee director?

Nominee director is having another person appearing in the government record as the director. The identity of real business controller is hidden.

Documents (Letter of Indemnity etc) will be prepared to protect the interest of both the real business owner and the nominee.

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Q. How to use company chop and common seal?

Signature chop - usually rectangular in shape. Together with signature of an authorized officer, most contracts and bank transactions are regarded as valid.

Common seal
- usually stainless steel. Only documents required to be signed in SEAL need to be chopped. Example of such documents including transfer of property.

In China, the official company chop is regarded as valid for contract even without signature. There is a big difference.

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Q. Who will hold the ultimate controlling power of a limited company?

Shareholders are the one holding the ultimate controlling power of a limited company. Directors are employees/agents of the company. The power of directors comes from shareholders.

However, a single shareholder with less than 50% shareholdings cannot interfere the action of directors. The power of shareholders can be executed collectively. This means by holding shareholders' meeting and passing the resolutions. Shareholders can remove directors by the same means.

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Q. What is the Power of Directors?

Directors are employees/agents of a company in nature. Directors owe duty to the company as a whole (not to a single shareholder). The powers of directors are governed by Company Ordinance and Memorandum & Articles of Association. Generally speaking, as long as directors are acting in good faith, directors do not have to take up any liability of the company.

Therefore, it is common to have Board of Directors (forming by all directors) detailing and supervising the duty and responsibility of each director.

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Q. Why accounting work is required?

Legally required
Accounting record keeping is compulsory according to HK laws;
[ Please click for detail ] http://www.ird.gov.hk/eng/pdf/51c_pam.pdf

Practically required
Accounting work is required for several major reasons:

  • required by tax department for filing the profit tax return;
  • required by management;
  • required by fund provider, such as shareholder and banker.

Only the requirement from tax department is mandatory in Hong Kong.

Hong Kong individual and company are not required to file tax return on monthly basis. It is required on annual basis. Therefore, many companies prefer to have formal accounting work and audit to be done once a year.
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Q. What kind of documents you have to provide us for preparing the accounting work and audit?

Material required for accounting work to start :

1. Bank account transactions

1.1.

Bank account list stating all bank accounts opened

1.2.

Bank statements

1.3.

Cheque book stubs

1.4.

Outward cheque copies (if any)

1.5.

Inward cheques copies (if any)

1.6.

Bank deposit and withdrawal record books (if any)


2. Agreements or contracts (if any)

3. Income

3.1.

Invoice copies

2.2.

Invoice copies of sales just before year start and just after year end (for cut off verification purpose)

3.3.

Sales record book (if any)


4. Accounts Receivable (A/R)

4.1.

Invoice settlement record

4.2.

Outstanding invoice (unsettled) as at year end

4.3.

Outstanding invoice (unsettled) as at year end for those appear as at last year end (aged invoice over 1 year)


5. Expenses & Accounts Payable (A/P)

5.1.

Bills (or invoices) received during the year

5.2.

Unpaid bills as at year end

5.3.

Unpaid bills as at year end which appears as well in last year end

5.4.

Goods or services received but bills not received – amount and supplier list


6. Stock (if applicable)

6.1.

Stock list and value as at last year end

6.2.

Stock list and value as at this year end

6.3.

Stock purchase record during the year

6.4.

Stock movement record (in and out)

6.5.

Stock-take record as at year end


7. Salary and commission

8.1.

List of recipients with name, ID number, address and amount received during the year (including those resigned)

8.2.

MPF contribution record (if applicable)

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Q. What kind of documents you can receive after the accounting work and audit?
  • Profit & Loss Statement
  • Balance Sheet
  • Auditor report (for limited company only)
  • A set of accounting record (usually in the form of computer data disk)
  • Tax computation

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Q.When the Hong Kong Company has to file the Profits Tax Return?
  • Generally, tax filing in Hong Kong (HK) is once a year;
  • 1st tax filing request will be issued by tax department around 18 months after company is incorporated;

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Q.Why the offshore income of a company is not taxable in Hong Kong?
  • Hong Kong adopts a territorial source principle of taxation. Only profits which have a source in Hong Kong are taxable here. Profits sourced elsewhere are not subject to Hong Kong Profits Tax. The principle itself is very clear but its application in particular cases can be, sometimes, contentious.

    To clarify the operation of the principle, Inland Revenue Department prepared a
    [simple guide on the territorial source principle of taxation]. http://www.ird.gov.hk/eng/pdf/e_dipn21.pdf

    It gives a brief explanation of how the principle operates and provides simple examples for illustrative purposes of the tests applied to different types of businesses. If you wish to explore the subject in greater depth, consultation with professional advisers is recommended.

    However, this territorial concept does not apply to director's income (fee, salary or whatever). 

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  • Q.How to apply for Offshore Operation Tax Exemption?

    Financial statement of a company needs to cover all transactions undertaken by a company disregarding where those transactions are carried out. This means even non-taxable offshore income needs to be reported in the financial statement.

    Therefore, offshore income needs to be stated in "Tax Computation' in order to claim for non-taxability.Sufficient evidence needs to be submitted in order to support the claim.

    Offshore income claim is not automatic. It needs to be applied.  It can be done in 2 ways:

    • Advance Ruling
      • Before you start the operation, write to HK tax department (IRD),describe your intended operation and request for "Advance Ruling";
      • The fee for this starts from around USD6,500;
    • Tax Return Filing
      • What documents are required for Tax Return Filing?

    Item 1 :

    Financial Statement (in case of limited liability company, this should be audited by Hong Kong CPA);

    Item 2 :

    Tax computation

    Item 3 :

    Offshore operation tax exemption application

    For a company does not need to apply for tax exemption, only Item 1 and 2 are required to be submitted to HK tax department.

    When tax exemption application is required, Item 3 is required as well.

    In Item 1, all income (inshore and offshore) of the taxpayer company should be reported.
    In Item 2, tax payable needs to be calculated according to tax rules in HK;
    In Item 3, at least below 2 document sets are included:

    • Organization Chart (Company function structure) showing which function is performed offshore
    • Walk-Through document, which is an example of a deal showing how an offshore income business is handled. (please select one of the largest in amount and typical)

     


    If apply for tax exemption without giving sufficient information. Tax department will issue a letter asking for proof. [Document Sample]


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    Q.Examples for offshore income claim

    Offshore income claim involves consideration of all facts. We extracted below cases from the tax department (Inland Revenue Department) to help demonstrating how the rules apply:

    There is no single determining factor, but, below will be advantageous:

    • has no real office in HK and only uses our office as a registered office;
    • has an overseas office in which the company's directors and staff are working;
    • has no staff in HK, its staff and directors rarely come to HK, e.g. about 2 weeks per annum;
    • negotiates and concludes contracts with suppliers and customers outside HK;
    • has no HK suppliers and customers;
    • shipment does not go through HK and arrangement of shipment is not done in HK;
    • physical inspection of goods is not carried out in HK.

    Having a bank account in HK to receive money is not relevant in most cases.

    As the Inland Revenue Department will select some transactions and request all the documents relating to these transactions to be submitted to ensure that all the company's operations are carried out outside HK. Therefore you are recommended to keep all the correspondence for all the transactions, e.g. faxes, emails, telephone bills, memos of meetings, purchase orders, sales orders, and shipping documents.

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    Q.How to sell the shares of a Hong Kong company to other investors?

    Existing shareholder can source for interested person to buy his shares and can agree with buyer any price - can be different from face value of shares.

    HK government charges stamp duty on the value of transfer which is around HK$1 per HK$1,000 value and the below documents are required:

    • Details of new shareholder(s);
    • Selling value of the shares;
    • Sales & Purchase Agreements if any;
    • Latest financial statement ( balance sheet ) - showing net asset value ( or value per share ) ;
    Upon receipt of the above, we will prepare the set of share transfers documents for the buyer and seller to sign.  Also we will calculate the total amount of stamp duty to be paid to the Stamp Duty Office for the share transfers.
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    Q.How to close a Hong Kong company?

    For closing of HK company, there are mainly 2 methods:

      1) De-registration
    • There should be no outstanding amount and liability due to 3rd party (such as debt, document filing duty to government etc.)
    • Final financial statements has to be prepared to clear all the tax liabilities if there’s any;
    • The fee is about USD600 (including government fee) plus the fee for preparing the financial statements;
    • Usually takes 6 to 8 months for the process to complete;

    Annual licence renewal
    As the process takes several months, client needs to pay annual licence renewal fee when it is close to due.  Otherwise, HK government will consider there is unpaid government debt and not approving the de-registration;
    Result of de-registration
    Client still needs to keep existing company record for 5 years;

      2) Winding up
    • It can be started even there is outstanding amount due to 3rd party;
    • Management account needs to be prepared in order to identify the company's financial status and to clear all the tax liabilities if there’s any;
    • Receiver will be appointed to take over the management power(usually appointing an accountant);
    • The fee starts from USD8,000;
    • It takes several months to complete;
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