Hong Kong: Five Compliance Tips For Hong Kong Companies Expanding Into China

Last Updated: 5 July 2018
Article by Louise Kan and Doris Li

Hong Kong companies can enjoy certain unique advantages in expanding to China. However, there are several key concerns they need to address and resolve in order to set up business in the country smoothly.

China has been adopting global reporting standards and requirements such as disclosure of Ultimate Beneficial Owner (UBO), Common Reporting Standards (CRS) and Foreign Account Tax Compliance Act (FATCA) amidst globalisation.

Many companies are planning their expansion strategy into China via Hong Kong - Is it always better and easier for Hong Kong companies, or foreign companies to first incorporate a Hong Kong entity, before expanding into Mainland China? How can you ensure that you are complying with all the local and global compliance requirements? Keep on reading to find out.

There are certainly some unique advantages to expand to China from Hong Kong as compared to other jurisdictions. Firstly there is the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) which opens market access for various business sectors with zero import tariffs for qualifying exports of goods and services from Hong Kong. In addition, there is also shorter period of notarisation and authentication of about one week for Hong Kong companies, and that certain industry sectors such as financial services are only open to Hong Kong & Macau companies or joint-ventures of Chinese and Hong Kong / Macau companies.

Whilst you are considering to use Hong Kong as a spring board into China, below are five compliance tips to aid you in your expansion strategy:

Tip 1: Know the company incorporation basics before entering Mainland China

When expanding into China from Hong Kong and defining your business scope, it is important to check the common business scope terms, which could vary between the two jurisdictions. Additionally, all company names and documents must be in Chinese (simplified Chinese recommended) and whether the name is available or not can be verified against the National Enterprise Credit Information Publicity System.

The company registration address must be physical instead of virtual. Although there is no limitation for registered capital in China, it is strictly a foreign currency controlled country. To either increase or reduce the registered capital, the company needs to get approval from the registry prior any fund transaction.

Tip 2: Establish your company's legal environment in Mainland China

Establishing your company's legal environment in Mainland China, from Hong Kong, needs to take account of the laws of the People's Republic of China. Since Chinese law restricts the choice of law and the types of resolution mechanisms that can be used in China-related commercial contracts, these contracts need to be drafted carefully.

Before entering into a contract in China, companies should take legal advice in both Hong Kong and in China including dispute resolution clauses and governing law clauses. This enables planning under which law, and how disputes will be practically resolved. Joint ventures operating within China are considered to be domestic Chinese entities. Disputes involving joint ventures will be considered to be domestic disputes to be arbitrated in China in most cases.

Tip 3: Maintain a process to manage your company chop

To legally register in China, your company must have an official company chop and a financial chop, which are red stamps which act as an official seal. Establishing a process to manage, maintain and retain these chops is imperative as they are used as a form of signature which is legally binding. The chops have to be made by a specified company, registered with the local Public Security Bureau.

Any loss of chops must be announced through publishing in an official journal recognised by the local authorities. Request for cancellation, remake, and re-register of the new chop should be made with the Public Security Bureau. The chops are critical for continuation of the business and any loss of chops can result in damaging consequences, so it is essential to have preventive measures and controls to safe keep them.

Tip 4: Create a strong regional / global compliance program

China's compliance environment is different to Hong Kong's and is continuously changing. It is imperative to either establish a team of dedicated compliance officers, outsource your compliance program or engage reputable local advisors to ensure staying abreast of changes and having people onsite. Having a compliance officer or other senior officer based in China, to supervise and document obedience to the policy and rules of conduct is recommended.

Examples of the requirements of your compliance program are: detailed guidelines and procedures, including employment agreements, company handbooks, codes of conduct, an anti-bribery/anti-corruption policy that addresses China-specific laws, regulations, and best practices. Ensuring very clear and concrete guidelines are in place will be more effective in China than standards with flexibility or which could be interpreted in different ways.

Tip 5: Keep abreast of regulatory changes to identify opportunities and risks

Establishing a process to stay up to date with relevant regulations and agreements is crucial to ensuring Hong Kong companies can leverage the benefits of expanding into China, such as updates to CEPA, free trade agreements, investment agreement, Economic and Technical Cooperation (Ecotech Agreement) and other enhancement agreements.

Changes such as Public Notice No. 9, released by China's State Administration of Taxation in 2018, provided additional guidance on beneficial ownership. Businesses investing in China through Hong Kong holding companies should be aware of the impact of the 'extended safe harbour rule' and the 'same jurisdiction / same treaty benefit rule'. These may provide benefits under the China/HK double tax arrangement depending on their business structure.

Contact our local TMF Group experts

TMF Group has the depth and breadth of knowledge and experience you need to make your business feel at home and belong wherever you are in the world. We can help you to navigate global rules and regulations such as CRS, FATCA and CbCr to help you mitigate any risks to your ongoing success.

Whether you want to set up in China or want to streamline your operations there, we have 10 years of in-depth knowledge and local expertise to help.

Want to know more about our services? Talk to us today.

Learn more about TMF China.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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