Hong Kong: Hong Kong in the early years of the 21st century

Since Hong Kong’s reunification with China, it has repeatedly proven its economic resiliency in the face of adverse international circumstances. In 1998, it weathered the Asian financial crisis without devaluing the Hong Kong dollar. Then, it survived boom and bust in the technology sector, only to see the global downturn of 2001 drag it back into recession. Since mid-2002, however, despite the impact of SARS, Hong Kong has bounced back strong, posting robust export results that have stimulated renewed economic growth.

Services have accounted for more than 80 percent of Hong Kong’s GDP in every year since 1996. As a small, open economy, heavily dependent on international trade and investment, Hong Kong is continually reinventing itself to stay competitive as the services centre for all of Asia – especially for China and its most prosperous region, the Pearl River Delta. Recent changes in the global business environment, especially in the offshore industry, serve to highlight Hong Kong’s key advantages.

On December 11, 2001, China officially became a full member of the World Trade Organization, ensuring permanent most-favoured-nation treatment by all other WTO members. Since then, China’s exports have continued to grow apace, fueling GDP growth in the range of eight percent per year.

Hong Kong is ideally situated as a platform to take advantage of China’s increasing integration into the international trading community. Its location, adjacent to the bustling Pearl River Delta, provides excellent transport and communications links to China’s leading export-manufacturing region. At the same time, Hong Kong offers unparalleled professional expertise regarding doing business in China, as well as world-class logistics, banking and trade support. Hong Kong boasts both the world’s busiest container port and its highest throughput of air cargo.

Hong Kong’s stability relative to its neighbours has evolved from the population’s highly entrepreneurial spirit, combined with the positive influences of British colonialism. Transparency, the lack of which has plagued other countries in the region, is a central component in Hong Kong’s solid and well-regulated banking and financial sectors. This has been especially important since the events of September 11, 2001, as international financial centres – especially those that promote offshore transactions – have come under increasing scrutiny.

In recent years, the international commitment to halt the funding of terrorist groups has revitalized the Financial Action Task Force’s anti-money laundering mandate. Through a series of black lists, the FATF has pressured most offshore jurisdictions to strengthen their legislation, paying special attention to those that allow the incorporation of large numbers of brass-plate banks and companies. Throughout this period, Hong Kong’s reputation for responsible government, solid regulation and commercial credibility has distinguished it as a model offshore centre. As a result, Hong Kong has never appeared on any FATF black list.

Hong Kong’s government is comprised of an appointed chief executive and cabinet, combined with an elected Legislative Council. The judiciary is independent and highly respected. Hong Kong boasts an excellent infrastructure, and the use of English is common – an important factor for conducting international business in the gateway to China’s massive market. Hong Kong consistently tops international lists of the world’s freest economies. Its commercial stature is further enhanced by its position as an exceptional and largely undiscovered offshore centre. Corporate profits can often be legally exempted from tax due to a relatively simple, source-based, low-tax regime.

Hong Kong offers the exceptional circumstance, possibly unique in the world, of a commercially advanced environment where taxes can be greatly minimized and, in many cases, completely eliminated. The tax system is very simple, with no capital gains tax, dividend withholding tax nor VAT. The profits tax rate is a flat 17.5 percent, and is based on the source of the transaction, not the domicile of the company. Transactions deemed to have an offshore source are not subject to profits tax at all.

In a nutshell, to be deemed an offshore transaction, the contract should be negotiated outside of Hong Kong and the services performed or goods manufactured somewhere else. If those conditions are met, the transaction will not be deemed to be taxable, even if it is booked and the funds received in Hong Kong. International transactions can thus be structured through a Hong Kong company such that they are tax-neutral – i.e., they generate no additional tax liability for the owners. The profits can then be remitted elsewhere, with no withholding tax.

Salaries are taxed on a progressive scale, with the maximum tax being 16 percent of gross income. Because of these low tax rates, few allowances or tax credits exist and the system is relatively simple.

Based on these factors, Hong Kong can be considered an excellent offshore centre. Since it is a low-tax, rather than a no-tax, jurisdiction, it has not become the target of "unfair tax competition" complaints by the European Union or the Organization for Economic Cooperation and Development. Nonetheless, business can be conducted in Hong Kong tax-free, and because it is such an active commercial hub, its companies and banks are held in high regard internationally.

This makes Hong Kong perfect for international traders buying from the region, exporters seeking new markets or those requiring sophisticated banking structures.

Hong Kong’s legal system has been unaffected by the return to Chinese rule in 1997. The system continues to be based on British common law, characterized by an independent judiciary and a strong legal profession. The lone change is that the Hong Kong Court of Final Appeal, consisting of a panel of local and overseas judges on rotation, has replaced the Privy Council of the UK as the court of last resort.

In the run-up to 1997, many business contracts provided for independent arbitration in a foreign locale. Confidence in Hong Kong’s legal system today can be measured by the fact that the local arbitration centre has developed into a highly popular venue for resolution of disputes in other jurisdictions, including Mainland China.

About 95 percent of Hong Kong’s population is Chinese, and many local Chinese who had left prior to 1997 have returned to take advantage of economic opportunities in China, now that the level of perceived political risk has subsided.

Hong Kong’s weak domestic economy in recent years has not affected the official criteria for foreigners to obtain work visas. Applicants still have to demonstrate either that a Hong Kong resident could not be hired for the job or that the applicant is contributing to the economy. With increases in the unemployment rate, however, fulfilling these conditions has become more difficult. The process of obtaining a work visa is tedious and can stretch over several months. Professional assistance increases the prospects for success and also helps in expediting the process.

Hong Kong is the financial capital of Asia outside of Japan. At the beginning of 2003, Hong Kong had 133 licenced banks, 46 restricted licence banks and 45 deposit-taking companies, as well as representative offices for 94 additional foreign banks. Interests from 37 countries beneficially owned these institutions, which included 73 of the world’s 100 largest banks. Together, they operated a comprehensive network of some 1,400 local branches.

Given the large number of participants, it is not surprising that the banking sector is highly competitive and possesses a broad range of expertise. Hong Kong’s roots as an international commercial centre have ensured that its banks are well versed in all aspects of trade finance. Project finance is also a major strength, as a result of the funding requirements for deals in China. Because the banking sector is so highly developed, it is often possible for companies to get credit on better terms than are normally available in many other countries.

Hong Kong also has an active insurance market. At the end of February 2003, Hong Kong was home to 193 authorized insurers, of which 128 were pure general insurers, 46 were pure long-term insurers and the remaining 19 were composite insurers.

Companies listed on the Hong Kong stock exchange must comply with legal, accounting and financial regulatory standards that are comparable to those of any major Western exchange. As a result, Hong Kong listed companies have a greater credibility than their listed counterparts on the mainland.

Hong Kong has only one kind of company. There are no exempt or non-resident corporations. A local company can be incorporated in about one week. It is possible for corporations to act as shareholders and directors of a Hong Kong company, with no residency requirements. Hong Kong companies do, however, require a registered office in Hong Kong and a company secretary that is a Hong Kong resident or company. Many service providers act as corporate nominee shareholders and directors, and company secretaries. Hong Kong companies are required to file an annual return that lists, among other things, the shareholders, directors, company secretary, authorized and issued share capital and location of the registered office. As this is a public record, the use of corporate nominees to hide beneficial ownership is not uncommon.

An active Hong Kong company is required to submit audited accounts to its shareholders and file those accounts with the Inland Revenue Department each year. A detailed Companies Ordinance governs how Hong Kong companies are managed and there are adequate safeguards for minority shareholders and creditors.

Because so much of China’s exports are routed through Hong Kong companies, it is common for overseas trading companies to set up direct import programs out of Hong Kong to book their business. A local company is established to book sales that likely have been generated elsewhere. The local company then buys goods from a Chinese manufacturer, for example. The goods are shipped directly from the factory to the end user and the profits generated in Hong Kong are deemed "offshore" and hence tax-free. Accumulated profits can then be remitted out tax-free.

As the local company’s beneficial ownership does not have to be disclosed to anyone – except, in many cases, its bankers, due to increasingly stringent "know-your-client" requirements – the overseas trading company setting up this structure can enjoy some measure of anonymity if it wishes.

Hong Kong is in a unique position in the offshore world: it is a thriving commercial hub with a great international reputation and one of the least explored, yet most beneficial, offshore centres. Hong Kong serves as an ideal corporate headquarters for business in Asia or other parts of the world.

Gross domestic product: US$163 billion (2002 figure)