Doing Business in China & Hong Kong

Overview China Business Services About China China Market Entry About Hong Kong Taxation Hong Kong Market Entry


Hong Kong is a relatively small place, 1,098 square kilometres. Its economy really is open. No import duties. Companies registered in Hong Kong are treated equally regardless of origins. No tax preferences are given. No industries are sheltered.

In fact, the 2004 Index of Economic Freedom survey, issued by the Heritage Foundation, recently sited Hong Kong as the world's most liberal economy for the tenth year running. Hong Kong is again ranked the 1st place in the 2007 Index of Economic Freedom Survey.

When you come to Hong Kong you know exactly what you are getting  low taxes which are precisely the same as every other company in Hong Kong, a business friendly environment, modern infrastructure, and tremendous opportunity.

Hong Kong is taxed on income sourced within Hong Kong with a standard rate of 16%. Earnings outside Hong Kong and capital gains are not taxed. Profits tax is 17.5% and there is unlimited carry over of losses.

Hong Kong has a remarkable business environment but will it last? And what does it offer to international business?

Yes it will last, and for the following reasons:

  • The guarantees in the Hong Kong constitution
  • The deeply engrained, competitive business orientation of the Hong Kong people

The guarantees in the Hong Kong constitution reflect decisions taken in the late 1970s and early 1980s when the Chinese leadership made a very conscious decision to provide for the concept of "one country, two systems". The constitution guarantees the essential features of the Hong Kong way of life and Hong Kong as a business centre. In particular:

  • The rule of law and an impartial judiciary
  • The open market, with no import duties
  • The low, simple tax regime (no taxes are paid to Mainland China)
  • The freely convertible currency
  • The free flow of information

So the business friendly environment was written into the constitution. It is something which Hong Kong people believe in passionately. They know that this commitment to market forces is what has taken Hong Kong from a war-shattered economy in 1945 to a thriving community of 7 million people today, with per capita GDP higher than Great Britain's.

Because Hong Kong is an open market the Asian financial crisis hit Hong Kong quite badly. International investors avoided Asia. Money was withdrawn. Hong Kong's completely open financial markets meant a steady exodus of capital, driving up interest rates and driving down stock and property prices by over fifty per cent in some cases. This forced the Hong Kong government and Hong Kong businesses to examine their competitiveness critically and to liberalise and reform the banking, telecommunications and other sectors.

Hong Kong's stock market is the second largest in Asia after Japan and is considerably more liquid, and more familiar to investors than most others in Asia. The banking sector, the ninth largest in the world by some measures, is also among the best regulated. It is well known for high levels of corporate governance, risk management and high capital adequacy ratios. These factors make Hong Kong an ideal place for foreign capital to meet the fund-raising requirements of China's enterprises.

Hong Kong also has "first mover advantage" on the Mainland. Hong Kong entrepreneurs have been developing business contacts on the Mainland since China began its open door policy in 1978.

Now China has entered the WTO, many multi-national corporations may choose to move directly into the Mainland market. Some are already well established there. They have the staff and other resources to attempt such an approach. But for every large multi-national there are hundreds of small to medium sized enterprises without such resources. They are starting to size up the potential of what could become the world's single largest consumer market.

Many opportunities in the Mainland's domestic market will come not only from the prosperous coastal regions and big cities like Beijing and Shanghai, but from the developing inner and western provinces where Hong Kong businesses already have an established foothold.

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Following the signing of the main parts of the Closer Economic Partnership Arrangement (CEPA), Hong Kong and the Mainland signed the Arrangement on 29th September 2003. Starting from 1st January 2004, the Arrangement is to ensure Hong Kong is "economically interlocked" with the Mainland and that smaller Hong Kong companies will benefit from the opening-up and liberalisation on the Mainland beyond China's commitments in its WTO accession. CEPA is now coming to the fourth phrase, called CEPA IV, to be enforced on 1 January, 2008. After implementation of 4 phrases, CEPA provides tariff-free access for 100% products of Hong Kong origin (except prohibited articles) imported into the Mainland upon applications by local manufacturers and upon the CEPA rules of origin being agreed and met. On trade in services, the Mainland has agreed to provide preferential treatment to Hong Kong service suppliers in a number of service areas by taking various forms, including relaxation in equity share restrictions, reduction in the entry thresholds such as registered capital and business turnover, as well as relaxation in restrictions over geographical location and business scope. Looking further ahead, CEPA will be an open and developing platform; Hong Kong will continue to engage the mainland authorities on further liberalisation of trade in goods and services in the future.

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