For a lot of companies, access to Mainland China is essential. Many people travel to the main centres such as Shanghai, Beijing and its manufacturing areas in the (PRD) Pearl River Delta in a day, sourcing or visiting suppliers and strategic partners.
China despite its impressive economic growth over the past few years still has concerns for some companies. The bureaucratic process in general. Regulatory and transparency of a developing legal system, covering issues such as intellectual property rights protection, encourages them to look at alternatives. Hong Kong with its close proximity, established legal, accounting and regulatory systems is the obvious choice.
Hong Kong is seen by a lot of companies as the natural entry point to accessing the Mainland market. There is a vast amount of information and research available on possible markets. Also well qualified potential staff who have experience in dealing with China and can bridge the cultural and linguistic barrier. With China entering the WTO (World Trade Organisation) greater economic development is inevitable. Hong Kong has a long history with the mainland and now with the continued expansion of CEPA, (Closer Economic Partnership Arrangement) Hong Kong benefits from a growing number of free-trade tariffs and benefits.
Hong Kong taxes are low and simple. Salary tax is banded from 2%-17%, amongst the lowest in the world and is only collected on income earned in Hong Kong.
The Profits tax rate is 16.5 percent; all business expenses are tax deductable also various scales of depreciation that will impact on your already low tax bill. From a business point of view there isn't much you can't claim for unlike other countries. There is no capital gains tax or tax on dividends. Individuals are responsible for their own tax, based on an annual return that can be paid in two instalments. However, the first year individuals are assessed for the coming year, so be prepared for a larger than expected initial tax bill. The property tax is 16% again low by comparison against which there are allowances for repairs and maintenance. There is no GST or VAT (sales tax) so a great place to shop.
For some companies business model the idea of having a Hong Kong company with a representative office in China is an attractive possibility. The China Rep' Office can enter into contracts, for example, hire staff, sponsor overseas nationals for visas and rent office space. China tax is slightly below 30% for individuals.
However, since it is the Hong Kong company that does the business in China and NOT the representative office, it does not attract corporation/profits tax in China. Local tax is payable in China by the representative office based on its monthly expenses level. For details, the services of a local accountant from the area would need to be engaged.
The HK company, amongst other reporting requirements, has to prepare audited accounts and submit a tax return on an annual basis. Furthermore, if the business is performed outside of Hong Kong and the HK company is only a booking (legal) vehicle then it qualifies to apply to the tax department for an offshore profit claim whereby (if successful) the profits are exempted from HK profit tax. In simple terms, (legal) tax free income.