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The Hong Kong Companies Ordinance

The Hong Kong Companies Ordinance

By GIG

Yet another record year for Hong Kong in terms of registrations of new companies by both local entrepreneurs and international investors has been attributed in large part to an overhaul of the territory's company law, which went into effect last year. This feature provides an overview of the changes brought about by the new Hong Kong Companies Ordinance.

Introduction – Hong Kong's Attractions

Hong Kong is not an offshore centre in the traditional sense of the word but rather a territory which offers a non-discriminatory low tax regime governed by the "territorial principle" under which only income arising in or derived from Hong Kong is taxable in the jurisdiction, making it the ideal location for a holding company. As such its attraction lies not in the tight secrecy and minimal corporate disclosure and administrative requirements which characterize a number of offshore common-law island jurisdictions but rather in low tax rates, generous tax deductible allowances, a policy of only taxing income sourced from within the jurisdiction and the complete absence of capital gains taxes, withholding taxes, interest taxes, sales tax & VAT.

The establishment of an office in Hong Kong does not of itself render a company liable to profits tax where that office is not generating profits from within the territory. Indeed Hong Kong has been a favorite choice for regional headquarters, for this reason.

Evidently, the rapid opening up of mainland China and Hong Kong's special relationship with the mainland have increased the attractions of Hong Kong as a regional base from which to operate.

An Entrepreneurial Beehive

Although Hong Kong's economic growth figures have not reached the heights seen in the years preceding the financial crisis, company formation statistics nevertheless attest to the popularity of the territory among local and foreign investors.

According to the Hong Kong Companies Registry, the number of local companies registered under the Hong Kong Companies Ordinance surpassed 1.2m for the first time in 2014, after year-on-year growth of 9.4 percent.

In March 2014, there was a jump in new registrations to a record monthly high of 30,463, ahead of the expiry of a waiver on business registration fees on April 1, 2014. The fee for a one-year certificate normally totals HKD2,250 (USD290), made up of a HKD2,000 fee and a HKD250 levy, but this fee had been waived for two years.

A record number of companies – almost 39,000 – were incorporated online through the e-Registry, an increase of 8.23 percent. 811 foreign companies were newly registered last year, an increase of almost four percent on 2013 levels. The total number of registered non-Hong Kong companies reached more than 9,600 by the end of 2014.

"The new CO, which commenced operation on March 3 last year, provides a modernized legal framework for the incorporation and operation of companies in Hong Kong and reinforces Hong Kong's role as an international financial and commercial center," said the Registrar of Companies, Ada Chung.

During the year, the Companies Registry conducted a comprehensive publicity program to promote public awareness of the major changes brought about by the new Ordinance, such as the abolition of the par value of shares and removal of the mandatory requirement of having a common seal.

"We handled over 60,000 inquiries on the new Ordinance from January to August, 2014, and have organized or participated in over 70 briefings or seminars to promote the new law," Chung added. "The transition has been very smooth. The various initiatives introduced by the new CO further simplify the procedures for starting a business, as well as enhance corporate governance in Hong Kong."

International Investors

Hong Kong also remains as popular as ever among foreign investors, and Invest Hong Kong, the territory's inward investment agency, assisted a record number of businesses to establish operations in 2014.

InvestHK's Director-General of Investment Promotion, Simon Galpin, said: "2014 was another record year for InvestHK in terms of completed projects. Despite ongoing challenges in the global economy, Hong Kong continues to attract overseas and Mainland investors because of its enduring advantages and emerging business opportunities."

The Department assisted 355 overseas and Mainland companies to set up or expand in Hong Kong last year, a year-on-year increase of 5.4 percent. It hopes to increase this number to 370 this year.

Foreign direct investment came from a record 47 economies in 2014. Mainland China continued to lead with a total of 75 projects, followed by the United States (44), the United Kingdom (32), Japan (28), and France (25). For the first time, InvestHK also helped companies from Bangladesh, Cyprus, Kuwait, Poland, Romania, and Tajikistan.

The number of companies with a parent overseas or in the Mainland that set up regional headquarters, regional offices, and local offices reached a record 7,585 in 2014.

In addition, InvestHK set up a dedicated team to assist startups in 2014. During the year, the Department assisted 62 founders and entrepreneurs to start their businesses in Hong Kong, or 17.5 percent of its total number of projects. According to a recent survey by InvestHK, there are already more than 1,000 start-ups operating out of 35 co-work locations in Hong Kong.

"In the year ahead, we will continue to identify investors from key sectors and markets. Our targets include companies ranging from entrepreneur-led ventures to multinationals that plan to set up or expand in our city," Galpin added. He confirmed that InvestHK will continue to reach out to potential clients in priority markets, including Mainland China and Association of Southeast Asian Nations (ASEAN) economies, and the Department will focus in particular on businesses engaged in financial technology, e-commerce, and maritime services.

The New Companies Ordinance: Introduction

The new Companies Ordinance (CO) and its subsidiary legislation, which is intended to provide a modernized legal framework for the operation and incorporation of companies in Hong Kong, came into effect on March 3, 2014. This feature provides an introduction to the new law and outlines the major changes that will result from the reforms.

A Brief History of the Companies Ordinance

A comprehensive exercise to rewrite the CO was launched almost 10 years ago, in mid-2006. Following five rounds of public consultations and numerous discussions during a series of public forums and seminars over the years, the Companies Bill was finalized and introduced into the Legislative Council (LegCo) in January 2011. After 44 meetings lasting a total of over 120 hours and consideration of over 200 papers or submissions, the Bill was passed by LegCo on July 12, 2012.

Aims of the Companies Law

According to the Government of the Hong Kong Special Administrative Region of China, the new CO seeks to achieve four main objectives: enhancing corporate governance; facilitating business; ensuring better regulation; and modernizing the law. However, the overriding aim of the new law is to strengthening Hong Kong's status as an international commercial and financial centre.

Summary

The major initiatives within the new CO, which consists of 921 sections and 11 schedules, include measures to strengthen the accountability of directors and to clarify the directors' duty of care, skill and diligence with a view to providing clear guidance, while it also enhances shareholder engagement and protection in a company's decision-making process.

Public companies and the larger private companies (that do not qualify for simplified reporting) now need to prepare a more comprehensive directors' report, which includes an analytical and forward-looking "business review," although private companies are allowed to opt out by special resolution.

Auditors are empowered by the new CO to require a wider range of persons accountable for the company, or its subsidiary undertakings' accounting records, to provide information or explanation reasonably required for the performance of the auditor's duties.

Better regulation will be ensured by means of the accuracy of information on the public register, an improvement to the registration of charges scheme, and a strengthening of the enforcement regime through the Companies Registry. There will be easier reporting for small- and medium-sized enterprises, which will also be able to prepare simplified financial and directors' reports.

In addition, par value for shares is abolished and a mandatory system of no-par for all companies is instituted, with the objective of not inhibiting the raising of new capital or unnecessarily complicating a company's accounting regime. At the same time, the requirement for companies to have a memorandum of association is abolished, and only articles of association are required.

Conditions contained in the memorandum of existing companies are deemed to be provisions of their articles, except those relating to authorized share capital and par value, which are regarded as deleted under the new CO.

The power of companies to issue share warrants to bearers is revoked. It is considered that share warrants are undesirable from the perspective of anti-money laundering because of the lack of transparency in the recording of their ownership and the manner by which they are transferred.

To facilitate implementation of the new CO, 12 pieces of subsidiary legislation have been made to provide for the relevant technical and procedural matters. In parallel, the Companies Registry has enhanced its information system, carried out an overall review of its policies and procedures and specified new forms for the implementation of the new legislation.

Companies are reminded to comply with the requirements under the new CO, and use the appropriate new forms for the delivery of returns to the Registry.

 

 

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