Establish a Branch vs. a Subsidiary in Hong Kong
Establish a Branch vs. a Subsidiary in Hong KongUpdated on Monday 22nd June 2020
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Foreign business owners who want to set up a business in Hong Kong can choose to establish a branch or a subsidiary. Each of these two business forms has its own advantages and disadvantages. Our lawyers in Hong Kong can help you decide which business form suits your needs and open a subsidiary or a branch in Hong Kong.
The key difference between a branch and a subsidiary is the liability of the foreign company abroad. While the subsidiary is separate from the parent company, the branch is fully dependent. Another option suitable for foreign companies in Hong Kong is a representative office.
Main differences between branches and subsidiaries in Hong Kong
The branch and the subsidiary are two very distinct manners in which a foreign company can expand its operations on the Hong Kong market. The table below highlights these primary differences, so that investors may find it easier to weight in the advantages of each form of doing business.
The branch is not an independent and separate legal entity; in fact, it depends on the parent company abroad, which will be liable for the debts and obligations incurred by the Hong Kong branch.
The subsidiary is a separate and fully independent legal structure incorporated as per the local company formation laws in Hong Kong; it is a Hong Kong resident company.
Ease of incorporation
In terms of incorporation duration and easiness, the branch is generally easier to set up. However, foreign investors will still need to handle the basic steps of opening a bank account and submitting an application for registration with the Companies Registry.
The subsidiary is incorporated just like any other private limited liability company for example. The founders must open a bank account, draw up the Articles of Association, register the company and handle all of the subsequent steps.
The branch is subject to the same corporate income tax rate in Hong Kong; however, the provisions of the double tax treaties will state the manner in which the tax is levied in Hong Kong and in the foreign company’s country of residence.
The subsidiary is taxed as a resident company in Hong Kong. The city is a low-tax jurisdiction where the corporate income tax is 16.5%.
The branch will generally have lighter accounting and reporting requirements, compared to the subsidiary.
The subsidiary will follow the guidelines for the annual submission of its financial statements.
This table summarizes the main points that are relevant to how a business conducts its activities in Hong Kong. We encourage investors in Hong Kong to examine the traits of both the branch and the subsidiary as closely as possible before making a decision, as this choice will influence the manner in which they will set up their presence in this key Asian hub for doing business.
Choosing between the two available business forms can depend on a number of factors, such as the actual business activities of the company willing to enter the Hong Kong market. In addition to this, a business plan for the Hong Kong market should also be taken into consideration, meaning that the foreign company should weigh in its long-term interest in doing business in Hong Kong. For this purpose, the subsidiary may be more suitable as it allows the foreign company to set up an independent base in the Special Administrative Region.
If you need to further explore your options, and weigh in certain other factors such as the risk profile of the business on the Hong Kong market and other issues, please feel free to reach out to the team of experts at our law firm in HK.
Below, our team of lawyers offers a definition and a more complex description of both the branch and the subsidiary.
Branches in Hong Kong
A branch is an extension of the parent company, this means that its name must be the same as that of the parent company and must conduct the same business activities. It is not a separate legal entity but it also has to be registered at the Company Registry.
The parent company must appoint a representative agent for the branch in Hong Kong. This type of company will have to observe the taxation rules and annual filing rules. Although the parent company is liable for any debts of the branch that may arise in Hong Kong, the branch also has certain advantages, among which:
- tax advantages;
- no lengthy company liquidation process;
- lower maintenance costs;
- lower set up costs.
Our Hong Kong lawyers can tell you more about the taxation for non-resident entities that applies to branches in Hong Kong.
Subsidiaries in Hong Kong
A subsidiary, unlike the branch, is a separate legal entity that needs to be incorporated just as any other Hong Kong company. It can be 100% foreign owned and its name does not have to be the same as the parent company’s. Also, the subsidiary can perform any business activities. This type of company will be taxed as a Hong Kong resident company.
The subsidiary must have at least one director and one shareholder and it is also necessary to open a bank account for the company. Some of the most important advantages of a subsidiary in Hong Kong are:
- no liability for the parent company;
- the subsidiary can have more credibility because it is a resident company;
- its accounts do not need to be filed on public record;
- the parent company will only provide subsidiary-related information to the Registrar and keep it up to date.
Find out more about the characteristics of the branch and subsidiary from this video:
Company formation in Hong Kong
Hong Kong is known to be a business hub that offers a number of important advantages, one of them being the fact that foreign investors have the same rights to open a business and they can do so in a very straightforward manner. Below, our team of lawyers in Hong Kong presents the main steps needed to open a company in Hong Kong. Please note that these steps apply to those who are interested in opening a resident company, a subsidiary. We are able to provide detailed steps for branch formation upon request.
- Choose the business form: there are two types of corporations in Hong Kong, the private and the public limited company, one suited to small or medium businesses and the other suited for large businesses; choosing one of these forms is the first essential step;
- Choose the company name: it is a mandatory requirement for the business to have a unique name; a free of charge company name search can be performed with the Companies Registry;
- Prepare the documents: the resident company (the subsidiary) will need to have its Articles of Association drawn up in accordance with the Companies Ordinance; one of our attorneys in Hong Kong can help during this step;
- Register: the new resident company is formally registered with the Companies Registry, after which it receives its Business Registration Certificate and Number.
Please keep in mind that these steps are only briefly outlined here. Depending on the business field in which it will activate, the resident company may also need to apply for additional special permits and licenses.
Subsidiary and branch taxation in Hong Kong
Hong Kong companies are taxed on the basis of their residence, meaning that resident companies, will be taxed on their worldwide income while non-residents only on their Hong Kong-source income. For this purpose, resident companies are the ones that are either incorporated in Hong Kong or are incorporated outside of the Administrative Region and are managed and controlled here.
Regardless of their status, companies are subject to a two-tier profits tax, along with other taxes:
- 8.25% on the first 2 million HKD of assessable profits (and a lower tax of 7.5% for unincorporated businesses);
- 16.5% on the remaining assessable assets (with a reduced rate of 15% for unincorporated businesses);
- 0% capital gains tax;
- 5% of the employee’s relevant income payable to the mandatory provident fund scheme.
There are certain conditions applicable to the low rate, for example, when a company is one of the partners who form a partnership, the concessionary rate of 8.5% will apply to only the 2 million HKD of assessable assets, distributed according to its share in the partnership. One of our lawyers in Hong Kong can provide more details.
Hong Kong has signed more than 40 double taxation agreements that allow individuals and companies to avoid the international (double) taxation of their income and property.
The filing requirements differ for branches, compared to subsidiaries sin Hong Kong. For a registered non-Hong Kong company, the requirement is to file the annual return (within 42 days of the date of registration each year), along with the certified copy of the most recent published accounts (for a 12 month period). For a locally registered limited company, the filing requirements also include the annual return along with the return of allotment (within one month after the allotment of shares). Our team of attorneys in Hong Kong can provide you with more details on how the annual return differs for private and public companies.
Branches and subsidiaries in Hong Kong need to report any changes in the company's particulars, such as the change of the registered address, the change of company secretary or company director as well as any other relevant changes.
Our Hong Kong law firm offers special legal services for companies and individuals. If you want to expand your business activities in Hong Kong and need help in choosing the right legal entity, you can contact our Hong Kong lawyers.