Subsidiary vs Branch vs Representative Office in Hong Kong
So, you have decided to extend your business operations to Hong Kong! How do you go about it, and what are your options? There are essentially three options to consider. You can establish:
- a subsidiary company or a standalone entity, i.e. a limited company; or
- a branch office; or
- a representative office.
While there are significant overlaps between the three options, each has its own unique characteristics and requirements. Which option will work best for you will depend on a few factors.
Comparison: Subsidiary vs Branch vs Representative Office in Hong Kong
|Hong Kong Branch||Representative Office|
|Entity name||Own choice||Must be the same as the parent company||Must be the same as the parent company|
|Separate legal entity||Yes||No|
Liabilities extend to the parent company
Liabilities extend to the parent company
|Activities allowed||No restrictions||Must be the same as the parent company||Only marketing and liaison activities are allowed|
|Ownership||Can be 100% foreign or locally owned||An extension of the parent company only||An extension of the parent company only|
|Hong Kong officers||A local Hong Kong resident or company is required to be appointed as a company secretary||A local Hong Kong resident is required to be appointed as an authorized representative||A local Hong Kong resident is required to be appointed as a chief officer|
|Audit requirements||Mandatory||Depends on the audit requirements of the parent company||Depends on the audit requirements of the parent company|
|Hong Kong profits tax impact||Applicable for Hong Kong-sourced profits||Applicable for Hong Kong-sourced profits||Not applicable as it cannot conduct any profit-generating activities|
|Location of operations||Hong Kong and other countries||Hong Kong only||Hong Kong only|
Separate Legal Entity
A limited company will be a separate legal entity distinct from you and your holding company. As such, a limited company will afford you limited liability should things not work out as planned. It will, for the most part, be responsible for its own operations in terms of legal liability arising from such operations. Your liability will be limited to the amount that you invest in the shares of the company and the value of any loans and guarantees that you extend. In contrast, a branch office and a representative office are not distinct legal personalities. In law, they are treated as extensions of the head office. Accordingly, the head office will be fully responsible for your entire business operations in Hong Kong and any liability arising.
As a result of being a separate legal personality, a limited company can generally adopt any name it chooses provided that it is not already in use or trademarked. This can be useful from a marketing perspective where the name of the company can be used to localize your business and its products. In the case of both a branch office and a representative office, the name of the parent company must be followed exactly. Under no circumstances must they give an impression that they are distinct or separate from the head office.
Having a separate legal personality, a limited company will be free to set up any kind of business operations even if they do not have any connection or similarity to your existing business operations. Suppose you own and operate hotels in other jurisdictions or even in Hong Kong. In that case, nothing is stopping you from establishing an ice cream manufacturing business in Hong Kong using a limited company as a vehicle. In comparison, a branch office is only allowed to conduct the same business activities as those of the head office. A representative office is even more restricted as it can only conduct marketing and liaison activities. You can also use a limited company to set up business operations outside Hong Kong subject to the laws and regulations of the host country.
Hong Kong Profits Tax Impact
As a limited company is a distinct legal personality, it will be taxed in its own right. Any tax liability arising from income earned by the company from its Hong Kong operations will be its own liability. The liability will not flow up to you or your holding company. However, any income distributed by a limited company to you or your holding company may be taxable depending on your own tax residence and corresponding tax rules. As there is no obligation to pay out profits, an element of tax planning is also afforded. Due to the relatively low corporate tax rate (8.25% to 16.5%) in Hong Kong, it may be more tax-efficient to hold the excess funds in your Hong Kong company for reinvestment rather than distributing it to the parent company. Conversely, a branch office can be taxed as part of the head office. All income earned by a branch office will be deemed to be that of the head office. Accounts will have to be prepared at the branch office level for Hong Kong taxation purposes, and the income can be subject to tax in both Hong Kong and the head office jurisdiction. The branch office and the head office will, however, be able to rely on any relevant double taxation provisions. There is no tax consideration for a representative office as it is not allowed to conduct any income-generating activities.
Hong Kong Audit Requirements
A limited company will have to audit its accounts on an annual basis according to the Hong Kong Companies Ordinance while a branch office and a representative office are obliged to follow the practice of the head office.
Hong Kong Officers
While you will not be required to be personally present in Hong Kong to conduct your business activities, the three entities will have to make some provisions to have some of their respective officers present in Hong Kong. In the case of a limited company, you will need to have the presence of a Hong Kong resident or a Hong Kong company to act as company secretary and the company will need to have at least one director. In the case of a branch office, you will need to appoint an authorized representative who must be a Hong Kong resident. For a representative office, you will need to appoint a chief officer who must also be a Hong Kong resident.
Hong Kong Address
In addition to the personnel requirements, you are required to maintain an official address in Hong Kong for all the three entities. You will need to have a registered address in Hong Kong to receive communications from the government and other parties.
A limited company will also offer you much greater flexibility in funding and financing your business operations in Hong Kong. In issuing its shares to its owners, a limited company raises its own capital to finance its operations. Aside from issuing ordinary voting shares, a limited company in Hong Kong is able to issue non-voting shares, preference shares, convertible loan stock or any combination of them. With a limited company, you will also have the option of inviting local investors or business associates to invest in your business to spread the financing burden. You will need to keep in mind that stamp duty at the rate of 0.1% will be payable on any transfer of shares in a limited company by both the transferor and the transferee based on the higher of the value of the transaction and the underlying value of the shares. The operations of a branch or representative office have to be entirely funded by the head office as they are not able to issue shares or other financial instruments.
Aside from share capital financing, a limited company can also finance its operations by borrowing funds from its shareholders or financial institutions. A limited company can also issue loan notes to potential lenders and investors with or without convertible rights. All such debt taken on by a limited company will not be your liability or the liability of any holding company unless the debt is guaranteed by you or the holding company. Whilst it is possible to raise financing from local financial institutions for a branch office, all such financing will have to be taken in the name of the parent company which will bear all liability. The head office will also have to provide all the documentary requirements of the financial institutions.
In the case of a limited company, its powers, rights and obligations will be set out in its Articles of Association, a copy of which will need to be filed with the Registrar of Companies at the time of its incorporation. The Articles will also spell out the rights, obligations and duties of the company’s directors and shareholders. In the case of a branch office and a representative office, there is no such separate formal document and the rights, obligations and duties of personnel will usually be spelt out in the rules and regulations and other governance procedures set up by the head office.
Ongoing Filing Obligations
You will also have ongoing filing obligations in respect of all the three entities. For a limited company, you will need to file an annual return within 42 days of the date of registration each year. A branch office is also required to file an annual return annually and also a copy of the audited accounts of the parent company if the parent company is under a legal obligation to publish such accounts. A limited company is also required to file a return of allotment within one month of any shares being issued. A limited company and a branch office are also required to update all company and personnel information – usually within 15 days for a limited company and 1 month for a branch office of such changes happening. The filing requirements for a representative office are somewhat less stringent and are limited to any changes in the business address and the chief officer.
Cessation of Business
Should a day come when you decide to cease your business operation in Hong Kong for whatever reasons, this will be more easily achieved if you are operating through a representative office or a branch office. This usually involves making a few filings with the relevant department. In the case of a limited company, it will need to be wound up under the Hong Kong Companies Ordinance. Depending on the nature and extent of a limited company’s business operation, this can be a time-consuming affair.
In conclusion, a limited company will generally provide you with the greatest flexibility when you set up your business operations in Hong Kong. It is the most popular option in Hong Kong. A branch office can be a suitable option if your scope of operations in Hong Kong is going to be narrow. A representative office will only be of use if you do not intend to undertake any profit-generating activity. Contact us today to expand your business into Hong Kong and incorporate a Hong Kong company.
Winson Kwok is the co-founder of Corporate Hub. He has a background in entrepreneurship, economics, and business development. He has extensive experience in helping entrepreneurs develop their business and, at the same time, avoid common pitfalls. His personal goal is to bring significant values to entrepreneurs and startups around the world.