This article is written by Michael Michelini, founder of GlobalfromAsia.com
I remember when I first moved to China in 2007 and I immediately wanted to register a Chinese company to “go direct”. I really had no idea what I was doing except for the limited blogs from incorporation services trying to push me to pay them their fees.
But the idea was, by registering a Mainland Chinese company, I would be on the “inside” of the game and be able to get special discounts and benefits. As I dug deeper, while in China, I realized most people were using Hong Kong companies for their trading.
Then it started to make sense to me, Alibaba and all the other supplier sites were loaded with Hong Kong flags – yet it is such a small area, how could that be?
I realized that many Chinese factories were using the benefits of Hong Kong for their own business, and by being in
Hong Kong alongside them, I could also reap those trading business benefits.
What are the benefits of using a Hong Kong company to purchase products from Chinese suppliers?
One of the big reasons to have a Hong Kong company is that your suppliers almost always have one too.
It essentially allows you to both be doing business in the same area. Hong Kong is an SAR – which stands for a special administrative region, which allows special economic differences from Mainland China.
We won’t get political today, but for business it means a different legal system, tax rate, and a different currency, with no currency controls like in Mainland China.
Which translates to mean: English (UK) influenced sound legal system, low taxes, and multiple currency accounts where you can hold your USD, HKD, EUR, and yes, even the restricted CNY (Chinese Yuan).
Also, by having a company in the Asia region, it gives you the ability to be the “exporter” of the goods, as well as the importer. You can tell your logistics company you have a Hong Kong company and want that to be the exporter of record instead of your supplier.
We all have heard of these sites like Import Genius that expose your suppliers to your competitor, but now you can have your competitor email you. Having a HK trading company turns you into an unofficial factory of sorts.
By having a company in HK, you are now the exporter to yourself, as well as to your wholesale suppliers. Stop sending invoices from a European or American company and saying you have a China factory.
Your customers will see you as a middleman, but having a HK company sending a quotation and an invoice, you are now a Chinese factory, protecting yourself from your large buyers going around you.
The list goes on and on about leveraging the power of Hong Kong for your import and export business, let’s make a short list.
By having a Hong Kong limited set up as your Asia headquarters and trading arm, you have more control of your Asia business. Let your home country be the sales and distribution company, and buy from yourself and have your big buyers getting quotes from your HK operations to show your global presence.
It is much easier and cheaper to setup than Mainland China, and at the same time gives you lower taxes and more flexibility (currencies, legal system), even able to grow into Southeast Asia and globally.
Say that I am based in the US or EU. Is it even legal to use a Hong Kong company as described above?
Many people new to international business are nervous they will get in trouble in their home country. What I tell people is – do you think Starbucks, IBM, and other conglomerates are afraid like you are?
We are all global from day one, and we need to leverage this to our advantage. By having a company setup outside of your home country you have international reach and more options.
But don’t do it to escape your home country and think you can hide it. Hong Kong is complying with other countries and sharing information – you should not hide this fact from your home country.
But the good thing about it is, you can “break out” of the system and potentially become a resident in Hong Kong or other countries outside of your home country. This requires you to be more of a “digital nomad” but more and more Amazon FBA power sellers are traveling the globe, leveraging a different residence than the one they were born in.
On top of that, you need to remember there are two levels of taxes as a business owner – you as an individual, and another as a company.
Even if you are the 100% shareholder, you need to declare and file your taxes at the company level separate from your personal.
Hong Kong corporate tax is at a much lower 16.5% corporate tax rate from most other countries in the world. What you do with that profit (dividend or salary) will the be taxed where you are a resident.
There is the saying, “with great power, comes great responsibility”. The same goes for a Hong Kong company. Stepping out of your home country will give you power, but you also need to be responsible and work with a tax adviser who understands your home country as well as the international side.
What do suppliers in mainland China think about importers using Hong Kong registered companies?
So many Chinese suppliers have a Hong Kong company. They are often surprised when their buyers have it too, as you can then pay them quickly with little or no fee.
Many times they don’t want to get paid in their Mainland Chinese bank for currency controls, taxes, and fees. Having a Hong Kong company will show your supplier you are a more advanced buyer that is in it for the long term.
What do I need to register the company, and how much does it cost?
Getting started with a Hong Kong company is fairly straightforward. You can be 100% foreign owned, no need for a local Hong Kong owner or director, but you will need a company secretary.
Plenty of service providers offer this on a yearly basis and the secretary has no power or ownership in your company, simply administrative help on the ground in Hong Kong.
You need your correspondence address (home country), Hong Kong address (service providers can help), passport, who the shareholders will be, and of course some company name ideas for the name search.
It will take one to two weeks from start to finish, and costs range on the service providers level of service you choose – from close to DIY to more full service assistance – $1,000 to $3,000 USD with various add ons such as the address, company secretary, government fees, and consulting sessions.
I heard that bank accounts can be really hard to open in Hong Kong these days. Do you have any tips to share with our readers?
Yes, since Q1 2016 banking has gotten much more challenging due to some people taking advantage of the very benefits I listed out above.
The key issue is some people used “fake” trading companies to actually cheat businesses and/or launder money. Now, the banks are under pressure to ensure these kinds of fake companies don’t slip through the cracks.
To improve your odds, have an active business with full proof of transactions buying from China, selling in your home country.
We normally advise the turnover to be 500,000 USD and above in the previous year to show the bank you will give them more business in the future.
Are there any alternatives to opening a bank account in Hong Kong?
As the banking crackdown has put a lot of pressure on the industry, yes many have opened banks in other jurisdictions.
Some have done so in Europe and others in the Caribbean, or Singapore. Really, the main point is if you are doing B2B trading, having the client wire the money to any country would work – but keeping it in Hong Kong will be required for Paypal and merchant accounts there.
How can your company help importers set up their business in Hong Kong?
My podcast and blog, GlobalFromAsia.com has a CPA firm equity partnership with a local firm, and we can provide these services to you and work closely with you along the way, check out all the services at GlobalFromAsia.com/products.
On top of that, we have grown our online blog into an offline conference, and meeting these experts and other business owners who have grown to this international level is extremely useful for you, it is called the Cross Border Summit, and it’s every year in April – check it out at www.globalfromasia.com/crossbordersummit.