Pedro Pinto October 24, 2020 1:58 pm

Mainland China company formation vs. Hong Kong company formation

Thinking of starting or expanding your company to China?

If you’re like most entrepreneurs, you’ll be debating whether to open a Hong Kong company or a Mainland Chinese company to do so.

They’re both popular options for entrepreneurs preparing to enter the Chinese market. However, these jurisdictions have completely different legal systems and ways of conducting business. Having a Hong Kong company doesn’t mean that you can operate in the same way as a Mainland Chinese company, and vice versa. So, which option makes the most sense for your business?

Let’s compare company formation in Mainland China vs. company formation in Hong Kong to see which option makes the most sense for your business.

Company formation in Mainland China

Below, we explain about the company structures that foreigners can choose in Mainland China. You’ll also learn about the benefits, disadvantages, costs, and how long it takes.

What company types exist in Mainland China?

There are three company structures available to foreign investors when incorporating in Mainland China:

  • Wholly-Foreign Owned Enterprise (WFOE)
  • Joint Venture (JV)
  • Representative Office (RO)

To note, there are other company structures available in Mainland China as well (like State-Owned Enterprises and Individually-owned companies) but these are only for domestic companies.

1. Wholly-Owned Foreign Enterprise (WFOE)

Wholly-Owned Foreign Enterprise (WFOE) is the most popular company structure among foreign investors. As you can tell by the name, WFOEs are solely owned by non-Chinese investors. This means you don’t need to partner with a local Mainland Chinese company to set up the WFOE (which is required for most of the other company structures, like Joint Ventures (JV)), or hire a Mainland Chinese director. In fact, most WFOEs are typically owned by a foreign parent company.

Benefits of setting up a WFOE include:

  • In general, WFOEs offer foreign businesses more opportunities since the activities are not as restricted as other structures, and you can compete with domestic businesses on a level playing field
  • Unlike the representative office structure, you can directly sell to Chinese consumers and grow a profit-making business
  • Profits can be remitted outside of Mainland China back to the parent company

For more in-depth information about WFOEs, check our separate article that explains everything you need to know about running a WFOE in China.

2. Joint Venture (JV)

The second-most popular option for foreign investors is to start a Joint Venture (JV). The main difference between a WFOE and a JV is that the latter one is owned and controlled by both Chinese and foreign partners.

Benefits of setting up a joint venture include:

  • It can be beneficial to collaborate with a local Chinese partner as they can have a long experience of doing business in Mainland China and leverage their network.
  • Your Chinese partner can manage most parts of the applications and registration of the JV, as they understand the system and the language fluently.
  • The Chinese government only accepts JVs and Chinese entities for specific sectors that are listed in the Negative List. Foreign investors sometimes only have JV as an option when incorporating in Mainland China.

One of the major drawbacks of opening a JV, however, is that it can take a long time to find the right Chinese partner if you don’t already have one in mind. Also, some entrepreneurs don’t want to share their intellectual property or want to maintain full ownership of their business.

3. Representative Office (RO)

Representative offices, referred to as rep offices, are also fairly common. They’re opened in very specific cases, as they offer a limited scope to run only a few non-profit generating activities, such as managing quality controls, market research, advertising, and conducting business meetings.

It can be beneficial to set up a representative office to learn more about the market and to expand your network. But you cannot sign business contracts, import equipment, invoice local companies, or warehouse products. If you’re trying to grow a business and profit from it in Mainland China, this won’t be the structure for you.

What are the benefits of opening in Mainland China vs. Hong Kong?

A huge advantage of opening a Mainland Chinese company comes down to having access to the business ecosystem there – if you’re in the right industry.

If your business is in the high-tech industry (including artificial intelligence, information and communications technology (ICT), semiconductor technologies, etc.) Mainland China is the second leading investor worldwide when it comes to R&D, after the United States.

This translates into ample funding opportunities and government support, sandboxes and incubators, as well as a strong ecosystem of science/business parks, startup communities, VCs and more.

So, if you’re in the high-tech field, opening a company in Mainland China can place you in one of the fastest-growing ecosystems for advancing your business.

How much does it cost to open a company in Mainland China?

First of all, it depends on the company structure and in which industry you operate. If you need to apply for licences (which you will if you are importing and exporting), additional costs will be added.

While fees can vary, in general, you should be prepared to pay at least USD 2,200 – 8,000 to open a WFOE. This will be according to your industry. For manufacturing WFOEs, a government fee of USD 3,000 can be added.

The service fee to register a joint venture is similar, costing around USD 6,000 – 7,000 for the first year, along with other government fees.

How long does it take to open a company in Mainland China?

It takes around 2 to 4 months to open a WFOE and depending on the service provider. For a joint venture, once you have a partner chosen, you’ll usually need 4 to 6 months to open a JV, according to your industry, your company, and the service provider.

Company formation in Hong Kong

Hong Kong is well known for its ease of doing business, ranked third in the world in fact by World Bank. Here’s how it compares to company formation in Mainland China.

What company types exist in Hong Kong?

In contrast to Mainland China, in Hong Kong there are no restrictions when it comes to the types of business structure foreigners can incorporate. Hong Kong doesn’t have any rules on foreign ownership, meaning you aren’t limited to just a few business structures if you’re not a Hong Kong resident.

Common business structures include:

  • Sole Proprietorships
  • Partnership
  • Limited Liability Company (Limited by Guarantee or by Shares)

Sole Proprietorship

Sole proprietorships are one-person companies where there’s no separation between the company and the owner. This is the business structure of choice for freelance consultants, tutors, or businesses run from home. In general you’d choose a sole proprietor structure if you’re not planning to expand your business in terms of team size or location.

Partnership

Partnerships are similar to sole proprietorships but they are owned by two or more people. The most common form of partnerships are limited partnerships. Some entrepreneurs may choose a partnership structure in the early stages of a business, as it’s much simpler to set up and maintain. You don’t need to audit or publish accounts or to register the Partnership Agreement. Other than income tax, no other returns are required.

Limited Liability Company (LLC)

LLC is the standard company type for most businesses. If you’re looking to grow beyond a one or two-person team, incorporating into a limited liability company will, in addition to protecting your assets, give your brand more credibility and professionalism, as well as make your company more attractive to partners and investors.

What are the benefits of opening a company in Hong Kong?

You don’t need to visit Hong Kong to set up the company. If you choose to incorporate in Hong Kong, you won’t need to spend the time or money to visit (if you don’t already live there). Only a few countries and cities allow this.

Setting up a Hong Kong company is quick and inexpensive. Incorporation doesn’t usually take longer than a week, and can be done entirely online. Incorporation fees are comparatively low, something that we explain more about in the next section.

Hong Kong has one of the best tax systems for business. Many foreign investors set up companies in Hong Kong thanks to the low taxes. The profits tax is merely 8.25% for the first HKD 2 million of assessable profits. Profits above HKD 2 million are taxed at a rate of 16.5%. Besides, you don’t need to pay tax for profits made outside of Hong Kong. (However, you’ll want to consult a professional accountant, as there may be different circumstances for different businesses.)

Operating a WFOE in China from a Hong Kong company. In terms of entering the Chinese market, one of the benefits of incorporating in Hong Kong is that you can run your WFOE through your Hong Kong company.

By using your Hong Kong company as the parent company of the WFOE, you benefit from:

  • Tax savings. As mentioned, the profit tax is 8.25% up to HKD 2 million and 16% after that, compared to China’s 25%.  Hong Kong also gets a preferential rate when it comes to withholding taxes if you remit money there – just 5%, as opposed to the 10% placed on any other jurisdiction.
  • A quicker set up time. When you set up a WFOE, the Chinese authorities require the parent company’s documents. These must be legalised, and the process to do so is costly and long, taking about a month at least. However, documents for Hong Kong companies undergo notarisation, which takes only a week or two, and are acceptable to the Chinese authorities. It’s much more cost-effective, straightforward, and also has the benefit of being done in both English and Chinese.
  • An efficient and transparent way of doing business. Hong Kong has been ranked as one of the best places to do business in the world, several times.
  • Removed fees for local transactions. Many Mainland Chinese suppliers have accounts in Hong Kong and manage transactions in USD. As such, you can often avoid paying local transaction fees between the accounts if you have a Hong Kong business bank account.

How much does it cost to open a company in Hong Kong?

If you plan to incorporate in Hong Kong, depending on the service provider, fees can range from approximately 300-1000 USD, and will rarely go over 1000 USD. This is far less expensive than most jurisdictions, including China.

If you incorporate independently, the fees are roughly as follows:

  • The company registration documents and company kit (seal, stamp and so on): ~USD 263
  • Company registration: ~ USD 220 (government fee)
  • The Business Registration Certificate: ~ USD 32 (government fee)
  • Provision for the company secretary: ~ USD 445
  • Provision for the registered office address: ~ USD 255
  • E-registration service fee: Around ~ USD 38 per officer (applies for e-registrations)
  • Bank account opening service fee: ~ USD 123

Neat also offers an incorporation package that includes a business account opening. See more about incorporating with Neat here.

How long does it take to open a company in Hong Kong?

In general, it won’t take longer than a week. According to the Hong Kong government, online applications are normally processed within one hour. On the other hand hard copy applications will take around four days. This is a huge contrast to opening a company in China, which takes at least a month.

Having said that, while the incorporation process in Hong Kong is very quick, most entrepreneurs still prefer to enlist the help of a corporate service provider to help manage all the different documentation, regulations, and steps required.

Should I open in Mainland China or Hong Kong?

In general, we would recommend you to open a Mainland Chinese company if your operations and scope of business are all focussed on Mainland China. For example:

  • Your customer base is primarily in Mainland China.
  • If you plan to hire Mainland Chinese employees locally, set up local manufacturing operations, or have Mainland Chinese investors.
  • You operate in a sensitive sector as stipulated in the Negative List (where starting a JV is your only option).
  • Or if you run a high-tech startup or business and want benefit from Mainland China’s rich tech ecosystem

On the other hand, a Hong Kong company would make more sense for your business if you plan to operate a more global business. For example:

  • You have customers all over the world (or plan to grow a global customer base)
  • You engage in cross-border trade (e.g. eCommerce) and regularly transact with businesses in various jurisdictions globally
  • Your main business language is English
  • You want to get get started and set up quickly

In general, for the most part, entrepreneurs do tend to gravitate towards opening a Hong Kong company. This is because of the ease of doing business and familiar business practices.

If you’d like to incorporate a Hong Kong company and set up a Neat account in one step, see Neat’s incorporation package here!

Related Content