Comparison of Subsidiary and Branch Office in Hong Kong
The subsidiary company (in the form of a company limited by shares) and Non-Hong Kong company (known as branch office) are the two most commonly used investment vehicles for foreign companies to establish and carry out business in Hong Kong.
A Non-Hong Kong company, also commonly known as branch office, is considered an extension of the foreign company and is not a separate legal entity of its own. This means that the foreign company is responsible for the liability of its non-Hong Kong company. Additionally, the foreign company can also be sued in Hong Kong in the case of any dispute.
A branch office is also subject to same compliance requirements applicable to a subsidiary, except that of auditing of financial statements. In accordance with the Companies Ordinance (Chapter 622 of Hong Kong laws), the annual financial statements of a branch is only required to be audited if the jurisdiction in which the foreign company is registered also requires that its financial statements be audited. On the other hand, all Hong Kong registered companies are required to have their annual financial statements audited.
A branch is generally not a tax resident and therefore making it ineligible for possible tax incentives that are available to companies incorporated in Hong Kong. A limited company wholly owned by a foreign company is a separate legal entity from its foreign parent company. A Hong Kong registered company will by default considered to be a tax resident in Hong Kong and therefore is eligible to enjoy tax benefits and incentives which otherwise not available to non-tax residents.
This article compares branch office and subsidiary company in Hong Kong in terms of asset protection, business activity, financial reporting and tax benefits. A table comparing a branch and a subsidiary in many other aspects is also attached.
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Separate Legal Identity and Asset Protection
A Hong Kong branch office (formally known as Non-Hong Kong company) is an extension of the foreign company and is not a separate legal entity of its own. This means that foreign company will be liability to and is responsible for the debts of its Hong Kong branch office. Also, a foreign company can be sued in Hong Kong in case where there is any dispute between its Hong Kong branch and its business partners. Hence the assets of the parent company will be not protected in this case.
A subsidiary company, which is in the form a company limited by shares, on the other hand, is an independent legal entity separate from the foreign company even if the foreign company holds 100% shares in it. This means that the foreign company does not have to bear the losses and liabilities of the Hong Kong subsidiary company. Effectively, the assets of both the subsidiary and the parent company are protected even if either company are sued.
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Organisational Structure
Since branch office is not a separate legal entity; therefore, it does not have the concepts of shareholder/member, director, company secretary and registered office as stipulated by the Companies Ordinance. That is, the foreign company is not required to appoint director and company secretary for its non-Hong Kong company. Also, in contrast to a local Hong Kong company, a branch office is not required to keep a significant controller register.
On the other hand, incorporation of a local Hong Kong company is required to have a minimum of one shareholder/member who must subscribe at least share of the company’s capital, one individual director, one company secretary who can be a corporation or individual, a designated representative and a street address as its registered office address to comply with the requirements of Companies Ordinance.
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Business Activities
Hong Kong branch office, being an extension of its parent foreign company, is only allowed to carry out activities defined in the constitution (articles of association) of that of its foreign company and cannot perform other activities in Hong Kong that are not aligned with the activities of the respective foreign company.
A subsidiary company can, however, be made to perform any activity, as long as these are defined clearly at the time of incorporation of the respective Hong Kong subsidiary company.
Both a branch office and subsidiary company, when they intend to carry out certain regulated business, they are required to apply and obtain licence and permit applicable to that intended business activities.
For example, when a branch or subsidiary company intend to provide asset management services to their clients in Hong Kong, they will need to obtain a type 9 licence from the Securities and Futures Commission according to the Securities and Futures Ordinance. And if they intend to provide travel services, they need to obtain a Travel Agent Licence under the Travel Agency Ordinance.
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Annual Financial Reports
The branch office of a foreign company, unless the laws of the jurisdiction in which its foreign head office is registered requires the annual financial statements of its foreign head office to be audited, is not required to arrange to have its annual financial statements audited, as per the Companies Ordinance.
Accordance with the Companies Ordinance, a subsidiary company, wholly owned by a foreign company and in the form of company limited by shares is required to appoint an accounting firm or a public accountant practising in Hong Kong as its auditor and arrange to have its annal financial statements audited by the auditor.
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Taxation
In terms of taxation, both a branch and a subsidiary company in Hong Kong are subject to the same tax liability and enjoys the same tax benefits, except the access to tax treaties.
Both a branch and a subsidiary in Hong Kong are subject to profits tax only and at the same two tiers of tax system at the rates of 8.25% and 16.5% respectively. A branch office is also eligible to whatever benefits of tax rebate or reduction or concession made available to a local company by the Hong Kong Government from time to time.
However, a branch is not accessible to the benefits of tax treaties between Hong Kong and other jurisdictions on the ground that a branch is not a Hong Kong tax resident or that the Hong Kong branch is not the ultimate beneficiary of the income stipulated by such a treaty.
In summary, a branch office is preferred by banks and insurance companies that want to use the brand name and finances of the parent company to secure licences and business contracts, while a subsidiary company is preferred by many foreign companies when establishing a business entity in Hong Kong due to its separate nature providing flexibility of business operations.
Comparison of Branch Office and Subsidiary in Hong Kong
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Types
|
Subsidiary Company
|
Branch Office
|
|
Entity Name
|
Need not be the
same as parent company
|
Must be the
same as the foreign head office
|
|
Allowed Activities
|
Can conduct all
business activities
|
Must be the same
as the foreign head office
|
|
Suitable For
|
For local or
foreign companies that wish to expand their operations in Hong Kong and/or
further expansion into the China and other Asian market
|
For foreign
companies that wish to expand their operations in Hong Kong
|
|
Disadvantages
|
Continuing compliance
obligations eg Financial Reports, Audit, AGMS, etc
|
Continuing compliance
obligations eg Financial Reports, etc
|
|
Ownership
|
Can be 100%
foreign or locally owned
|
Owned 100% by
the foreign head office
|
|
Separate Legal Entity
|
Yes
|
No
|
|
Cap on Number of Members
|
Yes, max 50
|
Not Applicable
|
|
Minimum Setting up Requirement
|
Minimum one shareholder that can be an individual
or a corporate entity (100% local or foreign shareholding allowed). Must have
at least one individual director
|
Must have one Hong
Kong Resident Agent/Representative
|
|
Limited Liability
|
Liabilities
limited to subsidiary
|
Liabilities
extend to the foreign head office
|
|
Need for Audited Accounts
|
Need to arrange
to its annual financial statements audited by a Hong Kong licenced accounting
firm.
|
Only need to be
audited if the financial statements of the foreign head office is also
required to be audited.
|
|
Filing of Accounts with CR/IRD
|
No/Yes
|
No/Yes
|
|
Tax Treatment
|
May be qualified
as Hong Kong resident entity and hence may be able to enjoy local corporate
tax benefits
|
Generally taxed
as non-resident entity, local tax benefits not available
|
|
Access to Tax Treaty
|
Generally, have
access to tax treaties
|
Generally, no access
to tax treaties
|
|
Tax Benefits
|
Eligible to be
taxed at the two-tier tax rates
|
Eligible to be
taxed at the two-tier tax rates
|
|
Bank Account
|
Can open bank
account in Hong Kong
|
Can open bank
account in Hong Kong
|
|
Validity Period
|
Perpetually
until deregistered
|
Perpetually
until deregistered
|
|
Staff Hiring
|
No restrictions
on hiring local or foreign staff
|
No restrictions
on hiring local or foreign staff
|
|
Appointment of Officers
|
Must appoint at
least one individual director and one company secretary
|
Must
appoint at least one local authorized agent.
|
|
Appointment of Designated Rep.
|
Must appoint a
local resident to act as the designated representative
|
No
|
|
Governing Body
|
CR
|
CR
|
|
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