Doing Business Internationally: Hong Kong

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Christy: Hello, everyone, and welcome to today's webinar, "Doing Business Internationally: Hong Kong." My name is Christy DeMaio Ziegler, and I will be your moderator. Please join me in welcoming our host Helena Ledic, an associate general counsel for CSC in the Chicago office. Helena.

Helena: Thank you so much, Christy, and thank you to the audience for joining us about doing business internationally with our Hong Kong presentation today, our Hong Kong webinar. And I am delighted to be joined by our two speakers, our experts in Hong Kong. We have Donald Tsang, the Head of Corporate Legal Solutions in Hong Kong, and Fang Ling Khor. Ling is the Head of Fund Services Asia-Pacific for CSC.

Donald: Hello, everyone. Thank you for having me. A pleasure to be here and looking forward to our discussion about doing business in Hong Kong.

Ling: Great to be here. Thanks for having me as well and allowing us to share our Hong Kong story today.

Helena: Before we get into our presentation, let me just walk you through our agenda. First we'll learn a little bit about CSC. We'll talk a little bit about why Hong Kong. Then we'll go into entry options for foreign investors in Hong Kong. Ling will cover funds in Hong Kong, and then, of course, we'll discuss how CSC can help you.

For more than 120 years CSC has been the partner of choice for companies around the globe, trusted to handle everything from incorporating a company through maintaining compliance to corporate transaction work, protecting digital assets from the threats of the online world, and everything in between. We offer the solutions and technology that keep businesses running in the background, allowing clients to focus on the important work of growing their business.

CSC has offices and capabilities in more than 140 jurisdictions across Europe, the Americas, Asia-Pacific, and the Middle East. We have an office in Hong Kong and several in mainland China. We're a global company capable of doing business wherever our clients are, and we accomplish that by employing local experts, such as Ling and Donald, in every business we serve.

With less than 8 million residents, Hong Kong has the 35th largest economy in the world. The smallest U.S. state, Rhode Island is nearly three times the size of Hong Kong.

Hong Kong is a knowledge-based economy focused on financial services, international trade and tourism, and it is characterized by low taxation, minimal government market intervention, and an established international financial market. In fact, the services sector accounts for 93% of Hong Kong's economy.

Hong Kong is ranked at fourth on the Global Financial Centers Index. In 2021, it was the ninth largest exporter, the eighth largest importer, and the Hong Kong dollar was the eighth most traded currency in the world. It has the highest number or I'm sorry the second highest number of corporate headquarters in the APAC region. Hong Kong is the gateway for foreign investment in mainland China through the Shanghai and Shenzhen Stock Exchanges. And its judicial system is based on English common law.

So let's dig into Hong Kong right now. So Donald, why don't you tell us some major benefits to setting up business in Hong Kong?

Donald: Sure, Helena. So Hong Kong is one of the major international financial centers and hubs in the world. We have a complete and well-established ecosystem here. So 75% of the top 100 banks in the world have branches in Hong Kong. Our stock exchange is number one in IPO fundraisings in 7 of the last 12, 13 years. Our bond market is number one for Asian bond issuance in the last six years. We have the largest offshore renminbi pool in the world, and we are among the top two fund management hubs and private wealth management hubs for high net worth individuals in Asia.

So we have the full package to support businesses who need financing for doing business in this part of the world, not to mention we have hundreds of international and local professionals, like lawyers, accountants, and professional service providers to support deals and transactions. So this is the full circle and full ecosystem. We can support businesses to do business here. This is also why we see asset managers, especially private equity funds and real estate funds managers continue to expand and set up their platform in Hong Kong for their investment in this part of the world.

Also Hong Kong is the gateway of doing business in China. We always say that we have the proximity to mainland China, and it makes Hong Kong as a logical option for overseas businesses to land as the first station before entering into the Chinese market, to test their products or concept, to look for capital, or to set up their intermediate company here for their further investment into China to leverage the several advantages of Hong Kong can offer from a financial infrastructure perspective as I mentioned before.

Interestingly, the same actually also applies for investment going abroad from China as they will use Hong Kong as their vehicle to set up companies here for their investment overseas. In fact, two-thirds of the inbound FDI, foreign direct investment into China and also outbound direct investment from China come through or come from Hong Kong.

This has been the story for Hong Kong for decades, and as a trend we only see this trend will continue and certainly with the recent initiatives like Greater Bay Area, which is comprised of nine municipalities in the Guangdong Province, including Guangzhou and Shenzhen, plus Hong Kong and Macau. This initiative, in simple terms, is to enable capital patterns and knowledge in this region to be more convenient to flow to each other more than ever while continuing to maintain the legal, tax, and social system between mainland and the Hong Kong and Macau's Special Administration Region. We have seen growing numbers of companies tapping into the opportunities of the GBA and access to the market, which consists of a population of 72 million and GDP of USD 1.7 trillion.

So we touched on the talent several times in these conversations, and talent really makes Hong Kong stand out in the benefit for using Hong Kong for business across APAC. We are a home of multicultural and diverse talent pool. Our homegrown professionals are bilingual in English and Cantonese. The majority of us also speak Mandarin, the official dialect of China. Combining with our heritage of melting pots of different cultures and entry ports of international businesses, this nurtures our talents with an interesting combination of deep understanding of international perspectives as well as our roots in the Chinese culture.

This is also why over a thousand multinationals pick Hong Kong as the regional headquarters for Asia. We continue to see businesses setting their APAC hub in Hong Kong to leverage the multicultural qualities in doing business for this region, and this is also why we have seen government to launch the Top Talent Pass Scheme recently to continue to attract more top talents to come to Hong Kong to keep us in the leading position in this global talent competition.

Helena: So Donald, can you tell us a little bit about the recent trends that you're seeing for business and investments coming into Hong Kong? What are those entry options for foreign investors?

Donald: Sure, Helena. So a limited company is the most common entity choice for a company to set up. This is the most commonly used entity for a private company as a limited liability company. Each company will have at least one director, and it must be an individual, a natural person, and each company has to have a company secretary for the statutory filings role. You don't need a physical office to set up a company, but you do need a registered office address for the registration purpose. In fact, we have 1.4 million live companies as we speak today, and this number keeps growing.

Another common choice is foreign branch for companies who don't need to set up a legal entity in Hong Kong. You can register a non-Hong Kong company with the Companies Registry. However, this is not a separate legal entity, and it's only an extension of the parent company.

Another option is partnership for specific businesses like law firms and accountants. However, we also see the trend of limited partnership funds, which is a new scheme introduced by the Hong Kong government to attract funds to set up in Hong Kong. And for limited partnership funds, I understand that Ling link will speak more about this later on in these sections.

Helena: Now that Donald has taken us through the different types of corporate structures, Donald, why don't you tell us a little bit more about doing business in Hong Kong? What are the things that we need to know?

Donald: Sure. So Hong Kong is known for its very tax friendly and simple tax system. In Hong Kong, we only have direct taxes, like profits tax and salary tax on people's income. We don't have any indirect tax, like VAT or capital gains tax. We have 45 tax treaties with different jurisdictions, and a lot of goods entering into Hong Kong will have no import tax or tariffs.

For hiring people, we have a rather straightforward Social Security system, what we call the Mandatory Provident Fund (MPF), which is a 5% contribution from the employee and the employer salary. For foreign employees coming to Hong Kong do need a work visa. And we have a special scheme for entrepreneurs coming from overseas to apply. We have a minim wage. As of 2020, the minim wage is HKD 37.50 per hour, and it's going to rise in the years to come. And employers must comply with the Hong Kong labor law to ensure the safety and health of employees at work. And we have the specific insurance for companies to acquire as part of the mandatory requirements.

In Hong Kong, we are proud of having our common law system remain and retained under the Basic Law, our constitutional framework for the Special Administration Regions, which is adhered to the rule of law and independence of the judiciary court.

Enforcement of contracts in Hong Kong is efficient and cost effective, and we do have alternative ways of dispute resolutions, such as arbitration, which is available and a popular option for businesses in Hong Kong.

Helena: And Donald, why don't you tell us a little bit about the effects of the pandemic in Hong Kong? How has it changed the way things are done in Hong Kong?

Donald: Yeah, sure. So if there is a silver lining in this pandemic, right, so it would be the opportunity for us to rethink and reset how we do business, and Hong Kong is not so dissimilar in this sense. So what we see is post-pandemic we see more and more business to adopt a regional approach and using Hong Kong as a hub for their Asian operations. We have been supporting a lot of clients to regionalize their finance and accounting and payroll functions. We predict this as an experience that we learned during the pandemic, that with the support of the right technologies and skill sets to coordinate multiple stakeholders' requirements and priorities at the same time, it is possible to organize certain functions regionally as opposed to locally.

On the other hand, the others we also see an acceleration of digitalization of doing business. Hong Kong has a reputation of efficiency. However, there's always room for improvement, right? So we have state government actually fast tracked the implementation of digital forms. For example, recently the Inland Revenue Department has introduced the long-awaited electronic filings for profit tax returns for corporations. So this is one of the many examples that we see after the pandemic.

Helena: We've heard from Donald about setting up corporate entities in Hong Kong and different things that we need to know. Ling is now going to walk us through setting up funds in Hong Kong. Hong Kong has continued to develop as a hot spot for funds with the introduction of different local structures over the past year. Ling, can you tell us a little bit more about this?

Ling: I'm more than happy to talk about this. So let me perhaps start by giving you some background information. From Asia asset management segments perspective, Hong Kong is the largest asset management hub and the second largest private equity center after mainland China in Asia. So over the period from the year 2000 until 2021, the assets under management in Hong Kong increased from USD 190 billion to more than USD 4.5 trillion.

For funds and managers who operate in Hong Kong, it's not uncommon for them to set up funds in other offshore jurisdictions. This is because of the limited choice of structures available in Hong Kong until very recent year. So to maintain Hong Kong's competitiveness as an international financial center, the Hong Kong government has introduced two local fund structures that allow managers to set up local funds. The two structures are limited partnership funds, LPFs, and open-ended fund company, the OFC. I'll briefly talk through the two structures before handing it back to Helena.

So for limited partnership funds or LPFs, the ordinance has commenced operations in August 2020. Just like partnership structures in many other funds jurisdictions, LPF allows the GP and LP to freely contract according to their intentions. Just an example, GP and LP would typically include India LPAs agreement, the so-called limited partnership agreement for methods such as waterfall model from commercial perspective. Another example is the operations governance requirements, such as reporting frequency and etc. LPFs also allow flexibilities in capital contributions and distributions to investors, which is very important for funds to be able to operate smoothly.

The registration for LPF is simple and can be completed with the local registries of companies. No doubt limited partnership is always the preferred structure for private equity and close-ended funds. This route of LPFs is highly welcomed by the industries and provides an alternative to fund managers to operate in Hong Kong and elsewhere.

As for OFCs, the OFC was first introduced around mid-year 2018. OFC is a legal entity structure in corporate form, with limited liabilities and allows variable share capital. The regime was revised in September of 2020 to remove certain restrictions and make it more attractive to fund managers. OFC can be a single fund or umbrella fund with sub-funds, where each sub-fund has separated liabilities. The applications for OFC will need to go through the Hong Kong Securities and Futures Commissions, the SFC, which is the equivalent of the U.S. SEC in Hong Kong. Once SFC approves the same, the Hong Kong Companies Registry will then register OFC accordingly.

Perhaps I will stop here unless, Helena, you have any questions for me.

Helena: And actually I do, Ling. Let's talk about operations for a moment. From an operations perspective, how does a Hong Kong domiciled fund differ from funds that are set up in other jurisdictions?

Ling: Good question, Helena. Yeah, I think basically Hong Kong is like what was mentioned earlier by Donald. Hong Kong is practicing common law systems. So this is very similar to a lot of offshore funds jurisdictions. This also means that there's a high level of similarity in running a Hong Kong fund compared to funds domiciled in say the Cayman Islands or Delaware.

Having said that, there is still a few areas that need to be operated or have to be operated slightly different. One example is the investors' due diligence checking. Here in Hong Kong, the UBO, I mean the ultimate beneficial owner threshold checking is 25% according to the Hong Kong local AML requirements, whereas many other jurisdictions need to identify any UBO with more than 10% interest in the structure.

Another area of operations difference is around second reporting. Hong Kong is a Model 2 IGA jurisdiction, whereas most Caribbean funds jurisdictions are Model 1 IGA for second reporting. In other words, any Hong Kong [inaudible 00:19:15] or entity is required to report directly to the U.S. IRS unlike those countries or jurisdictions under Model 1, which will make a second reporting to their respective local tax authority.

Helena: So Ling, why don't you tell us now about when you're setting up funds in Hong Kong, what are the things that fund managers and general partners need to know?

Ling: Sure. The first thing is about this China Greater Bay Area initiative that Donald talked about. While Hong Kong has been doing great so far as a financial center in Asia, yet we do have a lot more to offer and one of them is through the China's GBA initiative.

Under the GBA plan, eleven cities in South China, which including Hong Kong as well, will be integrated into a single economy and business hub. The estimated populations in the GBA is over 70 million, and the GDP is about USD 1.7 trillion based on the 2020 number. Under this plan, each of the 11 cities has a sector-specific role to play. Hong Kong as the most international city in the China GBA, we will be the primary hub for financial and legal arbitrations. For managers and GPs who plan to set up funds in Hong Kong, it's important for you to factor in these growth factors, growth potentials of the GBA initiative. I mean it's really an opportunity that you do not want to miss or anyone wants to miss.

Apart from the growth potential, it's also important for managers to utilize and benefit from the Hong Kong's existing financial infrastructure, which is really matured and very much a comprehensive one. On top of our sound legal systems we have in Hong Kong, it's not hard for one to get support from the local professional service provider to support your operations locally. Obviously, there's a deep pool of highly-educated financial and legal professionals available here for you to work with.

Last but not least, liquidity. Liquidity is always very important for managers and one of the key factors to be considered as part of any manager's investment strategy. This is again something that Hong Kong is well positioned as a funds jurisdiction. Hong Kong is one of the most active stock exchanges in Asia and globally. As of the end of Q1 this year, the Hong Kong Stock Exchange ranked number seven globally and number four in Asia by market capitalization. The Hong Kong Stock Exchange is among the world's largest IPO fundraising centers for years, and I think Donald also mentioned that it is the largest center for arranging Asian bonds over the past many, many years.

While we only covered three things today, indeed many other good reasons to set up Hong Kong funds. We do acknowledge that Hong Kong is somehow new as a funds jurisdiction. Yet I personally think that there are many potentials for us to grow and be successful with the visions and the infrastructures that we already have here in Hong Kong. Helena, over to you.

Helena: So I still have a follow-up question for you here, Ling. So let's talk a little bit about outsourcing fund operations. Is that common in Hong Kong for international managers, the fund managers to outsource those operations to third-party service providers?

Ling: The short answer is yes. Based on our experience, most managers outsource some if not all of their funds operations to third-party service providers. Especially for new managers in Hong Kong, the chance is that you do not want to maintain too big a team to start with. So in many circumstances or instances, one would have higher build and/or research teams on the ground, while outsourcing general operations to a local service provider like ourselves.

One of the benefits of outsource is that you will have access to seasoned professionals right away instead of sourcing and training one internally, which is very costly though. Furthermore, this will also allow you to get access to the funds technologies, which can be quite costly for managers to maintain it in-house.

Another good thing about outsourcing is that you can always rely and leverage on your local service provider in terms of their network and relationship, which I think can be very, very useful and handy, especially during the setup stage.

Helena: Now that we've heard from Ling about setting up funds and then from Donald about setting up entities and what are some of the things we need to know in Hong Kong, let's now talk about how CSC can help you.

So now let's talk a little bit about CSC in Hong Kong. How can we help you? And Donald is going to get us started off talking about our corporate and legal services in Hong Kong.

Donald: Sure. So in terms of corporate and legal solutions, we basically help companies on setting up their entity as well as maintenance. From setting up, we can help setting up holding company, an SPV, as well as operating company, and for operating company that includes trading company and as well as the fund managers. So we can do the full range of payroll services and accounting services and tax compliance service for all these entities, again including the fund managers. In terms of fund solutions, I would let Ling to tell us more about that.

Ling: Yeah, sure. I will talk a little bit about our funds solutions capability. So we provide fund administration services to our funds clients, which can be broadly grouped into four categories. Number one is around accounting and NAV calculations. We help to maintain accounting books and records on behalf of the funds. You will be supported by qualified accountants with in-depth funds knowledge to cover very complex calculations, such as equalizations, waterfall calculations, and etc. Somehow you are like having an accountant to your funds per se by having us as your partner.

As part of the service, we also cover methods relating to investors of your funds. Let's call it investor services. On this, we assist to maintain the register of investors, manage the investors' due diligence checking based on local AML requirements. It's always the best practice to complete the investors' CDD checking before they first onboard the fund. But yes, the work doesn't just end here, and ongoing screening reviews are equally important and it's always part of our investor services work.

The third area that we can support fund managers is around [SECA 00:26:29] and CIS reporting. We will assist with the filings to the tax authority every year.

Apart from accounting, investor services, [inaudible 00:26:38] and sales reporting, last but not least we also provide treasury operation support and many other administrative work on an ongoing basis. And that's from funds, right? It's worth noting that funds would normally set up a lot of special purpose vehicles, especially for the private equity funds, to house their underlying investments for risk control and/or legal reasons. For the SPV work, we will work together with our capital market and CLS experts, like Donald, to provide an end-to-end service to those SPV structures as well.

Maybe, Donald, you can share an example as to how our CLS private client team can support asset owner when they exit through IPO?

Donald: Sure. In terms of Hong Kong IPO market, a lot of owners and the management team will choose to set up a private trust for their wealth planning and also for their exit strategies. So we have a full range of solutions to help family and founders to set up their private trust and maintain the trust there thereon and working with family office for their succession planning as well. So that is on the equity and capital market side.

We also have a full range of solutions on capital market GCM solutions. So in terms of capital markets, we offer orphan SPV services. We set up trustee for clients, and we also administrate loan and escrow and process agents and facility agents for those structured finance deals as well. So we also have provided cash management and treasury management to support these kinds of deals for institutional clients.

Helena: Let's talk a little bit about CSC's global coverage. CSC has a distinct advantage when it comes to serving our clients where they are. Remember we're in over 140 different jurisdictions. We have regional hubs around the globe with in-country experts, such as Donald and Ling, who understand the ins and outs of the various jurisdictions. You'll work with a dedicated service team in your time zone fulfilling all your service needs. In all, our team is wherever you need us to be.

As we've learned from Donald and Ling, CSC is the business behind business. As you can see from our solutions listed here, we're the partner of choice for global companies needing expertise in business administration and compliance, fund solutions, transactions and lending, capital markets, and domain security and brand protection. Whatever your company needs to stay in compliance, transact business, and become secure against threats of the online world, CSC can help.