Foreign companies in desire of setting up their presence in another jurisdiction tend to opt for among three popular business structures, namely Branch Office, Representative Office and Subsidiary. This blog will help you clarify striking differences of these types in terms of their liabilities, incorporation requirements, tax implication and compliance requirements.
1. Making comparison: Branch vs Subsidiary vs Representative office
The given table illustrates main differences amongst three widely-used registration options for foreign companies in Hong Kong:
|Branch Office||Representative Office||Subsidiary|
|Business Activities Allowed||Must be the same as its parent company||Permitted activities limited to non-profit earning activities only (i.e., promotion, liaison, marketing & research)||Can be similar or different from its parent company|
|Company name||Must be the same as its parent company name||Must be the same as its parent company name||Can be same or different from its parent company name|
|Legal Status||Not a separate entity||Not a separate entity||A separate legal entity|
|Liability||Extend to its parent company||Extend to its parent company||Limited liability|
|Officer Appointment||1 local authorized representative||1 chief representative relocated from its parent company|
1 shareholder1 local company secretary
|Tax Obligation||Taxed as a Hong Kong incorporated entity||Not applicable||Taxed as a Hong Kong incorporated entity|
|Need to file annual returns, profits tax return and submit audited accounts||Not applicable||Need to file annual returns, profits tax return and submit audited accounts|
|Opening of Bank Account||Allowed||Allowed||Allowed|
2. Liability in relation to its parent company
One striking difference amongst a branch office, a representative office and a subsidiary lies in the liability of each type.
A representative office is not treated as a legal entity since it is actually the office of its foreign parent company to be set up temporarily for administrative tasks in another jurisdiction. Due to the fact that it has no legal standing in Hong Kong, a representative office does not bear any liability in event of costs of debts, but its foreign parent company will do.
In the same manner, a branch office is not a separate entity in its own rights and powers, despite the fact that it is a legal entity that is registered with the Companies Registry. The branch office is deemed as only an extension of its parent company, hence the full responsibility of the parent company for any debts or liabilities incurred by the branch office.
Unlike the above two types, a subsidiary is a private limited company in nature, and it is an independent legal entity from its foreign company, meaning that the liability of the foreign parent company is only limited to the contribution of share capital to the subsidiary.
3. Tax treatment
A big difference between branch and representative office lies in the tax obligations.
Both branch office and subsidiary are taxed in the same manner as locally incorporated companies in Hong Kong. Meanwhile, profit tax is not applicable to a representative office of foreign companies in Hong Kong since this type of entity does not involve in any income-generating activities.
4. Statutory and compliance requirements
In addition to taxation, regulatory requirements for three registration options show their disparities, chief of which basic requirements of the appointment of key managerial personnel and the company name are a key to mention.
Typically, the names of the branch office and representative office need to be identical to that of the foreign company name. By contrast, a subsidiary company is more flexible in choosing its company name which can be similar or different from the overseas parent company.
Note that registering an entity name in Hong Kong, whether it is the same or bears difference from its foreign company, must follow the company name requirements released by the Companies Registry of Hong Kong. For example, any name that either has already been reserved or in use in the jurisdiction, or is considered to be inappropriate or misleading, can be rejected for registration.
Entity’s key personnel
Requirements for appointing key officers are varied depending on which business structures that the foreign company decides to opt for.
A Hong Kong subsidiary is required to designate at least:
- One either local or foreign director;
- One either local or foreign shareholder; and
- One local resident company secretary
Above positions can be in charge by an individual or a body corporate. Furthermore, the number of shareholders for a subsidiary should not exceed 50 members in max.
On the other hand, the requirements for a branch office and a representative office are much simpler. Only one authorized representative who is a Hong Kong resident is required for a branch office setup, while the representative office needs to appoint a staff member of its overseas parent company to relocate to Hong Kong and become the chief manager of the representative office. A representative office is allowed to hire Hong Kong-based employees to act as support staff.
Registered business address
All companies wishing to incorporate in Hong Kong must have a physical address or a place of business within Hong Kong, not excluding the abovementioned business structures for foreign companies.
Reporting duties for post registration are applicable to all subsidiaries and branch offices of foreign companies in Hong Kong on an annual basis. Accordingly, the subsidiary as well as branch office must annually file Tax Return together with audited accounts to the Inland Revenue Department. In addition, they are also subject to the filing of an Annual Return with the Companies Registry.
Unlike the other two types, a representative office does not engage in any profit relevant activities. For this reason, it is not required in compliance requirements of filing tax return or annual return with competent authorities like others. Note, however, that application for a Business Registration Certificate with the IRD (including renewals of Certificate) is still a mandatory requirement for the representative office in Hong Kong.
5. Which business structure is the best for you as a foreign company?
Whether you decide on a branch office, a representative office or a subsidiary, you should in advance well consider your foreign parent company’s business goals, as well as positives and negatives of each structure.
Below are some key points for you:
- It appears to be common that large corporations often let a slight bias towards opening a branch office, while most SMEs companies are more likely to choose a subsidiary or a representative office.
- Branch office and subsidiary are in line with those engaging in profit-earning activities. However, the disadvantages of these two are their continuing compliance obligations namely audited accounts, filing annual return and tax returns, AGMs, etc.
- Both branch office and subsidiary bear no difference in the tax rates applied. Both are taxed as locally incorporated companies in Hong Kong.
- Representative offices act as a temporary vehicle. Despite the fact that it is not taxed by virtue of its non-profit making nature and less subject to compliance requirements than other business structures, it cannot generate any revenue for the foreign parent company.
- In case of a subsidiary, its parent company’s liability is limited to the amount of share capital contributed to the subsidiary, whereas a branch office and representative office have their liabilities extending to their parent company.
Still uncertain about branch vs subsidiary vs representative office - which type of entity in Hong Kong is best-suited for your foreign company? Feel free to contact us for more useful advice!