In December, 2005, the Hong Kong government announced a major overhaul of the territory's Companies Ordinance, in what promises to be the most substantial law reform exercise in its history.

The reform is expected to be carried out in the next five years, and will cost an estimated HK$156 million (US$20.1 million). This money will go towards the funding the cost of creating three directorate-level posts and an external legal consultant, although Companies Registrar Gordon Jones believes that most of the work will be conducted "in house".

Based on British law dating back to the 19th century, the ordinance has until now been amended on a piecemeal basis, and it is a widely held belief that Hong Kong's company laws have become outmoded compared to other financial jurisdictions. According to Mr Jones, the only way in which future corporate governance reforms will be possible will be through a complete re-write of the laws.

"We've got to the stage where we really can't tackle the remaining [corporate governance] items in piecemeal reform," Mr Jones stated.

Hong Kong has previously reviewed the companies statute, but a report released in 1997 offered only general principles for reform, rather than comprehensive nuts and bolts proposals.

Mr Jones stated that work to reform the ordinance would begin in 2006. A white paper will be released for consultation in mid-2009, and the SMCP reported that this will be split into three main areas: accountancy, auditing provisions and capital maintenance charges; company incorporation, investigation and offences; and operational provisions such as shareholder remedies.

In Hong Kong businesses normally trade as either limited companies, limited partnerships or sole proprietorships. Being a common law jurisdiction the concept of a trust is readily understood and widely used. The tight secrecy, minimal corporate disclosure and loose administrative requirements which characterize some island offshore common law jurisdictions and make these territories attractive locations in which to base commercial operations have no counterpart in Hong Kong, whose company and trust law are virtually identical to their United Kingdom equivalents.

To found a business company in Hong Kong, it is necessary to register with the Business Registration Office of the Inland Revenue Department (Revenue Tower, 4/F, 5 Gloucester Road, HongKong, tel: (852) 2594 0888) within one month of the commencement of business. The annual registration fee is currently HK$2,600. In general the minimum capital requirements for a business corporation are very low or nonexistent and all legal business forms are open for foreign participation

Applications for incorporation should be made to the Companies Registry (13th - 14th floors, Queensway Government Offices, 66 Queensway, Hong Kong, tel: (852) 2867 2587). The registration fee ranges from is HK$1,720. Incorporation normally takes 7 to 10 working days, depending on the financial structure of the company. It is also possible to purchase a shelf company, i.e. an already incorporated private company, through an accounting or law firm or through a secretarial company. It costs about HK$6,400 (US$800) and takes only a few days. Further time is required (about 3-4 weeks) if the name of the shelf company is to be changed.

Private Company Limited by Shares

Corporate entities are governed by the provisions of the Hong Kong Companies Ordinance 1984 which brought the territory's company law into line with United Kingdom company law. Incorporation can take 4-6 weeks. Their key features are as follows:

• The minimum number of subscribers and shareholders is two; if the number of shareholders falls to one, the remaining shareholder is personally responsible for the company debts;
  
• There is no minimum authorized or issued share capital requirement;
  
• Shares of no par value and bearer shares are not permitted;
  
• Shares can be issued at a premium or discount (if sanctioned by the court);
  
• A company may purchase its own shares out of distributable profits;
  
• Nominee shareholders, directors and secretary are permitted;
  
• The minimum number of directors is two; corporate directors are permitted (unless the company is a public company);
  
• The articles can provide that the directors' liability for the company be unlimited;
  
• Every company must have a secretary which can be an individual or a corporate body, but must be resident in Hong Kong;
  
• Meetings can be held anywhere in the world;
  
• Accounts must be prepared, filed and audited;
  
• The migration and re-domiciliation of corporate entities to or from a foreign jurisdiction is not permitted;
  
• Annual returns must be filed.

Every Hong Kong company must register annually under the Business Registration Ordinance, the fee for which is about US$300.

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Public Company Limited by Shares

A public company (plc) is any limited company which is not a private company.

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Branch of Overseas Company

Overseas companies starting businesses in Hong Kong can form a private company limited by shares, as above, or can simply establish a branch.

When a company incorporated outside Hong Kong establishes a place of business in Hong Kong, it must lodge the following documents with the Registrar of Companies:

• A Certified copy of its charter or memorandum and articles of association;
  
• Particulars of directors and the company secretary;
  
• Name and address of a resident of Hong Kong authorised to accept notices on behalf of the company;
  
• Power of attorney or other document appointing a Hong Kong representative;
  
• Address of principal place of business in Hong Kong and addresses of registered office and principal place of business in the company's country of incorporation; and
  
• A Certified copy of the certificate of incorporation.

A branch office is relatively easy to set up but is open to greater potential liability than a limited company since it is not treated in Hong Kong law as a separate legal entity.

In some countries, branches have tax advantages as against limited companies, for a foreign parent, but not in Hong Kong: the territorial basis of taxation means that the branch will be taxed exactly as a limited company, on Hong Kong-source income (see Direct Corporate Taxation).

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Limited Partnership

The law is contained in the Limited Partnership Ordinance. Limited partnerships have the following characteristics:

• The maximum number of partners permitted by law is 20;
• Limited partnerships consist of general and limited partners; there must be at least one general partner whose liability for the firms debts is unlimited; the remaining partners are limited partners whose liability is limited to the amount of their unpaid share capital;
• A limited partner cannot reduce or take out his share capital whilst the partnership continues in existence and is not allowed to take an active part in the management of the partnership nor bind the same vis a vis third parties in default of which provision he assumes the liability of a general partner;
• Limited partnerships must be registered at the Companies Registry under the Limited Partnership Ordinance in default of which they are deemed to be general partnerships with unlimited liability for each and every partner;
• All partnerships are required to obtain a business license under the provisions of the Business Registration Ordinance which license costs US$300 per annum.

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Sole Proprietorship

As in the UK, a sole proprietorship has the nature of a partnership with one partner, and the owner does of course have unlimited liability for his firm's debts. As an unincorporated business, a sole proprietorship is subject to profits tax in exactly the same way as any other business; but the rate of tax is 15% instead of 16% on taxable income.

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Trusts

Trust law in Hong Kong is virtually identical to English trust law and is contained in the provisions of the Trustee Ordinance (an Ordinance which is modeled on the English Trustee Act 1925).

Both fixed and discretionary trusts may be settled in Hong Kong. Documents do not have to be registered and there are no statutory requirements in Hong Kong for a trust to make annual returns, submit audited financial statements, etc., unless it is carrying on business in Hong Kong.

Unlike most offshore jurisdictions Hong Kong has not tampered with trust laws in order to make the jurisdiction a more attractive jurisdiction in which to create a settlement. Hong Kong will therefore not normally be a suitable location for an asset protection trust.

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