Entering any of the markets in Asia for the first time will be extraordinarily exciting for any business. The challenges will be, at times, immense but so will the rewards. Asia is a dynamic region comprising of 60% of the world’s population spread across 49 countries. It is diverse, international, entrepreneurial and well recognized as a principal driver of global economic and business growth.
Given the diversity of language, culture, and economic development in the region, it is important to bear in mind that, unlike Europe or the US, Asia does not have supranational or federal governance implementing uniform rules and regulations. Given the diversity of jurisdiction and legal system, careful consideration will be needed in selecting the initial Asian footprint of your business.
A tale of two cities
The two most preferred beachheads for companies looking to enter Asia are also the two smallest jurisdictions in the region. Hong Kong and Singapore have long been the destinations of choice for international investment.
Both cities are strategically located in the heart of Asia. Hong Kong is perfectly situated as the ideal spring board into mainland China, whilst Singapore is the traditional entry point and a natural hub for South East Asia.
The advantages of both Hong Kong and Singapore are numerous; both are well governed jurisdictions with strong legal systems and low levels of taxation (i.e. low corporate tax rate and no capital gains or dividend tax). Public corruption is almost non-existent due to effective and independent anti-corruption agencies.
Importantly for US companies both Hong Kong and Singapore operate with English as the official language of the respective territory.
Additionally, although Hong Kong is a part of China, the territory is governed by Beijing under the ‘one country – two systems’ arrangement. This means that Hong Kong is effectively a separate jurisdiction from China, maintaining its own legal and financial system, currency (which is pegged to the US dollar), and domestic governance which is wholly separate from that of mainland China.
Both Hong Kong and Singapore offer business friendly environments. Incorporation of a company usually takes no more than a few days with no foreign ownership restrictions. Moreover, there is also effectively no minimum capital contribution requirement in either Hong Kong or Singapore.
However, one important difference between Hong Kong and Singapore is that, whilst Hong Kong does not have any residency requirements for a director of a Hong Kong-incorporated company, at least one director of a Singapore-incorporated company must be resident in Singapore (as registered with the Singapore authorities).
Both Hong Kong and Singaporean companies are required to file annual returns, but may waive the requirement for an annual meeting by written resolution, subject to respective formalities. In each jurisdiction, accounting records must be maintained but in Hong Kong there is no exemption from the requirement to file audited accounts.
Singaporean companies earning less than SGD 5 million per year whose members do not exceed 20 individuals, and have only individual shareholders are exempted from having their annual reports independently audited, although they still must file annually. Where a Singaporean company has a corporate owner (such as the Singaporean subsidiary of a US or EU parent), they must still file audited accounts. Both jurisdictions also allow for consolidation of group accounts for annual filing if they have subsidiaries, subject to certain requirements.
Taxes in brief
Hong Kong sets its corporate taxes (called a profits tax) at a flat rate of 16.5%, while Singapore sets its standard rate at 17%.
Hong Kong follows a territorial taxation regime, whereby only income arising in or derived from the territory is subject to profits tax. Foreign sourced income is not taxable once granted offshore status, even if such income is repatriated to Hong Kong. Moreover, Hong Kong’s Double Tax Agreements are still applicable even where income is deemed offshore but repatriated to the territory, such as the situation for China based manufacturing and wholesale which are under transhipment via Hong Kong to markets in Japan, North America, and Europe.
Singapore is often described as a quasi-territorial jurisdiction, whereby both residents and non-residents are liable to tax on income accruing in or derived from Singapore, alongside foreign income deemed received in Singapore. This means that profits deemed to have been repatriated to Singapore will be assessable for full corporate tax. If a Singaporean company wants to claim benefits under the country’s extensive network of Double Tax Agreements, then the income considered for treatment must have been declared for taxes locally in Singapore.
Since both Hong Kong and Singapore are international financial centers, banking is straightforward in both locations. All banks in each city are able to process multi-currency transactions with ease. However, due to anti-money laundering and corresponding KYC compliance requirements, opening a local business bank account now almost always require the physical attendance of a majority of the directors of the company.
From a currency perspective, both jurisdictions are stable, based on the strength of the economy and the array of available financial products. While Singapore’s dollar is currently set to a market exchange allowing for a broad fluctuation of exchange rates, the Hong Kong dollar is pegged to the US dollar within a marginal band (approximately 7.75 HKD to 1 USD).
Hong Kong or Singapore?
Ultimately, whether Hong Kong or Singapore is the right choice for your initial steps into Asia will be largely driven by the target market of your business. Hong Kong is the ideal place to set up to penetrate the mainland Chinese market as well as the markets in other North Asian Countries, such as Korea or Japan. Hong Kong offers offshore RMB holdings (the currency of mainland China – which is not currently freely convertible) and a Hong Kong incorporated company will have an easier time setting up a wholly foreign owned entity (WFOE) within China (i.e. setting up a wholly owned subsidiary within China).
Singapore is no more than a two-to-three hour flight from the markets of South-East Asia, which include Thailand, Vietnam, Cambodia, Philippines, Indonesia and Malaysia. Given its location, workforce, legal protection and support business environment, Singapore is the essential hub for business into South East Asia.
Osborne Clarke is well positioned to support your business expansion across Asia. Our growing presence in the region includes an office in Hong Kong, associated firms in Singapore and Shanghai. And if you need support in India, we have a working relationship with the Mumbai based firm BTG Legal.