Introduction:

Hong Kong and China, two markets not to be confused

When a European company wants to expand its business in Asia, Hong Kong and mainland China are often among the first destinations considered.

However, this geographical proximity can give the impression that these are two markets operating in a similar way.

This is not the case.

Hong Kong and mainland China have different tax, administrative and business systems.

This distinction is essential for entrepreneurs and international leaders.

A company wishing to establish a presence in Hong Kong will not face the same rules as a company wishing to set up a structure in mainland China.

• The VAT rules are different. The tax systems are different.
• The accounting formalities are different.
• The structures that allow you to set up are different.
• Issues related to employees and international operations can also vary widely.

For this reason, a project to set up in Asia must be studied according to the real objective of the company.

• Does it want to have a commercial presence in Hong Kong?
• Does it want to work directly with Chinese customers? Does it want to produce in China?
• Does it want to import goods? Does it want to create a local team?

Or does it simply want to use Hong Kong as an international platform? The answer to these questions can completely change the structure to be preferred.

Euro Accounting supports entrepreneurs, SMEs, investors and international companies in their projects in Hong Kong and China, with accounting, taxation, company formation, VAT, payroll, auditing and consulting services.

Hong Kong or China: which jurisdiction to choose?

Before discussing taxation or accounting, it’s essential to understand the fundamental difference between the two markets.

Hong Kong: an international platform

Hong Kong is an international financial and commercial centre.

The city is particularly interesting for companies that want to:

• develop an international business in Asia;
• work with Asian partners;
• manage international trade flows;
• establish a regional presence ;
• develop relationships with investors;
• access the Asian market.

Hong Kong also has a relatively simple tax environment.

The tax system is based on the principle of territoriality: profits that come from Hong Kong are subject to local tax according to the applicable rules.

Mainland China: Accessing the Chinese market directly

Mainland China responds to a different logic.

With its huge domestic market, it is particularly interesting for companies wishing to:

• sell directly in China;
• produce locally;
• create a Chinese team;
• develop a business network;
• work with suppliers;
• establish local operations.

The Chinese market therefore offers considerable opportunities, but also implies a more complex regulatory and tax environment.

Setting up a company in Hong Kong

Hong Kong is a jurisdiction particularly used by international entrepreneurs and groups.

A local structure to develop your business

A foreign company can establish a company in Hong Kong in order to have a real local structure.

The process includes choosing the appropriate legal form, registering and putting in place the necessary administrative obligations

Euro Accounting assists companies and entrepreneurs in the company formation and establishment of companies in Hong Kong.

Why set up a company in Hong Kong?

A Hong Kong company may be relevant for:

international trade; services;

• e-commerce;
• financial activities; regional operations;
• trade relations with Asia.

Hong Kong can also be a platform between Western companies and Asian markets.

Setting up a company in mainland China

The creation of a company in China responds to a different logic.

The main possibilities of setting up

Depending on the activity and the project, a foreign company may study: a WFOE (Wholly Foreign-Owned Enterprise);

a joint venture

a representative office.

The choice depends on the sector, the planned activity and the commercial objectives.

Euro Accounting supports companies in creating and establishing operations in China, particularly for WFOEs, joint ventures, and representative offices.

Why create a structure in China?

A local presence can be relevant when a company wants to:

• sell directly to the Chinese market
• employ local staff; manage a commercial activity
• develop production
• work with Chinese suppliers
• have a real operational presence

Taxation in Hong Kong

Taxation is one of the major differences between Hong Kong and mainland China

A territorial tax system

Hong Kong applies a principle of territoriality.

In practice, the analysis includes whether the profits are made or derived from Hong Kong.

The tax authorities specify that a company operating in Hong Kong is liable to be taxed on profits from Hong Kong. Conversely, profits from abroad are in principle not subject to local tax simply because they are transferred to Hong Kong.

However, this approach must be analysed in the light of the facts and the actual activity of the company.

Profits Tax

The tax applicable to corporate profits is called Profits Tax. The standard corporate rate is 16.5%.

Hong Kong also has a two-tier system: the rate is 8.25% on the first HKD 2 million of taxable profits and 16.5% above that, subject to applicable conditions.

This taxation is one of the elements explaining the attractiveness of Hong Kong for certain international companies.

No VAT in Hong Kong

This is a fundamental difference with mainland China.

Hong Kong does not have a VAT or general sales tax system.

The Hong Kong government indicates in particular the absence of VAT or sales tax in its tax system.

A company that sets up in Hong Kong should therefore not be treated as if it were subject to the Chinese or European VAT system.

Taxation in Mainland China

China’s tax system is much broader.

Enterprise Income Tax

China applies a corporate tax called Enterprise Income Tax. The general rate is 25%.

Some companies or projects may benefit from preferential schemes or specific incentives depending on their situation.

It is therefore important to study the sector of activity, the location and the status of the company before determining the applicable tax treatment.

Non-resident companies

Taxation may also apply to foreign companies that have not incorporated a company in China but carry out certain operations or have a taxable presence in the country.

The rules depend in particular on the existence of an establishment or activity in China and the source of the income.

This issue is particularly important for international groups.

A company should therefore not assume that the absence of a Chinese subsidiary automatically means the absence of any tax liability in China.

VAT in Hong Kong and China: a fundamental difference

This is probably one of the most important distinctions to remember.

Hong Kong: no VAT

Hong Kong does not levy VAT or general sales tax. This simplifies some local business operations.

The company must nevertheless comply with its other tax and accounting obligations.

China: a real VAT system

Mainland China applies VAT on many transactions. It concerns in particular:

sales of goods; certain services

intangible assets; real estate; imports

The Chinese authorities distinguish between general taxpayers and small taxpayers, with different calculation mechanisms.

The Chinese system provides for several rates and mechanisms depending on the nature of the operation.

The management of Chinese VAT therefore requires rigorous local accounting.

Fapiao: an important feature in China

When a foreign company works in China, it must also understand how fapiao works.

The fapiao is an official invoice used in the Chinese tax system.

It plays an important role in:

• invoicing
• accounting
• VAT
• justification of certain expenditures

Euro Accounting includes issues related to VAT, declarations and fapiao issues in its support to companies in China.

For a foreign company, this difference can be significant.

A traditional commercial invoice used in Europe does not necessarily meet the same requirements as an invoice that complies with Chinese rules.

Accounting in Hong Kong

A Hong Kong company must comply with the accounting obligations applicable to it.

Bookkeeping

Organized accounting makes it possible to:

• monitor profitability
• prepare declarations
• justify transactions
• manage tax liabilities
• maintain a clear view of cash flow

Euro Accounting offers in Hong Kong:

• bookkeeping
• financial accounts
• management accounts
• reporting
• Accounting compliance support

Audit and annual obligations

Depending on the structure and situation of the company, certain audit and reporting requirements may apply.

Hong Kong companies must also comply with their obligations to the Companies Registry.

In particular, local private companies must file an annual return within the deadlines set out in the regulations.

Accounting in China

Chinese accounting requires knowledge of the local system.

Companies must manage:

• accounting
• tax returns; VAT
• invoices
• reporting obligations; supporting documents

Euro Accounting offers bookkeeping, financial reporting, annual accounts and accounting support services for local and international companies in China.

Why does Chinese accounting require local expertise?

Foreign companies can quickly run into difficulties when trying to replicate their European accounting methods in China.

Local rules, tax documents and administrative procedures must be taken into account.

Local support therefore reduces the risk of errors.

Employees and payroll in Hong Kong

The development of a local activity may require the recruitment of employees.

It is then necessary to manage:

• contracts
•  salaries
• declarations
• the employer’s obligations
• administrative records

Euro Accounting offers Payroll & HR services in Hong Kong to support companies in managing their teams.

Employees and payroll in China

In mainland China, issues related to employees are also important.

Payroll can include:

• personal income tax
• social security contributions
• local requirements
• the rules applicable to expatriate employees

Euro Accounting offers payroll and HR services in China, including payroll management, employee files, social security contributions and reporting obligations.

Import-export between Europe, Hong Kong and China

Hong Kong and China occupy a major place in international trade. Many European companies use these markets to:

• buy goods
• sell their products
• develop supplier networks
• manage supply chains
• distribute products in Asia

But international flows require precise structuring.

Importing from China

A European company that buys products from China must analyze, among other things:

• customs duties
• import VAT
• trade documents
• customs rules
• the delivery conditions

Exporting to China

The company must also determine:

• who imports the goods
• where VAT is due
• who bears customs duties
• what invoices are required
• what local obligations must be met

These issues must be analyzed before commercial contracts are signed.

International taxation and double taxation

When a company has operations in several countries, tax issues quickly become complex.

For example, a company may have:

• a parent company in France
• a subsidiary in Hong Kong
• a commercial activity in China
• employees in several countries

It is then necessary to determine where the profits are taxable and how the different jurisdictions interact.

Tax residence and permanent establishment

The concepts of tax residence and permanent establishment can be of major importance.

In particular, a company must determine whether its activities in a country create sufficient tax presence to trigger additional obligations.

Euro Accounting offers local and international tax advisory services in Hong Kong , including on international structures, cross-border transactions, double taxation, tax residency and permanent establishment issues.

Hong Kong or China: how to choose?

There is no one-size-fits-all answer.

Hong Kong may be particularly suitable if you want to:

• create an international platform
• develop financial or service activities
• manage international trade
• working with Asian partners

have a structure in a territorial tax environment.

Mainland China may be more suitable if you want to:

• sell directly to the Chinese market;
• recruit a local team;
• produce in China;
• develop a local commercial activity;
• establish a real operational presence.

In some groups, the two jurisdictions may even have complementary functions.

For example, a company may have a structure in Hong Kong for certain international activities and an entity in mainland China for its local operations.

But this organization must be studied in the light of the group’s real activity.

Why be supported by Euro Accounting?

Dedicated international expertise

Euro Accounting supports entrepreneurs, SMEs, subsidiaries and international investors in their projects in Hong Kong and China.

In China, the firm offers:

• accounting
• creation of a company
• local and international taxation
• tax audit
• payroll and human resources
• audit
• business consulting
• VAT
• income tax

In Hong Kong, services include:

• accounting
• creation and incorporation; local and international taxation
• assistance during tax audits
• payroll and HR
• audit
• business advisory
• income tax

Support adapted to foreign companies

Euro Accounting works with companies that are not necessarily familiar with Asian administrative and tax systems.

The objective is to make these issues simpler and more understandable for managers.

This can start with the creation of a company.

This may then extend to:

• accounting
• VAT
• taxation
• payroll
• auditing
• consulting
• international expansion

The main mistakes to avoid

Expanding into Asia should not be driven solely by tax considerations.

Among the most common mistakes:

• confusing Hong Kong with mainland China
• creating a company without defining its true purpose
• underestimating accounting obligations
• applying European VAT rules to the Chinese market
• neglecting fapiao
• ignoring the obligations related to employees
• failing to analyse intercompany flows

Neglect tax residency and permanent establishment issues.

Proper preparation can avoid most of these difficulties.

Conclusion

Hong Kong and mainland China represent two major opportunities for international companies wishing to expand their business in Asia.

But these two markets should not be considered as one and the same jurisdiction.

Hong Kong has a territorial tax system and does not levy VAT or general sales tax. Mainland China has a broader tax system, including VAT and corporate tax.

The corporate structures, accounting obligations, taxation and administrative rules therefore differ significantly.

For a European company, the choice between Hong Kong and China must be made according to the actual project: international trade, production, distribution, local presence, recruitment, investment or regional development.

With its expertise in accounting, taxation, company formation, VAT, payroll, auditing and consulting, Euro Accounting supports international companies in their projects in Hong Kong and China.

The objective is to enable managers to develop their business in Asia while benefiting from professional support on financial, tax and administrative aspects .

FAQ – Euro Accounting, Hong Kong and China

What is the difference between Hong Kong and mainland China for a company?

Hong Kong and mainland China have different legal, tax, and administrative systems. In particular, Hong Kong has a territorial tax system and does not have a general VAT, while mainland China has a VAT system and corporate income tax, among other things.

Does Hong Kong charge VAT?

No. Hong Kong does not have VAT or general sales tax.

Does China apply VAT?

Yes. Mainland China applies VAT on many transactions, including sales of goods, certain services, and imports.

What is the corporate tax rate in China?

The general rate of the Enterprise Income Tax is 25%. However, specific regimes and preferential rates may apply in certain situations.

What is the corporate income tax rate in Hong Kong?

The standard rate of the Profits Tax for companies is 16.5%. A two-tier system provides for a rate of 8.25% on the first HKD 2 million of taxable profits, subject to the applicable conditions.

Can a foreign company set up a company in Hong Kong?

Yes. Hong Kong allows the formation of local companies, including limited liability companies. Euro Accounting offers support for the creation and establishment of companies in Hong Kong.

Can a foreign company set up a company in China?

Yes. Depending on its project and sector of activity, a foreign company may consider setting up a WFOE, a joint venture or a representative office .

What is a WFOE in China?

A WFOE, or Wholly Foreign-Owned Enterprise, is a structure that allows a foreign investor to own a company in China under the conditions set out in the applicable regulations.

What is a fapiao?

The fapiao is an official invoice used in the Chinese tax system. It plays an important role in accounting, VAT and the justification of expenses.

Does Euro Accounting offer accounting services in China?

Yes. Euro Accounting offers bookkeeping, financial reporting, annual accounts and accounting compliance support.

Does Euro Accounting offer tax services in Hong Kong?

Yes. The firm assists companies on local and international tax issues, including cross-border structures, double taxation and tax residency issues.

Can I receive payroll support in China and Hong Kong?

Yes. Euro Accounting offers Payroll & HR services in both jurisdictions, including managing employees, payroll and related obligations.

Does a European company have to set up a company in China to sell in China?

Not necessarily. The answer depends on the business model, the nature of the products or services, the way in which the transactions are carried out and the local presence. A prior tax and legal analysis is recommended.

Is Hong Kong a good choice to develop a business in Asia?

Hong Kong can be particularly interesting for companies with an international activity, particularly in trade, services, finance and cross-border operations. However, the choice depends on the project and the markets really targeted.

Why use Euro Accounting to set up in Hong Kong or China?

Because an international presence requires the coordination of several subjects: company creation, accounting, taxation, VAT, payroll, auditing and cross-border operations. Euro Accounting offers these different services to support international companies in their development in Asia.