Hong Kong is well-known for it’s ease of business registering, at a small cost. This makes Hong Kong a shelter of shadow companies.
China special administrative territory’s business environment was created under British rule and never stopped even under communist China, making the base of one of the world’s most successful commercial hubs.
But it has also put Hong Kong at the centre of a web of trading companies that is funneling millions of dollars’ worth of American-made semiconductors into Russia despite U.S. sanctions imposed following the invasion of Ukraine.
A recent investigation revealed the extent to which small trading operations in Hong Kong are involved in exporting U.S. chips to Russia.
Hong Kong is a business hub well known for its ease of doing business, which could mean easily and cheaply starting shell companies.
The interconnected network of companies can then be used to evade sanctions, and when listed or banned simply shift to another one of the companies.
Under Hong Kong regulations, any person — local or foreigner — can register a company and be its sole director and shareholder. Making things even easier, numerous agencies in Hong Kong and mainland China offer one-stop services for registering a company here, even providing a local address to use as its registered office address. Fees range from 4,800 to 13,000 Hong Kong dollars ($611 to $1,656), and registration can usually be completed within a week.
Hong Kong has a huge number of companies compared with some of its bigger neighbors. Japan, for example, had about 1.78 million companies in 2021, according to a government survey, not far above Hong Kong’s 1.38 million that year — even though Japan’s population is 17 times bigger.
Hong Kong itself does not have comprehensive export controls of the type used by the U.S. on Chinese or Russian military end users, though it does have end-use controls for items that may be used in chemical, nuclear or biological weapons.
Therefore, it is possible for Hong Kong companies to import chips that are not controlled by license requirements for export to Hong Kong, China or even Russia, and re-export those chips.
Hong Kong’s reputation for business friendliness goes back to the early days of colonial rule. Capt. Sir Charles Elliot, the first British administrator for Hong Kong, declared it a free port in June 1841, meaning there were no tariffs on imports. The territory soon became one of the region’s major trading hubs.
The Basic Law, adopted a century and a half later, ensured that Hong Kong’s policy of free trade and a free and open financial market would continue after its handover in 1997. Since then, the city has remained a centre of global trade and commerce.
Hong Kong was a member of the General Agreement on Tariffs and Trade (GATT) since 1986, and was a founding member of the World Trade Organization (WTO) in 1995. The local government imposes tariffs on only four groups of imports — hydrocarbon oil, hard liquor with over 30% alcohol content, methyl alcohol and tobacco — which together make up just 0.5% of all imports.
There are no capital controls, which means funds can be brought in and out with almost complete freedom. And with the local currency pegged to the greenback, U.S. dollar-based investors do not have to worry about material risks in exchange rates.
Hong Kong also ranks second out of 191 economies — behind only Bahrain — in terms of ease of paying taxes. Corporate tax rates are capped at 16.5%, and personal income tax at 17%. There are no taxes on capital gains, shareholder dividends or foreign-sourced income.
China has largely preserved Hong Kong’s business-friendly system because doing so has long proved useful.
During the Korean War, for instance, when the country was under U.S. and U.N. sanctions, certain enterprises sympathetic to Beijing helped bridge commercial relationships with the Western world. Hong Kong-domiciled corporations such as China Resources Group, China Merchants Group and Bank of China Hong Kong acted as windows to the outside world and avenues for bringing in hard currencies.
Hong Kong’s Kwai Tsing container port. Beijing’s increasingly tight grip on the city has sparked concerns that it will lose its status as the commercial and financial hub of Asia.
The reform and opening-up led by Deng Xiaoping from the late 1970s triggered a new boom for incorporation in Hong Kong. Foreign businesses came back to use the territory as a springboard to gain a foothold in mainland China, while a number of mainland Chinese entities set up new companies in Hong Kong in order to gain “foreign investor” status.
To make use of the favourable policies towards foreign investments, some mainland people transferred their capital to Hong Kong and incorporated their business there.
When these Hong Kong-incorporated companies did business in China, they were then regarded as foreign investors and enjoyed the favourable treatment that came along with it. It was obvious that company incorporation in Hong Kong brought about a great deal of benefit to mainland businessmen.
Hong Kong was overtaken by Singapore last year as Asia’s premier finance centre, according to the Global Financial Centres Index, and remained behind the city-state in the semiannual update released last month.
Nevertheless, Hong Kong remains a vital business hub thanks largely to its system of business-friendly rules and regulations. The challenge for the city going forward is to maintain its ease of doing business without compromising its reputation.
While Hong Kong is a free port, its status should not be misconstrued as an invitation for lax customs enforcement or noncompliance with international sanctions and export controls.
© Times of Ukraine