Doing Business in China VS Hong Kong

China has become quite adept at spotting and hunting down foreign companies who are doing business in China without a required Chinese entity. What exactly constitutes doing business in China? This is a very complecated question, but suffice it to say that the Chinese government has a very expansive definition of that simply because such a definition increases its tax coffers.

China continues/accelerates its crackdown on foreign companies doing business in China without Chinese entity, hence the rise in foreign companies setting up companies in Hong Kong and paying taxes there.

So is it legal to set up a company in Hong Kong will solve the problem of their operating on the Mainland without a company? Let's put it like that “Think of Hong Kong as New York. Having a Hong Kong company will no more help you get legal in China than setting up a new company in New York. When it comes to business law, you need to think of Hong Kong as a completely different country than Mainland China”

It is very common to deal with a company established in Hong Kong and having chinese “employees” in China but with no office in Mainland. This is 100% illegal in China. Yet it is common for the Chinese government to catch these companies. The reason companies with employees in China want to avoid having to establish an entity in Mainland is because of the employer taxes so the payments are really high and if they can keep there employees off the grid, they will avoid paying those taxes and benefits.

The “Hong Kong excuse” is actually generated by the Chinese employee who wants its foreign “employer” to stay off China’s grid as well. The employee likes its foreign employer to operate illegally in China because wages can be higher (no employer taxes nor income taxes). So the employee convinces its foreign employer that forming a Hong Kong company will be both cheaper and equally effective as forming a PRC company.

while we are discussing how Hong Kong entities do not satisfy PRC entity requirements, I might as well remind you that having a trademark in Hong Kong, Taiwan or Macau does not give you any trademark rights in the PRC and vice-versa. Again, you must think of these jurisdictions as being legally separate as that is the case when it comes to intellectual property as well. 

One last area where we often have to deal with the differences between Hong Kong and China is on all of our contracts relating to manufacturing, such as NNN Agreements (IP rights) and Product Development Agreements. Many Chinese manufacturers  want their agreements with their foreign customers to be with the manufacturer’s Hong Kong entity, not its China entity. For the foreign Client, This creates all sorts of ownership and liability issues which must be resolved correctly to prevent any legal  issues in the future, because it is legally correct, but offers no protections to the foreign buyer. Again the key issue here is that Hong Kong and the Mainland China are legally separate specially when it comes to commercial transactions.