Background

Situated at the south-eastern tip of China, Hong Kong is ideally positioned at the centre of rapidly developing East Asia. With a total area of 1 102 square kilometres, it covers Hong Kong Island, the Kowloon peninsula and the New Territories, which also includes 235 outlying islands. Hong Kong was established as a British colony in 1841 and, under the terms of the Joint Declaration of the British and Chinese Governments of 1984, reverted to Chinese sovereignty on 1 July 1997. At that time, Hong Kong became a Special Administrative Region of the People's Republic of China retaining its current economic, social and legal system for a minimum period of 50 years after 1 July 1997. Since the handover, Hong Kong has continued to run its own affairs with complete autonomy. Hong Kong is the world's freest economy (Heritage Foundation 2003) and is a major trading centre with total volume of trade in goods and re-exports (2002) of over US$400 billion making the territory the 10th largest trading economy in the world. Hong Kong's population is approximately 6.81 million.

Legal & Business Environment

The legal system in Hong Kong is based on English common law and an increasingly comprehensive body of statutory law passed by the local legislature. Hong Kong is well-populated with firms of lawyers including a number of overseas firms from the United Kingdom, Australia, Canada and the United States. The language of the law and largely of business is English. The local language is the Cantonese dialect and Mandarin Chinese is increasingly spoken in Hong Kong. The Hong Kong Government has generally adopted a policy of 'Maximum Support and Minimum Intervention' and provides the most business-friendly conditions possible, including the rule of law, personal liberty and a clean and efficient administration.

Since October 1983, the Hong Kong Dollar has been pegged to the US Dollar at the rate of HK$7.80 to US$1.00 and there are no exchange controls. Hong Kong acts as a regional business centre in Asia with well established commercial links with most Asian countries. Hong Kong is in a special position with regard to business in China. With China's entry into the WTO, Hong Kong is well positioned to increase its role as China's major commercial and financial link with the outside world. Also, Hong Kong has signed a bilateral free trade agreement known as Closer Economic Partnership Agreement (CEPA) with Mainland China.

Communications through Hong Kong are excellent and, in particular, telecommunications are efficient and cheap.

Economy

Hong Kong is a major international financial centre with a large representation of banks, insurance companies, merchant banks, fund managers, venture capital companies and other financial intermediaries. Hong Kong is the world's 10th largest trading economy, one of the world's four largest gold markets, the world's 7th largest foreign exchange market, the world's 12th largest banking centre, and Asia's 3rd biggest stock market.

Hong Kong has always been a major trading centre. During the postwar period, the local economy developed rapidly in the field of manufacturing based largely on textile and garment production and other consumer good industries such as toys and electronic products. With the rapid development of the Chinese economy since the late 1970s, manufacturing has increasingly moved out of the territory and into China although some high value-added manufacturing remains. There is little heavy industry in Hong Kong and the economy is increasingly dependent on services. Hong Kong is the world's 10th largest exporter of services. Civil aviation, shipping, travel and tourism, trade-related services, and various financial and banking services are the main components of trade in services.

Hong Kong is also popular as regional head quarters for many multinational companies and has been successful in growing substantial indigenous companies in fields such as hotel management, property development and telecommunications. The local economy is dominated by the real estate sector which is active both within the territory and increasingly overseas in countries such as China, Malaysia and Vietnam. Hong Kong has independent membership of several international bodies such as the World Trade Organisation and for most international purposes is and will continue to be treated as a separate entity from China.

Some of the many advantages of Hong Kong include:

	Economic and Political Stability, Strategic location and a major Financial and Trading Centre
	Well established legal system based on the Common Law and transparent regulations
	Premier gateway for trade and investment into and out of Mainland China
	Freest economy in the world with low corporate and personal taxes
	No restrictions on capital flows into and out of Hong Kong
	Convertible and stable currency linked to the US Dollar
	A global communications hub and has excellent communications infrastructure
	World class International Airport and the world's busiest Container Port

Taxation

Taxation in Hong Kong is based on a territorial source principle. Hong Kong companies will only pay tax on profits sourced in Hong Kong and the rate of taxation currently is 17.5% on assessable profits. There are no withholding taxes on dividends or interest and no taxes on capital gains. However, withholding tax on royalties do apply, currently being 5.25%, and is only imposed on royalties paid to non-resident recipients not related to the payers. If they are related parties then a tax rate of 17.5% will be applicable.