Private Limited Companies offer flexibility to run business in Hong Kong. This kind of business entity does not have a minimum share capital required, and a company can be established starting with a share capital of 1 HKD. This is why it is a preferred investment vehicle for international businesses and entrepreneurs alike, due to its simplicity. And as your business grows and expands, the process of transferring or adding shareholders to the structure of your company is not complicated. However, there are a few considerations and steps to take to have a smooth process.
In this article, we will discuss how Private Limited Companies in Hong Kong can change their shareholder structure in the sense of adding or transferring their shares. More details will be discussed in the next sections.
What is the company shareholders' structure?
Company shareholders' structure, also known as the Ownership structure of a company, is the distribution of control that persons have over a defined business entity. In the case of Private Limited Companies in Hong Kong, there should be a minimum of 1 shareholder and a maximum of 50, and they don't need to be permanent residents in Hong Kong.
As businesses grow and their needs change, there might be some situations where the company structure needs to be revised. This could also be the case for people who own the company, due to personal or business reasons, who may want to expand or sell their shares in the company. We will explore both scenarios below.
Transferring shares
For the first scenario, the transfer of shares happens when the ownership of the current shares of the company changes from one party to another. This could happen between current shareholders when they decide to increase their participation by increasing their shares or when shareholders decide that they want to add more shareholders to their company.
This transaction can happen in two ways, either by selling the intended amount of shares or by gifting the shares. It is important to note the difference between the transfer of shares and the issuance of shares.
While the transfer of shares is related to the current shares the company has and the issuance of shares can happen at the moment the company is being established or when a company has decided to issue new shares.
Issuing new shares
In the next scenario, we will discuss expanding the number of already existing shares of the company, also known as issuing new shares. In order to issue new shares, all the current shareholders of the company must agree through a general meeting and specify the number of shares to be allotted to be able to continue with the issuance process.
In this situation, when a company creates new shares it could be done to increase its cash flow through the capital provided by the investors or even by providing something to enhance the business operation such as intellectual properties.
Obligations of the shareholders
From the side of shareholder’s perspective, especially if they are buying shares from a company as an investment or to obtain an income, they need to pay the full amount of the shares that were bought before they can receive any capital gain or dividends from the income generated from the operations of the company.
Now that we have expanded on these two scenarios, we will move to the prerequisites and the documents needed before starting the process.
Documentation - what is required before starting the process?
Once it has been decided and agreed on the process for transferring shares or issuing new shares, there are a few documents that need to be prepared prior to starting the process. Below is the list of documents required:
- Audited financial statement: It is preferable to use the latest audited financial statement of the company from the date the process is going to take place, otherwise it would not be possible to do the transaction with an older version. If the company does not have a current one, the company should catch up to the current period to finalize the process.
🔎 Tip: Read more on our article: Hong Kong Accounting and Bookkeeping - Prepare company records and reports.
- Company resolution by the shareholders: This resolution will mention the number of shares to be transferred to the new shareholder, and all the current shareholders must agree on the process.
- Passport copy or Identity Card of the individual.
- Residential address proof of the individual.
- Bought and Sold Notes or Sale and Purchase agreement: This will be the proof of the transaction of the purchase of the shares of the company.
- Instrument of transfer: This document will state the transfer or purchase of the specified amount of shares.
- Copy of the Articles of Association (AoA): It is important to review this document of the company just to make sure that there are no clauses that will impact the transfer of shares or the issue of new shares for the company.
🔎 Tip: Read more on our article: What you need to know about the Articles of Association in Hong Kong.
Normally, some technical knowledge is required to prepare some of the documents, and it is normal to request your Company Secretary to prepare them. This will save you time and also keep the transaction in compliance with the regulations of Hong Kong. Once the documents have been prepared and gathered, you can start the process and submit them to the corresponding authorities, such as the Inland Revenue Department (IRD). More details will be discussed in the next section.
How to carry out the shares transfer process?
Once all the documents are ready and prepared, the process can be started. After all, the only missing thing would be the signature of the parties involved, either a transfer of shares between the existing shareholders or adding a new shareholder by selling new shares.
Nevertheless, it is important to highlight that the process can be suddenly stopped or denied if the director of the company decides so. There is also a specific clause in the Articles of Association that dictates how this process should be carried out, as it is mandatory by the Hong Kong Companies Ordinance to sort this process out. Additionally, before selling the shares to a third party, the shares must first be offered to the existing shareholders.
As the last step, to finalize the process, the documents need to be submitted to the Hong Kong Stamp Office and the processing time takes around 3 to 5 working days once the document has been submitted. A fee would be determined to be paid based on the shares. With the stamp duty fee being paid, the stamp documents will be sent back to mark the process as finalised. Additionally, the Companies Registry must be updated about the process within one month of the change on the shares.
What taxes are involved in the process?
As briefly mentioned earlier, the process for the Transfer of Shares involves one of the lesser-known taxes that are charged in Hong Kong. This tax is known as the Stamp Duty, which should also encompass the Special Stamp Duty (SSD) or the Buyer’s Stamp Duty (BSD) but serve a different purpose. For example, the SSD is charged for the resale of residential property in Hong Kong that has been held for a short time, while the BSD is charged based on the value of the property bought by a non-Hong Kong resident in Hong Kong. These are regulated by the Stamp Duty Ordinance of Hong Kong.
Coming back to the Stamp Duty, which is relevant for this article, it is established that the Stamp Duty rates should be calculated based on the sale agreement and the value of the shares sold or transferred. There is a formula to calculate the amount of stamp duty fee to pay. For more information about the calculation of this fee, you can consult the following link from the Government of Hong Kong.
Conclusion
The share transfer process can be quickly prepared and finalised in a few days after the documents have been submitted to the authorities in Hong Kong. Nevertheless, as we have seen in this article there are a few steps to take before starting the process, and it is better to seek the advice of a professional, like your Company Secretary, for this kind of situation, especially when it involves money and the control of your company. If you are looking for a Company Secretary to help you maintain your company in compliance you can visit our Company Secretary Review page.
FAQs
What taxes are involved in the process?
The tax involved is called "Stamp Duty", which is calculated based on the sale agreement and the value of the shares sold or transferred.
How long does it take to transfer or issue shares in Hong Kong?
What is the company shareholders’ structure in Hong Kong?
