The differences between a Hong Kong branch and a Hong Kong subsidiary of a foreign company stem from the fact that, unlike a branch, a subsidiary is an entity which, under Hong Kong law, is entirely separate from its parent. The business activities available to a company in Hong Kong are generally not dependent upon whether the company is locally incorporated and there is generally little practical difference between operating a branch and a subsidiary company in respect of profit computation. The rate of tax levied on profits is the same for local and foreign companies and dividends are not subject to separate taxation in Hong Kong.

The usual reasons for preferring a subsidiary over a branch include the following:

(1) the parent company will not be liable for the debts of its subsidiary; its legal liability will be limited to the amount of any unpaid issued share capital and its potential loss will therefore be limited (in the absence of a guarantee or other security) to the value of any assets it contributes by way of capital to the company;

(2) only that information which relates to the subsidiary must be filed with the Registrar and kept up to date;

(3) a subsidiary does not need to file its accounts on the public record whereas in some cases a foreign company will need to;

(4) the presence of a branch in Hong Kong makes it more likely that the "parent" company would be sued in Hong Kong even in connection with matters unrelated to its business operations there;

(5) it is usually simpler and more cost effective to set up a Hong Kong company than it is a Hong Kong branch;

(6) where the constitutional documentation in relation to the "parent" company is not in English or Chinese, this will not require translation if a local company is incorporated, whereas in the case of a branch it will require translation;

(7) it is not necessary to arrange for certified copies of any documents to incorporate a Hong Kong company whereas in the case of a branch it is so necessary;

On the other hand, the usual reasons for preferring a branch over a subsidiary include the following:

(1) there may be tax advantages under the tax laws of the place of incorporation of the "parent", in particular, in relation to the treatment of any losses which the Hong Kong operations may incur in the first few years of its operation;

(2) a branch can often rely on the credit of the "parent" company;

(3) if business operations are terminated in Hong Kong, the lengthy liquidation process required for a Hong Kong company can be avoided and any capital can simply be remitted out of Hong Kong;

(4) a Hong Kong company can normally only reduce its issued capital with the consent of the Court;

(5) share repurchases by Hong Kong companies in some cases will require the consent of the Court;

(6) no stamp duty (except in relation to any land or any shares in Hong Kong companies owned by the foreign company) will be payable on any transfer of the Hong Kong business operated by a foreign company, whereas stamp duty will generally be payable on any transfer of shares in a Hong Kong subsidiary company ;

(7) no duty is payable in Hong Kong on the authorised (or issued) share capital of a foreign company with a Hong Kong registered branch;

(8) the ongoing maintenance expenses involved with a branch can be lower than those involved with a subsidiary, in particular, as Hong Kong law does not require the separate audit of a branch.

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