Free Trade Zone vs Hong Kong Company Setup Which Is More Suitable for You?

In-Depth Analysis of Company Establishment in Domestic Free Trade Zones vs. Hong Kong Which Is the Best Choice for You?

As the global economic landscape continues to evolve and cross-border business operations become increasingly common, more entrepreneurs and investors are paying attention to the option of setting up companies either in China’s domestic free trade zones FTZs or in Hong Kong. Each approach offers distinct advantages tailored to different types of businesses and operational needs.

This article provides a comparative analysis from multiple perspectives-policy environment, operating costs, tax systems, and capital flow-while incorporating recent news updates, helping readers determine which path best aligns with their strategic goals.

1. Policy Support and Business Environment

In recent years, China has continued to deepen its policy of opening-up, with FTZs serving as experimental fields for reform. These zones lead the way in streamlining approval procedures and easing foreign investment access. For instance, in July 2025, the National Development and Reform Commission clearly stated its intention to continue advancing the preparation for the full customs closure of Hainan Free Trade Port, aiming to achieve island-wide customs control by the end of 2025. This move implies that companies established in Hainan will benefit from more flexible foreign exchange controls, lower tax rates, and greater trade freedom.

Since its establishment in 2013, the Shanghai FTZ has consistently improved its business environment, attracting numerous multinational corporations to set up regional headquarters. According to reports from Yicai, in the first half of 2025, the number of newly registered foreign-invested enterprises in the Shanghai FTZ increased by more than 18% year-on-year, demonstrating strong appeal.

In contrast, Hong Kong, as an international financial center, boasts a mature legal system and a highly open market environment. Despite facing certain challenges due to global economic fluctuations, Hong Kong remains a crucial bridge between mainland China and global markets. According to mid-2025 data released by the Hong Kong Special Administrative Region, while local GDP slightly declined in the first half of the year, the professional services and financial sectors remained resilient.

2. Tax System and Cost Considerations

Taxation is one of the most critical factors when choosing a business location.

Companies established in domestic FTZs can often enjoy preferential tax policies. For example, Qianhai and Hengqin offer a 15% corporate income tax rate to eligible enterprises. Similarly, Hainan Free Trade Port applies a 15% tax rate to encouraged new enterprises established before 2025, along with a 15% cap on personal income tax for high-end and urgently needed talents-making it even more attractive.

In Hong Kong, the standard profits tax rate for companies is 16.5%, but newly established businesses benefit from a reduced rate of 8.25% on the first HKD 2 million of taxable profit. More importantly, Hong Kong adopts a territorial source principle of taxation, meaning only profits sourced from within Hong Kong are subject to tax. This makes it especially appealing for companies engaged in international trade or offshore operations.

Labor and office costs also play a key role. Compared to premium office rents in major cities that can reach thousands of RMB per square meter, emerging FTZs such as Hainan and Guangxi offer significant cost advantages in land and human resources. However, for businesses requiring an international team and efficient financial services, Hong Kong's overall operating costs may be more competitive.

3. Capital Flow and Regulatory Environment

The ease of capital movement directly affects cross-border business efficiency.

Domestic FTZs are piloting policies such as capital account convertibility and easier cross-border financing. In August 2025, the People's Bank of China announced plans to promote a unified RMB-foreign currency account system in the Guangdong FTZ, further enhancing enterprise capabilities in managing cross-border funds. However, due to the RMB not being fully convertible, domestic companies still face certain restrictions on outbound capital flows.

By comparison, as one of the world's leading offshore financial centers, Hong Kong allows free inflows and outflows of capital, enabling companies to manage global funds more flexibly-an important advantage for firms involved in overseas investments, mergers and acquisitions, or international financing.

In terms of regulation, although domestic FTZs have gradually relaxed oversight, they still require compliance with relatively strict foreign exchange and anti-money laundering rules. Hong Kong, on the other hand, is known for its efficient regulatory framework. With proper compliance, companies can complete processes such as registration, bank account opening, and tax reporting quickly and smoothly.

4. Industry Fit and Future Potential

Different industries should consider their specific needs when selecting a location.

For technology, pharmaceuticals, green energy, and other industries prioritized by the Chinese government, domestic FTZs often provide special subsidies, research funding, and talent introduction policies. For example, in September 2025, Qianhai in Shenzhen introduced new measures offering up to RMB 5 million in RD grants for companies in artificial intelligence and biomedicine.

Businesses engaged in international trade, investment, and asset management tend to favor Hong Kong. Its well-developed financial infrastructure, diverse financing channels-such as Hong Kong IPOs and bond issuance-and a wide range of professional service providers collectively offer strong support for business growth.

Notably, as the development of the Guangdong-Hong Kong-Macao Greater Bay Area progresses, interactions between domestic and offshore enterprises are becoming more frequent. Many companies adopt a dual-city strategy establishing operational entities in domestic FTZs while setting up holding or investment platforms in Hong Kong, creating synergies and mutual benefits.

5. Conclusion

In summary, both domestic FTZs and Hong Kong offer unique advantages for company establishment-there is no universally superior choice.

For enterprises seeking to deeply penetrate the Chinese market and benefit from policy incentives, FTZs may be the better option. Conversely, for companies emphasizing internationalization and requiring greater flexibility in cross-border capital flows, Hong Kong presents irreplaceable strengths.

Ultimately, the decision should be based on the company's strategic objectives, industry characteristics, capital structure, and stage of development. It is advisable for businesses to thoroughly understand the detailed policies of both regions and consult professional legal and tax advisors to ensure a smooth, compliant, and efficient setup process.