offshore company formation & virtual office services

HONG KONG COMPANIES
 

ABOUT HONG KONG
ENJOY TAX FREE ADVANTAGE ON PROFITS EARNED FROM RE-INVOICING
OTHER ADVANTAGES OF HONG KONG COMPANIES
DISADVANTAGE OF HONG KONG COMPANIES
SET UP A TRADING COMPANY
SET UP A SERVICING AND COMMISSIONING COMPANY
SET UP AN INVESTMENT HOLDING COMPANY

 

ABOUT HONG KONG  

Hong Kong is one the world’s largest foreign exchange markets and banking centers. Its stock market is the world’s fifth largest (after NYSE, Tokyo, NASDAQ and London, following by Toronto and Frankfurt). With foreign exchange reserve of over US$140 billion, which represents more than six times the currency in circulation, Hong Kong has always been one of the ten largest holders of foreign currency reserves. Hong Kong is a former British Dependent Territory with a population of about 7 million. After 1st, of July 1997, Hong Kong became a Special Administrative Region of People’s Republic of China. Under the “one country two systems” concept, the Chinese government has kept its promise not to interfere with Hong Kong's autonomy. It is their most fervent wish to keep Hong Kong strong and prosperous. After 10-year of the handover, it is proved that Hong Kong has practically not changed. Its share of the world's biggest banks, corporations and billionaires keeps on increasing. Cost of living is one of the highest among major cities. The Hong Kong harbor handles more containers than any other harbors in the world. The Hong Kong airport has always been voted the best airport and is also one of the largest and busiest in terms of cargo and passengers. Hong Kong definitely remains one of the best places for doing business. The Pearl of the Orient is still an important financial, trade and industrial centre. Hong Kong among the domiciles worldwide retains its leading priority for trading and investment companies and is the most significant gateway to the vast market in China.
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ENJOY TAX FREE ADVANTAGE ON PROFITS EARNED FROM RE-INVOICING

There is only one kind of tax for a HK company i.e. Profits Tax which is at 16.5% on its assessable profits. There is no VAT, and no tax on dividend or interest income in HK.
Basically a HK company is not subject to HK taxes if its operations are not carried out in HK. In determining whether a HK company's operations are carried out in HK, all the company's operations (starting from customers' enquiries about product prices, place of orders from the customer, place of a purchase order to completion of sale and purchase) will be considered to find out which processes are conducted in and outside HK. The location of bank accounts is insignificant for this matter. For instance, a HK trading company with a bank account in HK will not be subject to HK taxes if: -

  • It has no real office in HK and only uses our office as a registered office
  • It has an overseas office in which the company's directors and staff are working
  • It has no staff in HK, its staff and directors rarely come to HK, e.g. about 2 weeks per annum or less than 60 days per annum
  • It negotiates, concludes and executes contracts with suppliers and customers outside HK
  • It has no HK suppliers and customers
  • Shipment does not go through HK and arrangement of shipment is not done in HK
  • Physical inspection of goods is not carried out in HK
  • We have assisted a lot of our clients to have successfully claimed for taxes not subject to HK taxes.
    N.B.  It should be noted that the information is presented in summary form for reference only and readers are advised to seek professional advice before formulating business decisions.
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OTHER ADVANTAGES OF HONG KONG COMPANIES
  • Hong Kong Companies are not perceived as offshore tax haven as Hong Kong is not regarded as a tax shelter.  Thus, Hong Kong Companies are considered as a good vehicle with great reputation for conducting international business.
  • Due to the advantages of the Double Tax Agreement between Hong Kong and China, Hong Kong Company is commonly used as a holding company to invest in China. It is widely recognised that Hong Kong is and will continue to be a significant gateway to China. 
  • Hong Kong has Double Tax Agreements with Belgium and Luxembourg as well which allows the enjoyment of tax benefits through proper structuring.
  • Hong Kong will soon become a much more important jurisdiction for tax planning as it is not subject to review by the OECD. It is one of the only "offshore" banking centres which will not be subject to the new directive on withholding tax on savings accounts which will affect not only the EU Member States but "all territories under their control" and Switzerland and the USA. This leaves HK as one of the only respectable international banking centres not subject to automatic exchange of information on savings accounts belonging to EU residents.
  • With the presence of large reliable international banks which provide excellent banking facilities including Internet banking and multi-currencies accounts. 
  • There’s no foreign exchange in Hong Kong which allows free trade.
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DISADVANTAGE OF HONG KONG COMPANIES
  • A Hong Kong Company is obliged to file the tax return and to prepare the audit accounts once the company has commenced business or has business activity for the assessment year.  If the company has never commenced business or no business activity within the said year, then the company can file just negative tax return without the audit accounts.  Otherwise, the company is required to prepare audit accounts and to file the tax return to the Tax Authority.  We have our accountants and auditor to help you out on this matter.  If the profit generated is offshore in nature, our auditor will help the company to arrange the offshore claim in which the profit is not subject to taxation in HK.
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SET UP A TRADING COMPANY
  • You can set up a Hong Kong Company to do trading business.  In order to enjoy the tax-free advantage, the business conducted must be completely outside Hong Kong.  It means that:

    • It has no real office in HK and only uses our office as a registered office
    • It has an overseas office in which the company's directors and staff are working
    • It has no staff in HK, its staff and directors rarely come to HK, e.g. about 2 weeks per annum or less than 60 days per annum
    • It negotiates, concludes and executes contracts with suppliers and customers outside HK
    • It has no HK suppliers and customers
    • Shipment does not go through HK and arrangement of shipment is not done in HK
    • Physical inspection of goods is not carried out in HK

    The Hong Kong Company issues invoice to their overseas customers for payment.  But the merchandise will be shipped directly from the suppliers (located outside Hong Kong) to the overseas customers without touching Hong Kong port.  All the shipments will be arranged by the suppliers.  When the Hong Kong Company receives payment from customers, it will then settle the invoice of the suppliers.  The profit will be accumulated in the bank account of the Hong Kong Company.  Since this business operation is deemed as outside the Hong Kong territory, thus the profit generated is tax-free.

    Operation Diagram:

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SET UP A SERVICING AND COMMISSIONING COMPANY
  • If a business earns commission by securing buyers for products or by securing suppliers of products required by customers, the activity which gives rise to the commission income is the arrangement of the business to be transacted between the principals. The source of the income is the place where the activities are performed. If such activities are performed outside Hong Kong, say in USA, no income tax will be levied in Hong Kong. This makes Hong Kong an extremely cost- effective tax planning vehicle for trading.
    If a Hong Kong Company is engaged in consulting business, in which the consulting agreements are negotiated, concluded and executed outside Hong Kong, and the services performed are outside Hong Kong.  Then the consulting fee earned by the Hong Kong Company is tax-free in Hong Kong.

    Operation Diagram:

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SET UP AN INVESTMENT HOLDING COMPANY
  • A Hong Kong Company can be used to hold investment portfolio, assets such as company shares, bank deposits, property and property rights to avoid withholding tax on dividend, interest income and capital gain tax.

    Hong Kong has Double Tax Agreements with China, Luxembourg and Belgium in which the use of Hong Kong Company as a holding company allows you to really enjoy the tax savings if you have right structuring.  Please see below the various possible structuring for your easy reference: -

    Double Tax Agreements between Luxembourg and Hong Kong
    Double Tax Agreements between Belgium and Hong Kong
    Double Tax Agreements between China and Hong Kong

    Double Tax Agreements between Luxembourg and Hong Kong
    The relevant withholding tax rates under the Hong Kong and Luxembourg domestic laws and those provided for in the HK/Luxembourg DTA are summarized in below Table.

     

    Dividends

    Interest

    Royalties

      Luxembourg non-treaty rate

    15%

    Nil

    Nil

    Hong Kong non-treaty rate

    Nil

    Nil

    5.25%

     Treaty rate

    0% / 10%1

    Nil

    3%2

    Notes

    1. 0% applies if the beneficial owner is a Hong Kong company which directly holds (1) 10% or more of the capital of; or (2) a participation with an acquisition cost of EUR1.2 million or more in, the Luxembourg company paying the dividends.  10% in all other cases.
    1. The treaty rate only benefits Luxembourg companies receiving Hong Kong sourced royalty (i.e. reduced from 5.25% to 3%) but not Hong Kong companies receiving royalties from Luxembourg as royalties paid to non-residents are currently not subject to withholding tax in Luxembourg.

    Among several advantageous provisions, it is proper to refer to the one relating to the distribution of dividends between Luxembourg’s companies and Hong Kong resident companies.
    This provision allows a distribution of dividends coming from companies established in Europe or everywhere else in the world into Luxembourg SOPARFI by using the vast network of double tax treaties between these countries and Luxembourg.  Dividends are exempted from corporation tax in Luxembourg and can then be paid without any withholding tax (normally 15%) to the parent company established in Hong Kong.  Moreover, Hong Kong does not withhold tax at source on dividends paid to the shareholders.
    Example:


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    Double Tax Agreements between Belgium and Hong Kong
    In this respect, the tax treaty concluded between Belgium and Hong Kong foresees in the following maximum withholding tax rates:

    • Dividends
      • 0% if there is a minimum holding of 25% held for an uninterrupted period of at least 12 months;
      • 5% if there is a minimum holding of 10%;
      • 15% in other cases. 
    • Interest
      • 0%
        • On commercial debts-claims represented by commercial paper, resulting from deferred payment for goods, merchandise or services supplied by an enterprise;
        • On debt-claims or loans of any nature (not represented by bearer instruments) paid to banking enterprises;
        • On deposits made by an enterprise with a banking enterprise;
        • On certain loans related to the Hong Kong or Belgian governments;
      • 10% in other cases. 
    • Royalties
      • 5% in all cases. 

    Example:


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    Double Tax Agreements between China and Hong Kong
    The principal features of the new arrangement include:
    Withholding Tax

     

     Dividend

     Royalty

     Interest

    China non-treaty rate

     0%(1) / 20%

     10%

     10%

    Hong Kong non-treaty rate

     Nil

     5.25%

     Nil

    Treaty rate

     5% / 10%(2)

     7%

     0% / 7%(3)

    Notes:


    (1) 

    Dividends from foreign investment enterprises with at least 25% registered capital held by foreign investor(s) are specifically exempt under the current Mainland tax law.</SPAN< TD>

    (2) 

    The 5% withholding tax rate applies to dividends paid by a Mainland company to a Hong Kong resident, provided that the recipient is a company that holds at least 25% of the capital of the Mainland company. 10% in all other cases.

    (3) 

    The 7% withholding tax rate applies to interest payable from the Mainland; the 0% rate applies to interest received by the Hong Kong Government or recognised institutions.

    Capital Gains
    The new arrangement includes an article on capital gains.  Under this article, a full tax exemption in the Mainland is available on a capital gain derived by a Hong Kong investor from the disposal of shares in a Mainland company, provided that the shares sold are less than 25% of the shareholding of the Mainland company and the assets of the Mainland company are not comprised mainly of immoveable property situated on the Mainland.  However, the implementation of this exemption is subject to the interpretation of the tax authorities in the Mainland.

    Given the fact that there is no tax on gains from the sale of capital assets in Hong Kong, this article would effectively give a unilateral benefit to Hong Kong taxpayers.  Although the exemption only applies to the sale of a minority interest in a Mainland company, it should still provide a relief for certain Hong Kong investors.

    Tax Planning
    The tax exemption for capital gains mentioned above and the reduced withholding tax on dividends, royalties and interest would increase Hong Kong's competitiveness and provide added incentives for Hong Kong companies and foreign companies to use Hong Kong to do business or to invest in the Mainland.  Tax planning ideas that can be explored include:

    1. using a Hong Kong company as an intermediate holding company for holding investments in the Mainland;
    2. using a Hong Kong company as a vehicle for financing investments in the Mainland;
    3. using a Hong Kong company as a vehicle for licensing intellectual properties to the Mainland.

    If you are interested in learning more about the new arrangement and its impacts on your company, please contact our consultant.
    For full details about the arrangement, please visit for the following government site: -
    http://www.ird.gov.hk/eng/pdf/e_dipn44.pdf

    Example:

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