A Hong Kong Holding Company will benefit from the territorial tax system,
- The dividends received from a local company subject to profits tax, so resulting from an investment by the Hong Kong Holding company into another Hong Kong company are specifically exempt from profits tax.
- Dividends received from companies that are managed and controlled outside Hong Kong and carry on no business in Hong Kong are in practice exempt on the basis that they are not derived from Hong Kong.
- Any profits derived from the subsequent exit by sale or disposal of the local holding company should generally be treated as exempt from profits tax because Hong Kong does not tax profits derived from the sale of capital assets.
- The disposal of any foreign subsidiaries held by a Hong Kong holding company is not taxed in Hong Kong unless the acquisition of these subsidiaries is considered as speculative or as part of a trade carried out in Hong Kong.
- Disposal of a Hong Kong subsidiary is subject to 0.02 % stamp duty on the value of the shares transferred.
Additionally, there is no dividends tax in Hong Kong so no withholding taxes on payments of dividends and interest.
Hong Kong signed Double Treaty Agreements with numerous countries
IRD (Hong Kong Inland Revenue Department) is making it more difficult to obtain Tax Residence Certificates for HK companies to claim tax benefits and foreign tax authorities are also expecting the Hong Kong Holding Companies to demonstrate their place of control and management in the city in order to enjoy the tax benefits. This means that the Hong Kong holding company would not be considered as having an offshore status.
In order to obtain the Tax Residence Certificate, the Hong Kong Holding Company will have to demonstrate the below;
- Local resident Director with the abilities to 1. Formulate strategic policies 2. Determinate business directions 3. Organize the work plan 4. Decide on the mode of business financing 5. Implement management policies, work plan etc. 6. Evaluate the business performance
- The Director will organize the meetings in Hong Kong for the directors/partners to make resolutions with a description of the subject matters discussed.
- The company should hire employees besides administrative officers; this could be “solved” with an employment contract for the local resident Director.
- The fix place of business should be in Hong Kong, an office lease (sublet) would suffice
- The main banker should be in Hong Kong.
The concept of a Hong Kong offshore company will only be valid after acceptance of the offshore profits claim.
The incorporation of a Hong Kong company is the same whatever its future use as a Holding Company , a Special Purpose Vehicle , a trading or consulting company etc..
The Company can’t be legally defined as a Hong Kong Offshore Company from its incorporation process. Only after deployed activities and when preparing , a maximum of 18 months after inception, the Company audit the Company will be then in a position to claim offshore profits.
Its a claim, this means that the Hong Kong offshore profits claim could be questioned and so ..rejected.
The Company should be prepared to demonstrate the absence of activities in Hong Kong and the process should be repeated as a company could change its business models and activities.
The Hong Kong offshore Company concept also trigger additional and complex questions as if the company doesn’t have activities in Hong Kong the effective place of management should be located somewhere else.
When Hong Kong isn’t the effective place of management , if the offshore profit claim is accepted by the Inland Revenue Department, then the Company will be exempt of profits tax in Hong Kong.
Hong Kong with notable absence of VAT and Capital Gain has anyway a low tax and pro-business environment.
Paying profits tax in Hong Kong is advantageous, only 8.25 % till USD 250,000 and 16.5 % after this threshold.
The notion of tax substance in Hong Kong is becoming a real issue as travels are now limited, so the effective place of management could remain for a lot of SME’s the effective location of their beneficial owners.
Obviously the 1.3 million Hong Kong companies don’t all have offices and employees in the city , a large number of companies are paying local profits tax before repatriating their profits as dividends to the countries of tax residences of their beneficial owners.
But paying taxes in Hong Kong isn’t equal to having a tax substance as required by the double tax treaty agreements. The effective place of management where all strategic decisions take place, the implementations are decided etc.. is de facto where the company director is.
But for most small and medium Hong Kong companies having a foreign ownership, the beneficial owners decided to hold the position of Directors for confidentiality, efficiency and costs reasons.
But a Hong Kong company with a foreign Director not being anymore present in the city to take decisions and to implement them will have difficulties to demonstrate that the effective place of management is in Hong Kong.
Before the drastic limitation of business trips this wasn’t an issue, a frequent traveler had arguments to oppose to his country of tax residence, these arguments died with the Covid 19 apparition.
Tax substance in Hong Kong could be increased by having a individual local Director under an employment contract, there are multiples other actions to be taken to protect the Hong Kong Company and to obtain a Hong Kong Tax Residence Certificate.