Why Hong Kong is a perfect location for TECH Companies?

Hong Kong TECH companies

What are the best options?

Tech companies are often fast growing, so their legal and business environment should facilitate their development. Hong Kong’s economy was rated the freest in the world from 1995 through 2019.

The overall tax burden equals 14.1 percent of total domestic income. Government spending has amounted to 18.0 percent of the country’s output (GDP) over the past three years, and budget surpluses have averaged 4.0 percent of GDP. Public debt is equivalent to 0.1 percent of GDP.

So, your Hong Kong Company will benefit from a steady environment with little to no changes in taxation when in the same time other countries will surely have to raise taxes after months “printing money” to support their economies.

No sales tax or VAT -No withholding tax -No capital gains tax-No tax on dividends-No estate tax

If your Tech Company should enter into a merger, an acquisition, being sold or combine forces with other markets players under any circumstances, Hong Kong will remain the best possible location.

Option A – Zero Tax

  • Claim of offshore profits is prepared when (maximum 18 months after inception) audit and tax declaration are submitted. Pre-ruling is possible but expensive (circa USD 30K) and often useless as if the below rules are respected there are no issues
  • NO Hong Kong Director, employees, office warehousing, transit of goods, clients and suppliers. the main rule being:
  • No profits should derive from activities conducted, managed, controlled in Hong Kong.
  • Records keeping of proofs and demonstrations that the business is managed outside of Hong Kong, if we are in charge of a XERO accounting, instead of the client doing so, we could better follow-up the company activities.

The advantage of this option is in the title, the risk is to see the shareholder’s country of tax residence claiming that the Company profits derives from an activity conducted in the shareholder/director country of residence and enforcing taxes.


    Option B – Light Substance

    • Company is subject to profit tax (8.25 % the first USD 250,000 then 16.5 %)
    • Hong Kong Director with bank access (view or dual signatory)
    • Office located within the Director business environment/activities and not at a Corporate Services Provider address

    This option allows the shareholders to claim that all activities were conducted in Hong Kong, the HK tax authorities (Inland Revenue Department) will be happy to tax the company.

    But paying taxes in Hong Kong, or simply said in any country, doesn’t means that the Company has substance in the jurisdiction where profit taxes are paid. If the shareholder wish to benefit from a Double Tax Treaty Agreement then the Hong Kong Company would have to obtain a Tax Residence Certificate.

    In order to obtain the Tax Residence Certificate, the Hong Kong Company will have to demonstrate the below;

    1. 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
    2. The Director will organize the meetings in Hong Kong for the directors/partners to make resolutions with a description of the subject matters discussed.
    3. The company should hire employees besides administrative officers; this could be “solved” with an employment contract for the local resident Director.
    4. The fix place of business should be in Hong Kong, an office lease (sublet) would suffice
    5. The main banker should be in Hong Kong.

    The Option B – with a light substance, could then suffice when the shareholders are not residents in a country with a double tax treaty agreement with Hong Kong or simply said when the risks of being taxed (in their country of residence) on the Hong Kong Company profits, are considered as too low to implement a more sophisticated solution.


      Option C – Hong Kong Substance

      • Experienced Hong Kong Director
      • Employment contract for the Director paying retirement taxes and insurances
      • Bank signatory power, individual with main bank in Hong Kong
      • Lease agreement in Director’s office or at a separate fully dedicated to the company location.
      • Multiples substance related actions, including meeting with clients/suppliers.

      This option could/will match the requirements to obtain the Hong Kong Tax Residence Certificate and has the advantage of a public exposure in accordance with what are expecting banks and business partners.  

      Agreements impacting the Hong Kong Company profits

      Tech companies are facing specific issues, the companies are working “in the cloud” and ends up having their substance spread into different continents.

      Employees are often very talented freelancers working from home, instructions and meetings are taking place online, administration is often weak in term of demonstration/proofs of activities.

      A Hong Kong company could have from inception a profit-sharing agreement with another company which will provide the skills, knowledge, human resources, network and potentially a loan to the company and in exchange of part of the profits.

      Correctly worded, with a calculation based on the profits calculated quarterly. The agreement is to be stamp duty for date validation.


        Director Services, the related risks & solutions for the clients

        Director Services

        The risks for the clients requesting Directors Services are not often considered accurately. There are opportunities to mitigate the risks and to protect the client’s interests.

        Directors powers and duties

        The notion of Nominee Director and the corresponding nominee agreement are unknown from third parties (except bankers and we will engage this topic below) and this leave room to Directors powers being potentially abused. Having an agreement mentioning that the Director will only act on written instructions is enforceable but obviously only after the commission of potential illicit actions.

        Directors engaging in good faith the company into a delicate situation

        Honesty doesn’t compensate experience and skills, a Director could fail his Director’s duties by inadvertence, misjudging an operation and not taking into consideration a specific law or regulation. The potential to see errors is important, the demonstration of this is reflected by indemnify agreements and liability insurances requested to protect the Directors.

        Directors personal reputation and private activities

        Extreme political views, engagement into private activities in opposition with the Company values, the Directors activities on social medias could damage the company reputation. The public exposure of a Director is nowadays easily accessible to competitors, business partners and compliance departments.

        Directors professional profiles

        Directors are often selected from the team of the Corporate Services Provider, from a Certified Public Accountants firm or from a Legal professional’s firm. Despite the Company obvious advantage to have such professionals well aware of the compliance process as Directors, this is also a demonstration that the Directors are not specialized into a specific activity, say digital marketing, and this only will drag attention to their Nominee roles.

        Directors Business activities

        Risks are attached to every operation, to every Companies, by multiplying operations and companies and by engaging in many Directorships the risks are increasing drastically. The possibility to see a director bringing reputational, or worst, issues to a new client is real. Additionally, the Directors access to proprietary information (and the multiplication of such clients) is generating difficulties to always maintain a “Chinese-wall” between clients.

        Banking difficulties

        This subject itself could be expended into a long article, as a matter of fact the most important notion is the UNUSUAL CONFIDENTIALITY level so, basically, it’s a judgment call from the bank compliance department about the use of Nominee Director Services. Some banks are very reluctant to accept Companies using Nominee Directors and Nominee shareholders services.


          The risk assessment process could be supported by an unbiased legal professional (not providing the said Directors Services). In addition to a compliance on the company providing the individual directors I would suggest the below actions.

          1. Hiring two Directors

          One Director could go rogue, two at the same time would be extremely rare. Having the directors not located in the same country could also represent some tax advantage.

          2. Request for a qualified, fit & proper, Director

          The Director should have at least 5 years of experiences in a Senior position, plus adequate experiences as a Director for other companies.

          3. Request for a list of occupied positions

          The Director in addition of his/her qualifications should present an impeccable public profile, a compliance should be effectively prepared on his/her profile and the client should obtain a list of all the Direction positions held, at least in the company jurisdiction.

          4. The Director should have something to lose

          Let’s be straight-forward, a taxi-driver would not attach great importance to his public exposure as a company Director, a director should suffer (and will but it’s another story) from any wrong doing by any of the Companies for which he does act as a Director.

          5. Soft factors are important too

          Where does the Director reside? A public housing location will not be credible for an important company, his age and professional experiences are also informing about his qualities when your business partners will search the public register.

          6. Documents list to obtain

          Passport copy, identity card copy, address proof (utility bill) of less than 3 months old, Resume (CV), list of positions as Director in the same jurisdiction.

          7. Compliance to be performed

          Short compliance on the Companies for which the Director is acting, searching for red flags about activities and adverse medias. Full compliance on the proposed Director – private database and open sources.


          Few words about the Hong Kong situation:

          In Hong Kong there is No PUBLIC Register of significant controllers, so the use of Nominee Directors and Nominee shareholders is effective to protect confidentiality, privacy and business freedom.

          These services were in the past very well accepted, quite common and so obviously misused by criminal and tax cheaters. AML laws and regulations and more effectively bank’s reluctance to onboard clients using nominees did put the services providers on heavy pressure.

          The main issue is the compliance, and so the associated costs, incurred by a Corporate Services Provider before accepting a client and for the continuous monitoring of the Company activities.

          The Corporate Services Provider is confronted to a long list of risks, this will be explained further in another article. Offering nominee services is often reserved to existing clients or to other professionals whom performed due compliance and are knowing their clients very well.

          Disclaimer:
          
          I the co-founder of a Corporate Services Provider licensed in Hong Kong which provide Nominee Directors and Nominee Shareholders services.

            Hong Kong Company Registration Search

            Hong Kong Company information are publicly available with a simple registration search.

            Forget about business confidentiality and privacy, we live in a new era of transparency and everybody could access information.

            A Hong Kong Company registration search will reveal the director(s) name and addresses with their passports number.

            A Hong Kong Company registration name will also reveal the shareholders names, addresses, passports numbers, corporate shareholders names and addresses as well as additional information about the capital and the number of shares.

            To access information about a Hong Kong Company you should go online and pay a small fee, at least not all the information are available free of charge as it is the case for the UK company house.

            Less to say a small fee will not be a constraint to unwanted curiosity so how to protect you personal information ?

            A ) by using Hong Kong nominee director services

            B) by using Hong Kong nominee shareholder services

            Hong Kong Company registration search could be performed on https://www.cr.gov.hk/

            Hong Kong nominee director services are facing some reluctance by the banks during the onboarding process, the reasons behind privacy needs should be explained in details and the financial institution should be convinced of the treat created by a public exposure.

            Hong Kong nominee shareholders services don’t pose the same issues when banking in Hong Kong, its a more common situation.

            Hong Kong Director Nominee Services​

            August 3, 2020

            Hong Kong Director Nominee Services

            Protecting confidentiality has always been part of the services provided to international entrepreneurs. Suspicions have arose because of this additional layer of privacy but this is not obviously taking into account the fact that financial institutions are informed about such arrangement.

            Hong Kong nominee director services are not protecting criminals , the bank compliance is enhanced when the presence of a nominee director is disclosed and this is considered a a red flag during the compliance process.

            Nominee director services in hong kong are not legally to be understood as an exemption of responsibilities and liabilities for the nominee director. A company director in hong kong has important responsibilities and will not be exonerated by a nominee agreement.

            A hong kong nominee director accepting such mandate too easily is definitively something that should question his professionalism as the nominee director exposure is a crucial factor.

            Before accepting a hong kong nominee director position a full and enhanced compliance process as well as an indemnify agreement should take place.

            For the client of hong kong nominee director services the main task will be to understand the director profile and experience, his internet exposure to identify potential reputational issues and the absence of conflict of interests