Tax substance in Hong Kong, a new issue?

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.