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;
- 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 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.