Are you planning to incorporate a company in Hong Kong? You will need to understand more about the Common Reporting Standards because they affect most of your operations. In 2014, Hong Kong committed to implementing the CRS passed by OECD members.
Later in 2016, Hong Kong passed the requisite law operationalizing the CRS. In this post, we look at the CRS application in Hong Kong and why people looking forward to incorporating companies should seek to understand it.
A closer look at CRS application in Hong Kong
OECD passed common Reporting Standards after a long, illustrious history with other less effective legislations. For many countries, tax evasion is a burden to genuine businesses and denies governments’ important revenue needed for growth and development. The impacts dawned when the infamous 2008 global recession hit the world. No one was left out. And with that, no one wants to be left out preventing a repeat of the same problem.
In Hong Kong, CRS implementation can be dated back to 2014. Immediately after OECD passed the Common Reporting Standards, Hong Kong voiced its support and indicated it would pass relevant legislations. Two years later, in June 2016, Hong Kong passed the AEOI framework that defines the platform for exchanging information for reportable accounts
The Hong Kong CRS framework has four main things that affect opening and operations of a new company in Hong Kong.
- The framework outlined the nature of information sharing to be based on reciprocity: The CRS Framework in Hong Kong is guided by local agreements that define its operationalization. For Hong Kong to share information as espoused in the CRS, the respective jurisdiction has to sign appropriate Tax Information Exchange Agreement or Comprehensive Avoidance of Double Taxation Agreement. These agreements form the platform for sharing the information while a competent authority agreement defines the modalities.
- The financial institutions bear the greatest responsibilities in the implementation of CRS under the Hong Kong framework: The framework refers to financial institutions as reporting financial entities because they are at the grassroots and have to gather clients’ information and carry it to the IRD. This means two things. One, if you are opening a company in related financial services, there is a new obligation to all clients within your jurisdiction. Two, additional information will be required when opening a bank account.
- Under the framework, all account holders have to provide additional information to demonstrate their tax residence. This means that you must demonstrate where exactly your taxes are paid and whether all the obligations there meet the set standards.
- The new CRS framework of Hong Kong comes to reinforce the operation of previous double tax agreements. Previously, companies in Hong Kong used to enjoy preferential treatment when operating in countries that have ratified Double Trade Agreements.
Hong Kong CRS framework, tax residence, and tax substance
Tax residents are entities that pay tax to a specific jurisdiction by virtue of residing there. This means that if you reside in Hong Kong and pay taxes there, you are a tax resident. For companies, this means a lot of advantages related to preferential treatments when trading with other countries.
In Hong Kong, tax residence does not come automatically by simply running a company from there. Now, you must demonstrate economic value being contributed to Hong Kong. Under the new CRS framework, tax residence has become even more important.
How do you get tax residence certificate for your company under the new CRS framework in Hong Kong?
Ensure that most operations are carried out in Hong Kong
Tax residence certificate in Hong Kong requires that a company base most of its operations in Hong Kong. The Hong Kong administration hesitates to protect companies with most operations outside because the impact on the economy is limited. For example, if all operations are held outside Hong Kong, the company will easily qualify for 0% tax which means that the tax contribution is minimal.
By bringing the deals to Hong Kong, holding trade exhibitions, and other high-value operations in Hong Kong, you contribute to the economy in multiple ways. It is this compounded effects that Hong Kong administration want to see so that you can be protected from double taxation.
Demonstrate that the company is growing and impacting the economy positively
Every time that an investor makes an application for company registration, one of the requirements is the operational structure. The Hong Kong administration wants to work with top companies that grow fast and expand to neighboring countries.
This will require you to work harder so that the company starts opening branches, growing in equity, and acquiring assets. With rapid growth, the company creates new opportunities and increases its contribution to the economy.
Have an office of operation with all the infrastructure and regular bills
When you apply for tax residence certificate to present to the bank, the first thing that a bank wants to know is whether there is an operational office in Hong Kong. The office should be operational with standard infrastructure and staff. Besides, it should have its regular bills and be registered appropriately according to the Companies Ordinance.
Hold regular board and other important meetings in Hong Kong
The board meetings are the main determinants of the direction of a company (all about SPV Hong Kong). When such meetings are held, a lot of other auxiliary services that contribute to economic growth are involved. For example, booking hotel rooms, catering services, transport services, and others that help drive the economy.
The IRD will be persuaded to believe that Hong Kong has become the company’s important operational base and grant the tax residence certificate.
Pay all taxes on time
Paying taxes is the most important component when applying for Tax Resident Certificate. As a company, you need to maintain the books of accounts properly and pay all taxes on time. Note that the deductions remitted to the IRD should capture the actual situation of the company and progressive growth. If you have other tax obligations outside Hong Kong, it is important to capture it in your presentation of tax compliance (all about tax substance).
Develop networks with other local companies and contribute to their growth
Hong Kong administration works extra hard to help businesses grow and become profitable. Now, your impact will be felt more if you can develop networks that anchor growth of other companies. For example, if you are in the tech business, its contribution and ability to make other companies grow will convince the IRD to give you tax residence certificate with the first attempt.
Acquire property and keep growing it in Hong Kong
If there is a sense that you are only in Hong Kong to make a lot of profits and go away, a tax residence certificate will not be issued. Having been allowed to operate in Hong Kong, ensure to demonstrate that the company is there to stay and make Hong Kong better.
This can be demonstrated by acquiring properties in Hong Kong and sustaining growth. For example, the company can acquire shares from other companies in the capital market and physical assets in this Special Administrative Region of China.
Companies are scrutinized further before being allowed to open bank accounts
While acquiring a company under the Companies Ordinance might be relatively simple, getting a bank account will be very difficult. In addition to the certificate of legislation from companies registry, a lot more will be required to demonstrate the tax residence of shareholders and directors.
- Every shareholder whose name appears on the account name will have to provide additional information such as tax reference numbers back at home, date, and place of birth, and justification for opening the account.
- All signatories to the account will have to undergo rigorous scrutiny based on whether they come from a jurisdiction under CRS. Though only a few jurisdictions have entered into relevant agreements with Hong Kong for CRS operationalization, even non-reporting accounts still require extra scrutiny.
- The deals and operations held outside Hong Kong will attract extra scrutiny to establish their authenticity. The focus is ensuring that you meet all tax obligations and do not enter into deals with entities that are fraudulent.
Why you need help from experts
From the moment you decide to start operations in Hong Kong, you must appreciate all the new obligations under CRS framework. One mistake that many people make is trying to go it alone. Well, it might be a monumental task right from the start because of the huge documentation. However, it will become even more difficult when it comes to opening a bank account.
By identifying an expert to assist you from the beginning, it will be easy to register the company, acquire a bank account, and more importantly proof your tax substance.
This is all that you need to get the very important tax resident certificate for the company. Do not try going it alone; contact us right away for the best assistance.