Will Covid-19 kill your Hong Kong Offshore Company?

Will Covid-19 kill your Hong Kong Offshore Company?

A Hong Kong Offshore Company Status is obtained by demonstrating the effective place of management outside of the city, so that (basically) the profits don’t derive from Hong Kong activities. The same principle applies to many jurisdictions with no or low taxes.

If accepted with such status by the Inland Revenue Department, the company will not pay taxes in Hong Kong.

The problem lies in the fact that many SME’s owners were using such opportunity to pay no tax in Hong Kong and only pay (sometimes not) on the dividends received in their country of tax residence.

In their country of tax residence some Hong Kong Offshore Companies owners are declaring the opposite than what they are telling to Hong Kong tax authorities, a Spanish resident would tell the Spanish tax authorities that the effective place of management of his Hong Kong Offshore company IS Hong Kong.

Apart from the obvious lies, and the attached risks, why is COVID-19 increasing the risks to get caught for a Hong Kong offshore Company owner?

  1. Demonstrating that the company owner wasn’t conducting activities from his country of tax residence was an opportunity for frequent travellers.
  2. Not being able to demonstrate that the activities weren’t conducted from the country of tax residence would mean a high risk to see all profits repatriated and taxed in the country of tax residence, with penalties.

Most of the SME’s owners did choose to hold the Hong Kong Offshore Company’s Director position, for few reasons:

  • To decrease operational costs by not hiring a Hong Kong nominee director.
  • To keep the only bank signatory power, a trust issue.
  • To avoid the risks to be taxed in Hong Kong as if the effective place of management is located in the city the profits tax will be levied.
  • In absence of qualified director to hold the position with credibility, a lack of competences and skills within a specific market being the common factor for all the Hong Kong nominee directors.

By playing the systems the owner of a Hong Kong Offshore Company was also eluding the facts that the CRS and the automatic exchange of financial information might disclose his positions and render all this highly dangerous.

A lot of individuals using the same approach weren’t caught but the risks are drastically increased with an absence of excuse.

Will the COVID-19 increase the use of a Hong Kong Nominee Director?

  1. Maybe, but in the same time cost of services are going up as the compliance costs are rising, plus fewer CSP’s will accept to render Hong Kong nominee services.
  2. The risks and advantages of presenting a mid-shore situation, with low tax rates in Hong Kong is becoming attractive.
  3. Most owners are still not informed about CRS and don’t know how to mitigate their risks.

What are the best options to safeguard against penalties and further issues?

  1. Paying a little bit of taxes isn’t an issue, the risk is to pay taxes without the possibility to benefit from a Double Tax Agreement as paying taxes in Hong Kong isn’t in itself a proof of substance.
  2. Working with professionals with a full view of International activities, not with local providers partially informed.
  3. Last but not least clients should accepts that the world is changing, and not for the best.
Raphael

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