Hong Kong remains one of the hottest start-up cities (for more details, read article here), and one pivotal reason is that HK continues to expand its network of income tax treaties rapidly - HK has entered into Comprehensive Double Taxation Agreements / Arrangement (DTAs) with 40 jurisdictions (full list here) up to August 2018.

In order to claim tax benefits available under DTAs, some overseas entrepreneurs or investors owning HK companies applied for HK tax residency certificates (“Certificates”) from the Inland Revenue Department (“IRD”), and they may recall that the application process requires a well-thought-out interpretation to prove the applicant can qualify as a resident for the purpose of the relevant DTA, which is a prerequisite for enjoying DTA benefits. Provided that there is no abuse of the DTAs in question and as a responsible treaty partner internationally, the IRD is willing to facilitate the reduction of foreign (withholding) taxes in the source countries by issuing tax residency certificates acknowledging that the HK company or person is a HK tax resident.

In this article, we’ve included a few examples illustrating how some of our clients have enjoyed the DTA benefits step by step.
 

HK tax residency certificate application needs a convincing interpretation nowadays to prevent rejection by the IRD.

What’re the Possible Tax Advantages?

For those who are not sure or still considering whether it’s worth to obtain a Certificate, the envisaged tax benefits that a person or corporation is potentially eligible for, might help you make the decision.

Yes, you heard it right. There are multiple ways how the applicant may benefit from getting a Certificate. For example, you may avoid or lower the withholding taxes on dividends, interest and / or royalties / license fees in the jurisdiction from where the payments are made; you can potentially avoid capital gains tax in the country where shares are disposed of; etc. The possible outcome and advantages vary on a case-by-case basis.

Although this Certificate is not a ‘must-have’ item for every taxpayer in HK, if the country where you (are considering to) carry on business or invest has a DTA with HK, obtaining such a tax residency certificate could provide obvious tax benefits. In particular, it is noted that HK has the most favorable DTA with Indonesia (compared with any other DTAs that Indonesia has concluded so far).

Who Can Apply for a Certificate of Resident Status?

In principle, any individual who ordinarily resides in HK, any company incorporated in HK, and any foreign (e.g. Seychelles, BVI, Cayman Islands) company which is controlled and managed in HK can apply for a Certificate from the IRD. To avoid abuse of DTAs, however, the IRD would ask for the (corporate) applicant to have an appropriate degree of ‘business substance’ in HK though (simply said, ‘shell companies’ that actually have no substance in HK would not be entertained by the IRD).

Let’s take a look at the case studies below:-

CASE 1: “ I have companies in both Mainland China and HK, it’s almost the end of the current quarter, so I’d like to pay dividends from our Mainland Chinese company’s retained earnings to its shareholder in HK to myself. But the high withholding tax and foreign exchange controls seems to make the profit repatriation complicated?”

ANSWER: The proposed transaction could be like the Mainland Chinese company paying dividends to the HK company, and the HK company pays dividends to its shareholder(s). By doing so, the originally high withholding tax % will be decreased from 10% to 5% if the DTA applies, and the dividend income of the HK company will become non-taxable in HK. In such case, the Mainland Chinese tax bureau would request the Mainland Chinese company to submit a Certificate from the IRD in HK, confirming that the recipient of the dividends, i.e. the HK company, is a resident of HK for the purpose of the HK / China DTA. Once the dividend income is received by the HK company, it can be further distributed to the shareholder / yourself without any withholding tax leakage since HK does not impose withholding tax on dividends paid to non-residents. The Certificate also forms part of the supporting evidence in case the Mainland Chinese foreign exchange authorities request documentation for the cross-border payment of the (net amount of) dividends.

CASE 2: “ I’d like to open a new or additional bank account for my business, yet I left my home country behind as I travel here & there all year around. However, when I tried to open a corporate bank account, it requires me to declare the residence of my company so I got stuck there...”

ANSWER: This is where our consultant will help review your business activities and the jurisdictions involved, in order to guide you with the preparation and application for a Certificate in case the bank asks for proof of the residency in view of opening or maintaining your company’s bank account(s).

There are various elements that can affect the possible outcome. To enjoy the most out of the benefits available under DTAs, the best approach is to obtain professional advice from our experienced specialists to get well prepared before making an application. You may also check out our Certificate of Resident Status Package here. Feel free to shoot us an email at info@bridges.hk anytime for in-depth advice or appointment making with our tax strategist.

Or, simply drop us a private message to start chatting with our advisors who will swiftly answer your queries. Let’s work together to conceive your sagacious cross-border tax planning before another year-end!

In the blink of an eye, it’s the beginning of a year again, which means you could start over to think about how to deploy your business plans, and at the same time, not to miss any local compliance duties that might affect your company’s operation, especially if you are a foreign entrepreneur. Ring a bell? Yes, don’t forget the principle “the earlier the better” - when it is talking about tailoring your own tax strategies and being well prepared to report your taxes to the Inland Revenue Department (IRD) on time in this year’s Apr, not too much time left honestly. 

** Commencing from the year of 2018/19 (i.e. on or after 1 April 2018), the HK profits tax rate will be reduced from 16.5% to 8.25% according to the newly proposed two-tier profits tax system. On this system, the tax rate for the first HK$2 million of profits is being halved to 8.25%, and 16.5% will be kept for profits exceeding that amount. Without a doubt, this new measure will provide huge tax relief to start-ups, SMEs and international entrepreneurs like you, provided that 8.25% is an extremely low profits tax rate among global market.

No clues yet on where to start? Let’s take a closer look at some of the basic TAX FILING & PLANNING areas that need your attention if you have a business in HK :
 

Get Familiar with the Compliance

There are 3 types of annual tax returns the IRD will issue to those entrepreneurs doing business in HK for more than 1 year since the date of incorporation: Employer’s Return, Profits Tax Return and Individual Tax Return. Different tax return has different kinds of compliance. Taking Employer’s Return as an example: there are several types of document you need to file for your employees compulsorily (e.g. completed BIR56A and IR56B - the Employers’ Return of Remuneration and Pensions Forms; completed IR6036B that is about remuneration paid to persons other than employees; etc.), for which you might feel dizzy when seeing all these requirements and a little nervous that some of them could be filled out incorrectly, and your tax return will get rejected at the worst case.

So yes, if you are not familiar with HK tax compliance, it can give you a real headache (although HK tax regime is rather simple, its documentation filing requirements are relatively rigorous due to the well-developed regulatory system). For you, it could be a stress-relieving assurance if all your tax filing duties are managed by a professional and experienced agency in HK with good reputation.

Accurateness & Effectiveness

Please keep this in mind: if your accounts and audit reports are not built properly from the beginning, it is not easy to further execute an effective tax efficiency plan in the financial reports when you start making good profits at a more matured stage. Some people might think they can just prepare some simple bookkeeping records by themselves for their businesses since they don’t have much resources - that’s a misconception indeed - provided that every HK business is required to submit audit reports to the Government every year in general, if the full set of accounts including Profit & Loss Accounts, Balance Sheet, General Ledger, Trial Balance, etc. is not available for the auditors to assess, they just can’t finish the auditing procedure, and nearly unable to give any advice on tax compliance strategy.
In fact, getting a reliable accounting service provider to help is not as hard (and expensive) as you think, simply check out the rate here to have an idea. After your accounts and audit reports are well arranged at an early stage, next you will be able to review the whole financial picture of your business in advance, and receive the tax computation information for fixing your financial strategies in the most tax-efficient manner.

Yet, not only we need to focus on financial accurateness and optimisation, timeframe is also one of the key elements. Given that you‘ll not want to face penalties or prosecution due to late submission of tax return (or so far without noticing it at all), some agencies will even send you reminders and related advice on your coming tax reporting date and you would never, ever miss the deadline! For those outstanding service providers that are capable of doing this, it would need years of battlefront experience or in-house accounting specialists to take care of their clients, case by case, from head to toe.

Tax Exemption for Offshore Company?

As one of the most flourishing market in the world, HK has adopted a lot of overseas investors. Some of them (including you??) might be running an offshore business while the operation does not really take place in HK. You may wonder how your company can be claimed as an ‘offshore business’ by the IRD and it will then be able to enjoy tax exemption? To put it simply, certain criteria need to be met to qualify for such definition, e.g. the terms of the purchase and sales contracts are completely negotiated and conducted with suppliers and customers outside HK; the service is performed in a place wholly outside HK; etc. Please click here for details of qualifying for ‘offshore claims’ submission, while one important key is to prove the profits are not liable to HK Profits Tax by proper planning at the initial stage.  

As seen, there are heaps of tax compliance issues that could be affecting your final tax reporting and optimisation result. Although different accounting & tax advisors have their own specialties, how do you know which one can be trusted? For newbies, trying to go for those with word of mouth, years of experience and a solid foundation might help. If you are still unsure how to start or execute the whole arrangement properly, simply send a private message to us today!

Many of our clients sway between the choices of setting up a HK company and offshore company like Seychelles, BVI before coming to us. Last time in the blog: Which Entity Will Drive More Efficient Operation - HK or Offshore Co.?, we have covered 3 important questions to ask yourself before making such decision, yet after the incorporation, from time to time, you should review whether the profits generated are derived from HK or not. If you found your HK company is generating all profits wholly outside HK, then you may be eligible to enjoy tax exemption because your profits are not liable to HK Profits Tax. Here we‘ll provide more clues for you to take a closer look.
 

Most entrepreneurs chose to start their HK business as they foresaw they may have business activities in HK or they valued the good reputation standing of HK company. However, we came across certain exceptional cases - some clients might realize that their company did not involve a profession or business in HK after it had been operated for some time, and would like to check if they can claim their business offshore and lodge such filing with the IRD.

Mainly there are TWO types of Offshore Claim that might be applicable to you: Profits Tax and Salaries Tax:-

>> For Profits Tax, it is essential to identify how your business profits are generated or derived from HK, please take a look at the questions below for a better understanding:

* Q1 : What is the organization structure of your business?
* Q2 : How is the service agreement made?
* Q3 : Who performs the service? Where does this person locate?
* Q4 : How is the payment made and received?

If all your answers to the above questions are concluded in: outside HK, you may consider talking to your BRIDGES consultant to see if it is worth to file an Offshore Claim.

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>> For Salaries Tax, the main point is to see whether a person’s income derived from employment is arising in HK or not. As a staff, senior management or director, check out the following 3 crucial questions to easily identify your situation:

* Q1 : Did you render services in HK? NO?
* Q2 : Did you visit HK for more than 60 days? NO?
* Q3 : Is your foreign tax paid? YES?

For example, if you are a foreigner being employed as the director of a HK Company (with an employment contract), and you have visited HK for 57 days only throughout a year, you can consider applying for Offshore Claim upon your employment income. It’s suggested to approach your tax consultant and get dedicated advice first for full arrangement.

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The above questions and examples are for your own reference only, cases have to be individually evaluated and advised by experienced tax experts. Keeping you stress-free (especially when you are aboard), the tax team here at BRIDGES can provide preliminary tax review on your company’s case and reports, and this treatment is complimentary if you are our existing accounting client.

Starting early makes it easy. Generally the whole process will last several months or even more than 1 year depending on the case complexity, thus please feel free to seek our advice now to kick start your early preparation and submission if needed. In any case you are required to submit the first Profits Tax Return (in 18 months since incorporation) with completed audit report, for which it can be arranged by us in a legitimate format. If you decide to proceed the Offshore Claim, it will be filed to the IRD and you shall receive a so-called Query Letter from them with a full list of questions for your answering within 1 month time. The appointed tax representative will then act on your behalf and handle all correspondence with the IRD by furnishing appropriate information and reply.

Provided the application is successful, it will take a few years for the IRD to assess your case again on whether your latest profits are chargeable to HK Profits Tax, so you won’t receive the local tax filing request frequently under this arrangement. Chat with our experienced team now and see if we can help save your time and hassles too!