Offshore Status of Hong Kong Companies
Hong Kong is often seen as a favorable business location, due to its low tax rates, easier access to the Asian market, as well as a relatively stress-free establishment procedure. The region’s stable political environment and excellent finance and banking services also provide investors with a better business environment. Moreover, there are no exchange controls in Hong Kong. A Hong Kong company may do business anywhere in the world and there is no requirement for the Directors and Shareholders to be residents in Hong Kong. The last benefit leads us to the consideration of the region’s stance on the offshore status of Hong Kong companies. There is no offshore status regulation in Hong Kong per se.
A company in Hong Kong can be established without substance. This means that the business operation can be run in name only with no office or staff and can be operated remotely. Under the current practices if no income is sourced from the Hong Kong company, meaning that all the income is sourced from abroad, then the company will not be liable for tax in Hong Kong. Generally, there are two common types of tests to determine a company’s offshore status:
Contract Effected Test
The contract effected test is used for determining the taxability of the income accruing to the taxpayer from trading transactions. The important factor here is whether or not the contract of purchase or sale is made in Hong Kong. This includes negotiation, conclusion and execution of the terms of the contract. The following factors should also be taken into consideration:
- How were the goods shipped?
- How were the sales solicited and orders processed?
- How were the goods procured and stored?
- How was financing arranged?
- How was the payment made?
The operations test is for cases other than trading and money lending (manufacturing income and passive income). For commission income, when applying for tax exemptions, one should take the following questions into consideration:
- What is the originating cause of the income?
- Did the originating cause take place in Hong Kong?
- What has been done to earn profits and where was it done?
Essentially enterprises should be aware of the following needs when applying for offshore status:
- No operations office in Hong Kong
- No staff hired and working in Hong Kong
- No customers/client from Hong Kong
- No suppliers from Hong Kong
- Income contract not negotiated or concluded in Hong Kong
- Goods not entering Hong Kong
- Services agreements or sales/purchases invoices should avoid involving any Hong Kong parties
- The actual operations take place outside Hong Kong
Once these basic requirements are met, the tax authority will check the supporting documents and decide whether the company should pay tax or not. However, once the exemption is granted the company should prepare annual accounting and audit reports, as well as tax returns in the jurisdictions where it operates outside of Hong Kong.
It is common for the tax authority to wait 2-3 years before questioning companies regarding their offshore status. At that point the company should prepare for a review of their books starting from incorporation. Obtaining an offshore status was quite popular up to five years ago, but now the tax authority is becoming quite strict.
Documentary evidences including but not limited to the following documents are critical to the success of the claim:
- Organization chart with full details of the company’s establishments in Hong Kong and overseas which should include the location and size of the office, the number of employees and their respective names, post titles, duties and remuneration packages.
- Travelling schedule and passport of the directors and the persons who are involved in the business of the Hong Kong company.
- A detailed description of the businesses carried out by the company in order to earn income. For each of the activities identified, the company should specify the name of the responsible person and the place where such activity was performed.
- With regard to the income, especially high-income, the investor needs to provide the following documents:
- Correspondence of negotiation with the customer and suppliers (email, fax etc.,)
- Distribution agreement or master sales agreement should be provided if any
- The purchase/sales order, sales confirmation, shipping documents and invoice of sales and purchase
- Relevant banking documents
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.
Tax, Accounting, and Audit in China 2015
This edition of Tax, Accounting, and Audit in China, updated for 2015, offers a comprehensive overview of the major taxes foreign investors are likely to encounter when establishing or operating a business in China, as well as other tax-relevant obligations. This concise, detailed, yet pragmatic guide is ideal for CFOs, compliance officers and heads of accounting who must navigate the complex tax and accounting landscape in China in order to effectively manage and strategically plan their China operations.
Strategies for Repatriating Profits from China
In this issue of China Briefing, we guide you through the different channels for repatriating profits, including via intercompany expenses (i.e., charging service fees and royalties to the Chinese subsidiary) and loans. We also cover the requirements and procedures for repatriating dividends, as well as how to take advantage of lowered tax rates under double tax avoidance treaties.
Adapting Your China WFOE to Service China’s Consumers
In this issue of China Briefing Magazine, we look at the challenges posed to manufacturers amidst China’s rising labor costs and stricter environmental regulations. Manufacturing WFOEs in China should adapt by expanding their business scope to include distribution and determine suitable supply chain solutions. In this regard, we will take a look at the opportunities in China’s domestic consumer market and forecast the sectors that are set to boom in the coming years.