Dateline: Tbilisi, Georgia
I love Hong Kong. In my books, it’s one of the greatest cities in the world. The stunning skylines contrast perfectly with the lush green mountains creating unforgettable views. The city is always bustling with people from across Asia and beyond, and the banking sector seems to never sleep.
For planting business flags, it’s one of the most stable and attractive jurisdictions in the world. Unlike the island “tax havens” that you might consider for economic citizenship, Hong Kong is a solid financial center with real business activity that also offers the perks of low to zero taxes. No one would ever question the legitimacy of your Hong Kong business. Unlike having a Seychelles or Belize company (which automatically sends the message you’re just trying to evade taxes), having a Hong Kong corporation is a globally respected business practice.
And why not? Every year Hong Kong places within the top five of the World Bank’s Ease of Doing Business Rankings. It is also among the top five busiest container ports in the world and is a world-class center of manufacturing. It’s also just a hop and skip from Mainland China where you can source your products from Chinese factories for you Amazon or other e-commerce businesses.
And, while it is getting harder for foreigners to open an account there, Hong Kong is an incredibly stable banking sector with a very transparent legal system. Hong Kong is also one of only two countries in all of Asia that allows foreigners to fully own all of the shares in their business without the need to have locals on the board of directors. This saves you a lot of time and effort and gives you total control over your company.
The biggest draw of all, though, is Hong Kong’s incredibly attractive corporate tax system. Before we jump into the details of the system, however, please note that I am not a tax lawyer or an accountant and you should not take this free blog post as professional advice. Feel free to use this information as a starting point and for your own personal reference, but remember that my number one piece of advice for success in the offshore world is to pay for the best offshore service providers — that includes accountants and other offshore tax professionals.
Corporate Tax Rates
The corporate tax rate in Hong Kong is 16.5%. While it’s not the lowest tax rate in the world (especially compared to many Eastern European countries), it definitely qualifies as a generously low rate. If your company has made $100,000 by year-end, for example, you pay $16,500 in taxes and keep the rest. It’s as simple as that.
But here’s the best news of all: the 16.5% rate only applies to Hong Kong companies that operate in and/or have customers in Hong Kong. If you are among the many offshore companies that can incorporate in Hong Kong and then operate elsewhere, you can enjoy a tax rate of ZERO percent.
Hong Kong uses a territorial tax system based on the notion that taxes are earned by a government that provides you with services. Because of this, HK only taxes transactions made in and earnings that come from within its borders. So, for example, if you set up a trading company in Hong Kong that sources goods from Bangladesh and sells to markets in the EU, Honk Kong will not tax your company.
Hong Kong is able to offer 0% tax for offshore companies because they get a significant amount of revenue from land value. Hong Kong’s land is owned by the government of The People’s Republic of China and they only give it out on a leasehold basis. The amount of money that leaseholders have to pay goes up when the property value rises. This creates a stable flow of money for the government and low taxes for anyone looking to incorporate in the jurisdiction.
But what exactly do you have to do to qualify for the 0% tax rate? Here’s how it works:
Making an Offshore Claim for 0% Corporate Tax
The main requirement in making an offshore claim to obtain the 0% tax rate is to prove to Hong Kong’s tax department — the Inland Revenue Department (IRD) — that you’re doing business completely offshore. (Note: offshore in this situation means outside of Hong Kong.)
Qualifying does take some time (at least six months, if not more) and comes with greater scrutiny from the tax department. However, just remember that the reward for dealing with a little bit of scrutiny is ZERO corporate tax.
The main thing the IRD wants to verify is that your business is not benefiting from any local services or selling to any local HK companies or individuals. As part of that, you’ll need to prove that you have no physical or business presence in Hong Kong.
Once you prove these things, you will likely qualify.
If possible, you should make an offshore claim as soon as you open your HK company. You will need to build your case from the beginning, but also practice it once your company is up and running since you are still subject to the required annual audit and you’ll need to renew your offshore claim every three years.
You can read more here about whether it’s possible to be 50% offshore and 50% “onshore” in Honk Kong. You can also go to the IRD’s website to read about the processing of offshore claims and Hong Kong’s basis of taxation.
I find Hong Kong’s set up to be even better than Singapore’s in most categories. It’s the perfect set up for online or location independent businesses.
Deductions and Annual Reporting Requirements
The other tax benefit to setting your company up in Hong Kong is that Hong Kong corporations receive more liberal write-offs. The IRS, on the other hand, is pretty stingy when it comes to business write-offs. While the tax authorities in bankrupt, western countries might say buying a big client a glass of wine doesn’t count as a business expense, Hong Kong authorities are more lenient.
Still, having a Hong Kong corporation does not mean that everything will be easy. Don’t think you can approach your HK business with an attitude of set-it-and-forget-it. As mentioned, whether your business is considered offshore or “onshore” you will need to comply with very specific annual reporting requirements. Many businesses will need to hire an accounting firm to file audited financial statements every year.
According to Mike Michelini at GlobalFromAsia, the mandatory CPA audit involves having a licensed HK CPA review your books, as well as your profit and loss statement, balance sheet and other transactions. Once they find that the “books are true and clean” they will stamp it and send t to the IRD. This service usually costs somewhere between $1,000 and $2,000 USD. Once you receive a Profit Tax Return (PRT) from the IRD you will have 60 days to prepare this auditor’s report.
In all, Mike estimates that the annual costs of running a Hong Kong company should be approximately $2,000 – $2,500 USD. While there are cheaper jurisdictions, Hong Kong’s biggest appeal is its reputation. Putting up with accounting and auditing reports to maintain your HK company can mean that banks, clients, suppliers and others will be more willing to deal with you than if you set up shop in a cheaper, less regulated offshore island.
Other Taxes and Challenges
For those interested in living in Hong Kong, there is a rather simple tax bracket for personal income tax. This, of course, is only in the case that you take money out of your business for living expenses. You can do this by paying yourself a salary or by taking money out of the business as a dividend.
However you choose to do it, even the very wealthiest of people will pay no more than 20% in personal income taxes. Most “normal” people pay quite a bit less. You can read here for more information on the subject.
Additionally, Hong Kong does not apply any type of capital gains tax or estate tax.
Overall, Hong Kong is a great jurisdiction for setting up an offshore company. With low — if not non-existent — taxes it more than balances out the amount of paperwork needed to make it all happen. Hong Kong’s reputation doesn’t hurt things either.
My biggest challenge with Hong Kong is that it’s getting harder to access the country’s institutions without being a resident. I’ve shared my frustrations about Hong Kong banks and how I’ve even had a hard time trying to get something as simple as a vault. Still, if you’re willing to spend the time to do things right, Hong Kong is a great jurisdiction for taxes and business in general.