With its unique position to offer connectivity between mainland China and the rest of the world, Hong Kong could well be described as a natural choice for companies to establish an Asian base.
Ranked in fourth place globally for its ease of doing business by the World Bank in 2023, the Hong Kong Government boasts almost 400 foreign or mainland companies which started up or expanded in Hong Kong in 2023.
The region was also placed among the ten least-complex business jurisdictions last year. Evidence that its efforts to prioritise international alignment and simplify business processes are bearing fruit.
One of the most important things you can do when going offshore is choosing the right place to incorporate your business. As such, Hong Kong is a notable jurisdiction because of its good reputation, robust bank infrastructure, long-running history of stability, and business-friendly environment.
In fact, there is little dispute that Hong Kong, which regularly features on lists of the best places to do business, has a government that encourages business to go there and an infrastructure built for international trading.
However, while Hong Kong is an attractive option to incorporate, you need to pay attention to certain nuances.
We’ll get into those in more detail later, but suffice to say, if you want to enjoy the benefits of incorporating in Hong Kong, you can’t afford to make any mistakes.
Perhaps the most significant positive is that Hong Kong has an Offshore Profit Tax Claim, which allows you to pay 0% tax on your offshore income. This only applies to revenues that are not regenerated within the country. The Hong Kong authorities have attached some fairly strict criteria to the Offshore Profit Tax Claim and failure to comply can be costly.
Hong Kong’s Offshore Profit Tax Claim
Hong Kong has a corporate tax rate of 8.25% to 16.5% for revenue derived from clients within its national borders. So, to claim the 0% tax rate, you cannot have any revenues from Hong Kong clients.
As well as that, offshore company directors cannot spend more than 60 days in Hong Kong, and it is generally advised not to be there at all. You cannot have any sales in Hong Kong and you cannot maintain any kind of day-to-day operations there. So, having people on the ground in Hong Kong, working from an office, will result in losing your opportunity to claim the Offshore Profit Tax Claim.
In essence, an offshore company established in Hong Kong is used as a tax-efficient vehicle based on establishing a perfectly legal shell company. However, this means that the company should not have bank accounts, accounting, transactions, operations, directors, or shareholders in Hong Kong.
Even having a personal bank account in the owner’s name in Hong Kong may be questioned.
If you meet all the criteria, you can apply for the offshore profits claim in the company’s first tax return. If Hong Kong’s Inland Revenue Department (IRD) accepts your offshore profits claim, you will be taxed 0% on income earned from offshore sources, including dividends, capital gains and interest income.
Establishing an onshore company with the whole structure in Hong Kong is also possible through the operation of a two-tier system. Naturally, this requires having an office, a local director, a board of directors and employees in Hong Kong. With an onshore company, the corporate tax rate is 16.5%, however, the tax rate on the first HK$2 million is 8.25%.
Complying with Hong Kong’s Regulations and Requirements
While it is absolutely possible to set up an offshore company in Hong Kong and pay zero tax, there are a few pitfalls that could cause you to lose your offshore status. Making a mistake can result in a hefty tax bill later on.
One thing about Hong Kong is that you need to be organised. If you don’t set things up properly, you might not even know it for a couple of years and be on the hook for a substantial amount of tax. This isn’t a place, like many of the tax-free islands in the Caribbean, where you can pretty much do as you please and be guaranteed to have no tax.
While you get the benefit of a more legitimate, highly reputable jurisdiction, it comes with some additional paperwork.
When you run a Hong Kong company, you have to file an audit for each trading year. As surprising as it may seem, however, Hong Kong doesn’t have a set deadline for filing audited financial statements. Instead, the regulations dictate that you have to file them every year by the date of company establishment.
For example, suppose you open a company in Hong Kong on June 15. In that case, it’s desirable to file all the papers, all the audited financial statements and the documents to renew the company by June 15 of the following year. It’s important that you make sure the audit starts on time – based on our experience, it can take considerable time to complete the process.
In some cases, companies have corporate secretaries to help, but even in this case, you may still need to push the auditors to complete their work on time. Audits are mandatory for a Hong Kong company, and there are strict requirements compared to some other countries, so the process can be overwhelming.
Even for a smaller company with a modest turnover, the audit process can take three to five months. You have to provide documentary evidence rather than just information. When the audit is submitted, you have to keep in touch with the tax authorities to make sure they have all the information they need. This could include gathering bank confirmation letters for banking jurisdictions outside Hong Kong.
You have to coordinate the bank letters being delivered to the auditors in Hong Kong and, depending on the countries you’re banking in, this can be time-consuming. Some banks are reluctant to make international deliveries, so you might have to stand over them to ensure they are done.
When you file audited financial statements, the role of an independent auditor is to state that all your revenue is in compliance with the criteria for the offshore tax claim. Based on that opinion, the tax authority decides whether to grant you the 0% tax claim. However, if you do have some onshore income in Hong Kong that you have to pay tax on, you need to keep meticulous accounting records.
Establishing a Hong Kong company can be beneficial, but it does require a bit more attention to detail and extra paperwork. Complying with the ongoing regulations and requirements, filing the audit and keeping up with the maintenance fees are non-negotiable.
How to Establish an Offshore Company in Hong Kong
The documents needed to form a Hong Kong company include:
- Passport copies of all shareholders and directors
- Proof of address (within three months) of the directors and shareholders
- Preferred name for the company
- Number of shares allocated for each shareholder (if there is more than one).
When establishing an offshore company in Hong Kong, the first thing to consider is getting confirmation and approval from the designated authorities that your chosen trading name is available.
Once everything is approved and the entity is established, you have to enlist a corporate secretary or a company that will provide the service. The cost of the corporate secretary, your representative on the ground, has to be fully paid for a year.
You also have to get a registered address to receive correspondence. Your corporate secretary can provide this and it is mandatory. Once you’ve got that address, you have to display the letter confirming that the entity exists at that location.
The Hong Kong Offshore Company Set-Up Process:
- Once the company secretary submits the application to the register, the company is established in two to five business days.
- A Hong Kong company is a ‘Limited’ company, meaning that the liability of each shareholder is limited by the number of shares each has taken.
- Name example: ‘ABC Limited’.
- Once the company is established, the owner receives the following documents via email: the Business Registration, Articles of Association and Certificate of Incorporation.
- The Green Box, a collective term of all company documents, usually stays with the company’s secretary but may be mailed to the company owner upon their request.
The cost of Hong Kong business registration is HK$2,150 for a period of one year and HK$5,650 for three years. However, the fee for company audits depends on the level of turnover:
- Maximum turnover HK$250,000 – HK$4,000
- Turnover up to HK$1,000,000 – HK$5,000
- Turnover up to HK$2,000,000 – HK$6,500
- Turnover up to HK$3,500,000 – HK$8,000
- Turnover up to HK$5,500,000 – HK$10,000.
The length of time it takes to set up the company may vary. Opening a bank account can take two weeks or more, depending on the chosen bank. Hong Kong does have good banking opportunities, but most banks there require original documentation. So, basically, if you’re not there, you have to mail the paperwork every time you make any kind of change.
Having established the company, you now have to maintain it and, because Hong Kong has stringent audit requirements, you have to keep all your records: every receipt, every invoice, everything needs to be kept in order. In order to provide financial statements to your independent auditor, you need to hire an accountant.
Establishing a Hong Kong company is still relatively complicated and maintaining one requires additional time and effort to ensure you remain within the law.
That’s why at Nomad Capitalist, we recommend having a trusted partner who can solve your challenges and pay attention to the details so you don’t have to. Find out more about our bespoke services for entrepreneurs and investors here.
Pros and Cons of a Hong Kong Offshore Company
Hong Kong, like any offshore jurisdiction, will work for some and be less useful for others. It’s not a cheap and easy place to incorporate, but it is well respected, has a number of tax treaties with established economies and is foreigner-friendly. Hong Kong is one of only a few places in Asia where you can go as a foreigner, own 100% of your company and be a director.
Obviously, the Offshore Profit Claim Tax Claim is a major incentive, but that being said, there are a number of operational issues to contend with in order to maintain eligibility for it. After all, this is not the British Virgin Islands, Vanuatu or any other place where people go if they don’t want to pay any tax.
Hong Kong’s system is one in which profits derived from outside its borders are ostensibly tax-free. However, people who live there and operate onshore companies are taxed under a local tax system with certain deductions available.
So, while Hong Kong has a pretty flexible tax system, it is not the same as a traditional offshore jurisdiction. In short, there are some challenges to setting up and maintaining a company there.
Taking your eye off the ball can potentially end your offshore status. If you set things up properly, you can benefit from a legitimate, organised and stable business jurisdiction in return for that extra paperwork, compliance and audit requirements.
If you have an e-commerce business or are doing a face-to-face or person-to-person business, it’s crucial to have protocols to ensure your Hong Kong business is tax-efficient.
In most cases, you’ll need help establishing an offshore company in Hong Kong, not only with the paperwork but also with a strategy to ensure you’re following the various criteria for legitimately being offshore.
However, you will need to plan this carefully.
That’s where Nomad Capitalist comes in. We help seven- and eight-figure entrepreneurs and investors create a bespoke strategy using our uniquely successful methods. We’ll help you keep more money, create new wealth faster, and be protected from whatever happens in just three steps. Become a client today.
