Hong Kong is not an “offshore” destination per se. To the contrary it is one of the biggest financial center of the world, and one of the economical and trade center as well. Therefore incorporating a company in HK is free of the stigmata attached to the formation of an offshore company in destination such as BVI or Belize or Seychelles. When you set up a company in Hong Kong there is no presumption that you are doing so in order to dodge taxes.
So why chose Hong Kong?
A Hong Kong company can be used
- As trading vehicle for international and China trade;
- As investment vehicle in Global and China projects;
- As finance management centre – using Hong Kong banking system …… etc.;
- Enjoy simple tax system, low tax rate and easy maintenance requirement;
In terms of taxation, Hong Kong is not per se a no taxes jurisdiction. In principle HK companies may be taxable at a rate of 16.5% on their profits. But, and this is where HK is interesting a person is chargeable to Profits Tax only if the following conditions are fulfilled
- he carries on a trade, profession or business in Hong Kong; and
- he trade, profession or business derives profits; and
- the profits arise in or are derived from Hong Kong.
0% taxation rate
If those 3 conditions are not fulfilled then the income is deemed to have been made outside Hong Kong and the rate applicable for taxation will be 0%. In other words no taxes will be levied on income realized from sources outside Hong Kong.The first two conditions are straightforward. Some elaboration is necessary for the third because no universal rule can apply to every scenario. Whether profits arise in or are derived from Hong Kong depends on the nature of the profits and of the transactions which give rise to such profits.
The operations test
According to the HK Inland Revenue department, the broad guiding principle is that one looks to see what the taxpayer has done to earn the profits in question and where he has done it. In other words, the proper approach is to identify the operations which produced the relevant profits and ascertain where those operations took place. The source of profits must be attributed to the operations of the taxpayer which produce them and not to the operations of other members of the taxpayer’s group.
The example of trading operations
This is one of the sectors where the HK Inland Revenue Department and Hong Kong courts have dealt with the most. The principles applicable to the taxation or not of trading operation made by a Hong Kong company are as follows:
- Where the contracts of purchase and sale are effected in Hong Kong, the profits are taxable here.
- Where the contracts of purchase and sale are effected outside Hong Kong, the profits are not taxable here.
- Where either the contract of purchase or the contract of sale is effected in Hong Kong, the initial presumption is that the profits are taxable here. However, other relevant facts will have to be examined to determine the source of profits.
- Where the sale is made to a Hong Kong customer (including the Hong Kong buying office of an overseas customer), the sale contract will usually be taken as having been effected in Hong Kong.
- Where the effecting of the purchase and sale contracts does not require travelling outside Hong Kong but is carried out in Hong Kong by use of telephone, or other electronic means including the Internet, the contracts will be considered as having been effected in Hong Kong.
- Trading profits are regarded as being either wholly taxable or wholly non-taxable here. Apportionment is not appropriate