Hong Kong operates a territorial tax system that does not distinguish between a Hong Kong Company and a non-Hong Kong Company. Hong Kong Profits Tax – currently levied at 16.5% – is imposed on every ‘person’ carrying on a trade, profession or business in Hong Kong, but only in respect of profits arising in or derived from Hong Kong for that year and for that trade or business.
Profits from the sale of capital assets and dividends are not taxable in Hong Kong, and there are no withholding taxes on dividend and interest payments made out of Hong Kong. Withholding taxes do apply to certain royalty payments.
The definition of residence under Hong Kong’s tax treaties includes both an entity incorporated in Hong Kong and an entity whose place of effective management is in Hong Kong. A foreign company that is managed in Hong Kong can therefore access treaty benefits as readily as a Hong Kong-incorporated company.
Any foreign incorporated company can be registered in Hong Kong as a non-Hong Kong Company but for clients who simply wish to create a new Hong Kong entity, our recommendation would be to register a company incorporated in the Turks & Caicos Islands (TCI). The potential advantages of a TCI company include:
- Share transfer – Any share transfer would follow the procedures applicable in TCI where a reduced amount of paperwork is required and no stamp duty would need be paid
- Unaudited accounts – A TCI company will be exempt from the requirement to file accounts with the Hong Kong Public Registrar and for these accounts to be auditedCompany names – A TCI company would not be subject to the restrictions imposed by the Hong Kong Registrar of Companies.
- Corporate mobility – A TCI company can leave the Hong Kong Companies Register and continue to exist under TCI law or re-domicile itself in another jurisdiction. A Hong Kong-incorporated company would have to be formally wound up
- Tax benefits – A TCI company can contract for the purchase of goods in Hong Kong without liability to Hong Kong tax, whereas a Hong Kong-incorporated company cannot
In addition, an employee of a Part XI registered company who can demonstrate that his contract of employment was signed and negotiated outside Hong Kong, may be able to gain relief from Hong Kong Salaries Tax in respect of earnings accumulated while outside Hong Kong.
A possible disadvantage of registering under Part XI is that two sets of administration will be required and therefore two sets of registered office, registered agent and local company secretarial fees are likely to be incurred. However Sovereign would generally provide these services as part of its domiciliary service fee in both jurisdictions.