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Hong Kong
Chinese and English are the official languages of Hong Kong and the legal system is based on the English common law system. Hong Kong became the Hong Kong Special Administrative Region (SAR) of China on 1st July 1997. In this agreement, China has promised that, under its "one country, two systems" formula, China's socialist economic system will not be imposed on Hong Kong and that Hong Kong will enjoy a high degree of autonomy in all matters except foreign and defence affairs for the next 50 years. Hong Kong has a free market economy highly dependent on international trade which gives its population a GDP per head of over $37,000. The territory has become more closely linked to mainland China over the past few years. Hong Kong's service industry over the past decade has grown rapidly as its manufacturing industry has moved to the mainland. The basics for Hong Kong companies are:
Costs The costs for founding a company start at around US$1,300 not including registered office and company secretary fees which start at around $1,000. The full annual costs start at around US$2,300 plus audit fees. Money Laundering The banks carry out most of the AML work and are very sensitive to any possible drug-related activities and money laundering. It is advisable to work closely with the bank account manager if there are large sums of money moving quickly in and out of the account. Taxation Hong Kong’s corporation tax rate is 17.5% is applied on a territorial basis and is payable on all transactions sourced in Hong Kong – onshore. If the transactions are effected totally outside Hong Kong – offshore – they are exempt from tax. There are various criteria to be met to be eligible for offshore recognition by the tax authorities in Hong Kong, the most important of which are:
The general procedure is for the financial statements of the first year of operations are reviewed by the tax authorities to establish whether the offshore activities are genuine. This review will look at the decision processes, marketing activities and flows of goods and there are certain techniques which can strengthen the offshore claim. If the offshore activities are recognised accordingly, then the tax rate on these activities will be zero. The offshore status will be re-examined periodically. Unlike Singapore, the management of the accounting books and bank accounts in Hong Kong does not create a prima facie case for onshore status. Over the past few years and tax authorities have more stringent and whereas before it was sufficient to keep clear divisions in the bookkeeping to differentiate between the offshore and onshore activities, now accountants are recommending the use of two separate companies. Dividends There are no withholding taxes on dividends received or paid by a Hong Kong company. Dividends can be pain from both taxed onshore and tax-exempt offshore activities. Double Taxation Treaty with Belgium Belgium has a very interesting double taxation treaty with Hong Kong. In principle, as long as the Belgian company owns 10% of the equity of the Hong Kong company, it pays tax only on 5% of the dividends received. This effectively reduces the tax rate to about 1.7%.
The treaty is unclear whether this 95% rule applies to dividends from offshore activities. In 2006 the Belgian Minister of Finance answered a question in the Belgian Senate which explained that the 95% rule does apply to dividends from offshore activities provided the Hong Kong company was not purely for tax avoidance purposes. In practice, in order to benefit from this treaty, the Hong Kong company must have economic reality and commercial viability. And, the Belgian parent company has to be sure to avoid direct control of the subsidiary from Belgium. Transfer Pricing As a rule of thumb, in order to avoid transfer pricing issues, the Hong Kong subsidiary should not be more than four times more profitable than the Belgian parent company. Definitions & Criteria There are various criteria and conditions which have to be met in order to create an economic reality in Hong Kong and readers are strongly advised to consult their financial advisers or www.cfoplus.eu/taxation.htm before proceeding.
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