Hong Kong –Economic Substance considerations

As a result of the OECD Base Erosion and Profit Shifting (“BEPS”) project, combined with pressure from the EU certain no-tax or low tax jurisdictions have started to adopt, in a very short timeframe, economic substance requirements for businesses based there. This requires taxpayers to have an adequate number of full-time employees with necessary qualifications and to incur an adequate amount of operating expenditures to undertake the core income-generating activities associated with the income that may benefit from a regime.
Hong Kong’s operates a territoriality basis for the taxation of business activities there. For all activities it is necessary to consider whether income is subject to profit tax or not. Income is consider to be “Onshore” or “Offshore”:

  • Onshore: corporate tax will apply on the profit raised from the commercial operations.
  • Offshore: 0% tax but this implies that the real substance is not in HK

In Hong Kong it is not possible to consider to re-domicile foreign entities to Hong Kong, however the change of tax residence of a foreign entity to Hong Kong is possible.

Moving the tax residency from one jurisdiction to another is also an option, but needs to take into account the changes being implemented as a result of the OECD BEPs project. Consideration will need to be given to any relevant Double-Taxation Agreements.

As an example see below a table reviewing the options for a BVI company that may be considering operating economically from Hong Kong:

  Options     Comments     Costs to consider
  1- BVI company to become HK tax resident : Registration in HK of a Non-HK company       In Summary:
Principle: A non-Hong Kong company that establishes a place of business in Hong Kong is required to be registered within one month of establishing that place of business as a non-Hong Kong company under Part 16 of the Companies Ordinance
  1. Process : Registering the non-Hong Kong company in Hong Kong is done with  the Companies Registry (from NN1) and the Inland Revenue Department (for BR). Upon approval, the Hong Kong Companies Registry will issue the Certificate of Registration of Non-Hong Kong company and the Business Registration Certificate “BR”.
  2. Requirement:
    1. Authorized person: must be a resident of HK or an accredited professional in HK which will be the link between the Non-HK company and the HK administration. Such authorized person can sign the company’s forms to be submitted to HK Administration;
    2. Registered office address & place of business in HK
    3. Director & Company secretary: being the ones of the BVI company
Annual Declaration
  1. Companies Registry: Annual Return at the non-HK company’s anniversary date of its registration in HK (with or without certified account of the BVI company);
  2. Inland Revenue Department
    1. Profit Tax Return “PTR”: If the foreign jurisdiction does not impose a requirement for accounts to be audited, the PTR could be submitted together with management account (i.e. no need for audited accounts) – it will be at the IRD’s discretion to accept or not unaudited accounts. Consequently, the Non-HK company will be subject to Profit Tax in HK if the profit are onshore.
    2. Employer’s Return: declaring all remuneration paid to HK and Non-HK employees.
    Registration: same as for a HK Ltd company + cost of certification BVI docs

    1. Company secretary & Registered Office & authorized representative: Standard Rosemont International’s fee
    2. Directorship: standard Rosemont International’s
    3. Accounting/audit/tax filings cost: standard

Cost of registration and administration of the company in BVI;
2- Re-domiciliation of BVI company to Hong Kong
    Not possible in HK.      
  3- Establishment of a new HK company and transfer of assets under new HK company     Under this option, new HK Limited company can be established, and the assets that currently belong to BVI company can be transferred under the new HK company.     Relevant costs regarding incorporation and maintenance of a HK limited.

For more background information on the global move towards requirements for businesses to have Economic Substance where they are based please read our new article here.