Creating a Limited companyin HK

I am considering creating a limited company in HK and was wondering if someone could enlighten me on the taxes involved.


The company would be to support contracted services provided by me to a US based company. Now if they pay directly into my corporate bank HK account, will I be taxed once for the business by HK IRD, once for personal income earned as an employee of the company by HK IRD, and possibly one more time when filing US income taxes?


Any info is greatly appreciated.

I suppose what I really want to know is if it would be better to register the company in HK or in the US in regards to taxation?

Why don't you contact the Inland revenue dept and ask them.

Maddog - Was hoping someone would have personal experience and advice. In my experience, IRD hasn't been the most helpful govt. organisation I've had the pleasure of dealing with. Then again, don't know any govt. organisation that has been especially helpful!

I think your best bet is to consult a US tax attorney.

In order to provide you with a full advice, we need to seek more information from you regarding the nature of your company in HK, your capacity in the company and how are you considering getting pay from your company. Our preliminary advice is as follow:-


1. Profits Tax - HK IRD


Hong Kong adopts a territorial basis of taxation. Generally, a person is subject to Profits Tax if:-

a. he carries on trade, profession or business in HK;

b. the trade, profession or business derives profits; and

c. the profits arise in or are derived from HK.


Hence, the source of profits is one important determining factor to determine whether your company is subject to taxation and it is not simply based on whether you are a HK resident or not. If your source of profits is in HK, then you are most likely subject to Profits Tax; “likely” because there is no defined interpretation for the term “arise in” or “derived from” to determine the source of profits. The tax Board of Review and/or the Courts will look at all surrounding factors to decide whether your company is subject to taxation. These factors include classifying the nature of business, identifying the operations that produced the relevant profits and ascertaining where those operations took place. If the nature of your company in HK is trading, then the general approach to decide the source of profits is to consider a number of factors: where the contracts for purchase and sale are effected, how were the goods procured and stored, how were the sales solicited, how were the orders processed, how was the financing arranged, where was the contract signed, etc. If you engage in manufacture business, then the source of profit is most likely the place where the goods are manufactured.



2. Salaries Tax - HK IRD


You are most certainly subject to Salaries Tax if you are employed in a position in a HK company to deliver your services in Hong Kong since your employment to be in HK.


Salaries Tax assessment depends on your capacity in your company in HK. If your capacity is a director, then your full income derived from such office in HK is chargeable to Salaries Tax irrespective that your HK office may appoint you to work overseas. There is neither exemption nor relief. If your capacity in the company is an employee, then all income including salaries, director’s fees, pension, bonus, allowances, share options, etc, arising in or derived from your HK office is chargeable to Salaries Tax. However, the IRD will consider the allowance of a tax credit for foreign (e.g. US) income tax. Furthermore, if, as an employee, you have spent considerable time rendering services outside HK, you may apply that this income is tax exempt in Hong Kong on the grounds that you were rendering your services outside HK.


3. US Income Tax


Unlike HK, the US operates under a concept of worldwide taxability, meaning US residents and citizens are generally subject to US Income Tax irrespective of the source of earning, the currency of earning and the place where the earning is deposited. However, to avoid double taxation, US taxpayers are allowed to credit foreign income taxes on foreign earnings against their US income tax liability; as well US taxpayers are allowed certain extensive personal exemptions when abroad. Furthermore, if your company in HK is regarded as an active corporation, then its US taxes will generally be deferred until profits are repatriated to the USA.


The amount of your US income tax depends on the tax rate of your state less the tax rate of HK Salaries Tax. Since HK tax rate is lower than the US rate, then you will be subject to US tax on the differences between the rates subject to the comments above.


COMMENTS ABOVE


If you decide to establish a limited company in HK, your company will subject to 17.5% on your profit under Profits Tax. If you undertake any position in the said company and remunerate by way of salary, you will be subject to the above and charged with paying HK Salaries Tax and US Income tax.


Weir & Associates

Solicitors & Notaries

2108 Gloucester Tower

The Landmark

15 Queens Road Central

Hong Kong

Tel : 2526-1767

Fax : 2868-3568

email : weirlaw@hongkonglaw.com

www.HongKongLaw.com/weirlaw

One thing to bear in mind - if the company is incorporated for the sole purpose of providing services that you would have otherwise provided as an employee to the US company, then IRD would likely levy Salaries Tax on whatever is paid to the Service Company.


I assume from your question - you are a US person and asking about US income tax. From the facts above, it would appear that only the company that you are providing services to has the US connection.