Cross-border business – Hong Kong as a preferred ... · Cross-border business – Hong Kong as a...

IYER PRACTICE Singapore vs Hong Kong

Cross-border business – Hong Kong as a preferred jusrisdiction

SINGAPORE | HONGKONG20 YEARS IN PRACTICE

Sanjay Iyer4 September 2014


General Background

Tax

Tax Treaties

AGENDA

SINGAPORE | HONGKONG20 YEARS IN PRACTICE

GENERAL BACKGROUND


General Factor Hong KongEase of Company Formation 4 daysTime Zone GMT + 8 hoursBusiness Language EnglishForeign Exchange Controls NoneAvailability of Service Providers PlentifulEconomically and Politically Stable VeryLegal System Common lawWorld Bank Survey:Ease of Doing Business 2Starting a Business 5Registering Property 89Getting Credit 3Protecting Investors 3Paying Taxes 4Trading Across Borders 2Enforcing Contracts 9Resolving Insolvency 19

4


Criteria Hong KongTax System Pure territorial [Only income

sourced in Hong Kong]

No. of Tax Treaties 30

Participation Exemption No WHT on dividend distributionGST (VAT) None

Corporate Income Tax Rate Flat 16.5%

Double Tax Relief Ordinary Credit Method(No Pooling)

Capital Gains Tax None

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Tax


• Setting up– Minimum one director (natural, can be non-resident)– Resident Company Secretary (Corporate or Individual)– Local Registered Office (No PO Box)– No definition of tax residence (as per DTA) [Inc (HK); M&C (O/S)]– Minimum share capital – HK$1– Business registration certificate– No restriction on foreign ownership

• Ongoing requirements– Audit – AGM/Annual Return– Profits tax return (Must always be filed)

Setting Up and Ongoing Requirements

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TAX FACTORS

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Dividend Income

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Dividend income (Received)

✓ Hong Kong sourced income - Exempt from taxation

✓ Foreign sourced income - Exempt even if remitted

Dividend Income (Paid)

✓ No dividend withholding tax

Shareholder

Hong Kong

InvestmentN

o dividend w

ithholding tax

Dividend incom

e exempt


Interest Income

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Interest income (Received)

✓ Hong Kong sourced income – Exempt unless earned from carrying on such a business (financial institution)

✓ Foreign sourced income - Exempt from taxation even if remitted

Interest Income (Paid)

✓ No interest withholding tax

✓ BUT no deduction

Shareholder

Hong Kong

LoanN

o interest w

ithholding tax

Interest income exem

pt


Royalty Income

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Royalty income (Received)

✓ Hong Kong sourced income – Exempt unless earned from carrying on such a business

✓ Foreign sourced income - Exempt from taxation

Royalty Income (Paid)

✓ 30% of 16.5% gross✓ 100% of 16.5% (associated

company & previously owned by a person carrying on business in Hong Kong)

✓ Deemed source in Hong Kong (deductible

✓ Unless reduced by treaties)

Shareholder

Hong Kong

Investment

30% of 16.5%

gross; 100%

of 16.5%, deem

ed sourced in H

K, unless reduced by treaties

Royalty income exem

pt


Other Payments to Non-Residents

No withholding tax on payments but required to report IRD in tax return

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Tax Incentives

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IYER PRACTICE Singapore vs Hong Kong 13

Hong Kong Outside

Hong Kong Activities

• Exempt income in Hong Kong?

Offshore Claim


• Territorial tax system

• Person will not be subject to profits tax unless:

✓ Business must be carried on in Hong Kong

✓ Profits must arise in or be derived from Hong Kong

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Inland Revenue Ordinance


Operations Test

• “All profits from business transacted in Hong Kong, whether directly or through an agent”

✓ “What the taxpayer has done to earn profit in question” and “where has he done it”?

• Focus of the effective causes of profit

✓ Where is the geographical location of the taxpayer’s profit producing activities?

✓ Commercial answer: Practical realities?

[ING Baring, Hang Seng Bank]

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Case Law


• DIPN 21: Locality of profits – cases don’t cover all situations

• Evidence:

– Expenses (Travelling/hotel)

– Agents (Agency agreement)

• Advance Rulings available

• Subject to tax overseas?

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Hong Kong IRD Position


Capital Gains

• No Capital Gains Tax

• Tax if trading in nature

• Badges of Trade

• No Safe Harbour

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• Intention at time of purchase

• Period of ownership

• Frequency of similar transactions

• Reasons for sale

• Means of financing the acquisition

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Badges of Trade

TAX TREATIES

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Tax Treaties

• 30 full tax treaties concluded, 28 in force

• 1 full treaty pending

• No limitation of relief provisions

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Reducing HK Withholding Tax

• Royalties only

• Obtain reduced withholding (royalties only) in Hong Kong✓ Take a tax position (in tax return)

✓ Provide COR in residence jurisdiction

✓ Provide details of transaction

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• Company incorporated or constituted in Hong Kong

• Company incorporated or constituted outside Hong Kong but managed or controlled in Hong Kong

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Certificate of Residence Status


Hong Kong – India Treaty

• Signed a limited double taxation treaty in 2003 (exempting shipping companies and airlines)

• In April 2010, India specified HK as a ‘specified territory’

• Two rounds of DTA negotiations in late 2010 and 2011

• Talks concluded unsuccessfully

• New government in India – policy action increase in FDI – might result in a treaty

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Hong Kong – Indonesia Treaty• Full tax relief from capital gains tax

• Dividends 10% (individuals)/ 5% (for qualifying companies)

• Interest 10%

• Royalties 5%

• Form DGT-1 pre-requisite for claiming tax benefit

• The beneficial owner needs to submit Form DGT-1 which confirms that the income is subject to taxation in Hong Kong

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Hong Kong – Indonesia Treaty• Issues:

✓ Hong Kong tax system is territory based, therefore a Hong Kong recipient of dividends from Indonesia will not be able to obtain a Form DGT-1

✓ Therefore, suffer withholding @ 20% or potential adjustments and penalties

✓ DGT Form requires certification of tax residency from relevant tax authority

✓ Subject to tax requirement in DGT-1

✓ Uncertainty as to claiming CGT DTA relief

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Hong Kong – China Treaty• Full tax relief from capital gains tax in respect of the disposal of non “land rich”

companies if under 25% owned, otherwise 10%

• Dividends 10% (individuals)/ 5% (for qualifying companies)

• Interest 7%

• Royalties 7%

• For dividend income, numerous requirements need to be met (Circular 81)

• Non-residents need to provide proof that DTA relief requirements are met (Circular 124)

• Assessing whether beneficial ownership requirements met (Circular 124)

• Different rules for different local tax authorities

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Hong Kong – China Treaty

• State Administration of Taxation of Mainland China has set out procedures for obtaining Certificate of Tax Residency (‘CTR’) in Hong Kong

• Announcement 53 – China tax authority to issue a referral letter to the IRD to facilitate the application of CTR

• To submit the referral letter and application form to obtain the CTR

• The CTR issued would distinguish whether the entity is incorporated or constituted under the HK laws or under foreign jurisdiction laws

• The CTR would entitle the taxpayer benefits under the treaty in Mainland China

• Whether an entity qualifies as a tax resident in Hong Kong is still an issue, especially for Companies incorporated abroad

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Hong Kong – China Treaty• Circular 81 requires following conditions to be satisfied:

✓ The recipient of the dividend must be Hong Kong tax resident

✓ The recipient of dividend must be the beneficial owner

✓ The dividend must qualify as dividend under the tax laws of China

✓ The recipient must satisfy the minimum ownership requirement

✓ Any other condition that SAT may impose

• Ultimately onus is on the HK resident to prove that they satisfy the conditions to claim DTA relief

• Local tax authorities continuously change their views on the application of law

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• International & Domestic Tax

• Company Formation & Administration

• Trusts & Foundations

• Immigration & HR

• Funds & Family Offices

• Accounting & Financial Reporting

The insight to be your trusted adviser

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Unit 29E, 29/F Admiralty Centre Tower 118 Harcourt Road, AdmiraltyHong Kong

Sanjay IyerEmail [email protected] +852 2529 9952Mobile +852 9355 3495

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