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Cross-border group cost recharge

Inbound and outbound taxation

Cross-border group cost recharge in Hong Kong refers to an arrangement whereby a Hong Kong company conducts cross-border intercompany transactions and remunerates non-Hong Kong companies by service / consultancy / management fees in return for the operational / business support services received. These kinds of cross-border arrangements are very common, in particular when a headquarters enters into new countries for business development while the headquarters may centralize certain administrative functions and render those services for its subsidiaries.

These transactions are often under scrutiny by the Hong Kong Inland Revenue Department (IRD) as the IRD seeks to ensure tax compliance and prevent tax evasion and profits shifting by group companies. In this regard, the IRD pays close attention to the pricing, terms, and conditions of the transactions. If the payments are deemed excessive or not in line with market rates, the IRD may disallow the tax deduction for the fees paid or assess profits tax on the income earned by the non-Hong Kong recipient.

To mitigate such risks, proper tax planning is crucial. Companies should ensure that all cross-border transactions are charged at arm’s length. Documentation is key; detailed contracts and invoices should clearly outline the scope of work, pricing, and terms of payment. Regular audits and reviews of these transactions can also help identify any potential issues and ensure compliance. In case the fees are being challenged by the tax authority as excessive, Companies should be prepared to produce the result of benchmarking study to justify the charge is fair. A significant related parties’ recharge should be properly documented via a Local File.

Furthermore, Companies should consult with tax experts or accountants who are familiar with Hong Kong's tax laws and regulations. They can provide guidance on structuring transactions in a tax-efficient manner and advise on any tax planning strategies that can minimize the overall tax burden.

In summary, cross-border group cost recharge in Hong Kong requires careful planning and compliance. By ensuring that all transactions are priced fairly, documented thoroughly, and reviewed regularly, Companies can avoid unnecessary tax risks and maintain their good standing with the IRD.

Our Services

- Advising on the optimal structure for cross-border transactions to ensure tax efficiency and compliance. This includes identifying the most suitable legal entities, jurisdictions, and pricing mechanisms.

- Performing a comprehensive tax risk assessment for cross-border transactions to identify potential issues and recommend mitigation strategies. This includes identifying areas of potential controversy with the IRD and advising on how to resolve them.

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