Welcome to Our Hong Kong Tax Residency Series Part 3. I am Henry Kwong, the Tax Partner of Cheng & Cheng. In part 3, I will talk about the use of a Hong Kong company to deal with Asian business partners.
Case 1 Service Arrangements
Case 1 applies to service providers. If your clients are in South East Asian Countries like Indonesia, India, Malaysia, you may not notice that you are actually paying substantial amount of tax in these countries.
Your clients are actually paying tax of around 20% on behalf of you. However, if you qualify as a Hong Kong tax resident, you can present the Tax Residency Certificate and the withholding tax could be significantly reduced to 5 to 10%. As such, it is important to build up your awareness to obtain Hong Kong Tax Residency Certificate.
Second tax saving opportunity is to apply for Tax Credit in Hong Kong. Obtain your overseas tax receipts from your clients and include them in your Hong Kong Profits Tax filing. We are pleased to advise the detailed procedures if needed.
Case 2 Loan Arrangements
Cross-Border loan financing arrangement is also common for Multi-National Corporations. One of our clients makes a loan to a Japanese company and derives interest income. Interest income is subject to withholding tax of 20% in Japan.
Again, if the Hong Kong company becomes a Hong Kong tax resident, the withholding tax can be reduced from 20% to 10%.
Lastly, don’t forget to apply for Tax Credit in Hong Kong. The Japanese withholding tax paid can help you significantly reduce your Hong Kong Profits Tax liabilities to avoid double taxation.
Case 3 Royalty / Licensing Arrangements
It is common for Multi-National Corporations to charge royalties to their Asian business partners. They prefer to enter into licensing agreements with a Hong Kong company, which will then have to enter into a sub-licensing arrangements with entities in Mainland China and Asia.
Royalty arrangements could be complicated, but it is important to keep in mind the two tax saving methods: Tax Credit and Reduction of Overseas withholding tax. Please note that Hong Kong imposes withholding tax on royalties as well.
To conclude, becoming a Hong Kong tax resident and applying for Hong Kong Tax Residency certificate is an important part of your tax planning for doing business in Asia. To learn some practical examples of becoming a Hong Kong tax resident, please sign up below to obtain our Part 4 Video.