Some people argue that a business registered under the Hong Kong Companies Ordinance is automatically considered a tax resident. While this is true, it is important to appreciate that the Hong Kong administration considers failure to demonstrate economic substance to mean that the company has shifted it to another jurisdiction.
The impact of this is that your company might get denied tax resident certificate, making doing business in other countries very difficult. Here is all that you need to know about tax substance in Hong Kong.
A Closer Look at Tax Substance in Hong Kong
Notably, there is no clear definition of tax substance in the Hong Kong laws. However, the term is used to mean the value that a company is contributing to the Hong Kong economy. As an island with little or no minerals or land for agriculture, Hong Kong spares no effort to ensure that companies operating there support its business-based economy.
When a business applies for a tax resident certificate, the Inland Revenue Department (IRD) indicates that it considers two things;
- A firm is incorporated in Hong Kong.
- A company incorporated outside Hong Kong but has most of the operations managed in Hong Kong.
However, we must say that a lot more than the above two factors are checked before the certificate is issued. This means that even if your firm is incorporated in Hong Kong, it might still fail to qualify for a tax resident certificate. Some things that might make you fail to get the certificate include not filing tax returns correctly and on time and breaking other Hong Kong laws.
Why You Need to Demonstrate Tax Substance in Hong Kong
After incorporating businesses in Hong Kong, most investors want to grow them into both the neighboring countries and globally as well. Demonstrating tax substance can help you to achieve this goal easily. See other benefits of demonstrating economic substance:
- It is the Gateway to Enjoying the Benefits of DTAs
Hong Kong has entered into more than 40 double tax agreements (DTAs) with different countries across the globe. To enjoy the full benefits of these DTAs, you have to get a tax resident certificate from IRD after demonstrating tax substance. Some of the benefits of DTAs include low withholding tax rates on interest or dividends and avoiding capital gains tax.
- It Gives Your Company an Advantage Over Competitors
By demonstrating tax substance, you get an added advantage over other companies in Hong Kong because you can easily expand globally. So, go ahead and extend your reach, such as identifying and working with partners in different countries to grow sales.
How to Demonstrate Tax Substance
The following are some key things you can do to demonstrate tax substance for your company:
- Manage your company or most of its operations from Hong Kong.
- Make sure some of the directors or senior managers stay on the island.
- Have a functional office in Hong Kong.
- Hold regular meetings on the island.
- Ensure you have staff residing in Hong Kong.
- Have some of the company’s cash stored in Hong Kong.
Opening a business in Hong Kong is the first step to growing its presence globally. By demonstrating tax substance in Hong Kong, global expansion becomes pretty easy because you can take advantage of the DTAs. Consider working with an expert agency to help you understand tax substance more effectively and get a tax resident certificate from IRD.