Offshore in Hong Kong: reality or myth

For many years, Hong Kong has attracted entrepreneurs from around the world with its reputation as a low-tax jurisdiction with no VAT, a simple system for registering and conducting business, and English common law. But does this status remain in the conditions of today's tax and banking regulations, which are being strengthened? In this article, together with Antwort Law, let's find out whether Hong Kong lives up to its reputation as an offshore company today, or whether it is still a widespread myth.

The main advantage of a company in Hong Kong is the territorial principle of taxation: taxes are collected only on income received in the country, which means that if you run a business outside the city, its income is not subject to local taxes.

To receive such a zero tax rate, the company must meet certain conditions:

1. No office and employees in Hong Kong: The company must not have a physical presence in Hong Kong, which automatically makes the company non-resident.
2. Conduct of business outside Hong Kong: All transactions and income must be derived outside Hong Kong.

It is this main advantage of Hong Kong that has given rise to the most common myth that companies in this jurisdiction can completely avoid paying taxes. However, many do not understand that not having a physical presence in Hong Kong means that the company will have residency and is obliged to pay taxes in another country where its activities are conducted. Therefore, the claim of complete tax freedom in Hong Kong is a fallacy.

In this case, what criteria for recognition of permanent representation exist in other countries, for example Germany? In Germany, a number of criteria based on international standards established by the Organization for Economic Co-operation and Development (OECD) can be identified, which reflect the need for a stable and significant company presence in the country to recognize a permanent establishment:

1. A fixed place of business through which the company's activities are carried out can be an office, branch, factory, workshop or any other object used for commercial purposes.
2. Duration of presence: If employees or representatives of the company are in Germany on a permanent basis or regularly perform their duties for a long period (usually more than 6 months), this can also be grounds for recognition of a permanent establishment.
3. Management and control: if the management of the company is carried out from Germany or significant management decisions are made on the territory of the country - it is also considered a sign of permanent representation.
4. Conducting commercial activities: if the company enters into contracts and conducts business operations in Germany. Selling goods or providing services in Germany are key indicators.
5. Use of resources: The availability of office space, equipment, use of production facilities or other resources in Germany that are consumed for running the business is also an important criterion.

Therefore, it is important for companies incorporated in Hong Kong or other offshore jurisdictions to understand that if they have a significant presence and conduct business in another country, they are required to comply with the tax obligations of that country, despite low or zero taxes in the country of incorporation. Otherwise, companies may face serious legal and financial consequences.

And this is the main difference between Hong Kong and another popular low-tax jurisdiction - the UAE. Emirati companies can receive a zero tax rate and, subject to a number of conditions, also local residency, which allows them not to pay taxes in other countries.

When considering the tax status of a company in Hong Kong, it is also important to consider the type of business that significantly affects the risk of recognition of a permanent establishment in another country. Let's analyze one of the most common types of activity - the sale of goods and services.

Sale of goods: the situation is more transparent and less risky and the main factors that make this type of business less likely to be recognized as a permanent establishment in another country include:

- proof of goods: companies can easily prove the movement of goods through documentation such as bills of lading, transport documents, invoices and supply contracts, which allows them to determine exactly where the goods were purchased and where they were delivered.

- minimal physical presence: the sale of goods usually does not require a significant physical presence in the buyer's country. Basic operations can be performed remotely, which reduces the risk of recognition of a permanent establishment.

The provision of services is a more complicated case from the point of view of tax status for the following reasons:

- physical location of the performer: if services are provided to clients in another country, this may be grounds for recognizing a permanent establishment in that country.

- difficulties with evidence: it is difficult to prove exactly where the services were provided, as this may involve the physical presence of employees, the use of local resources and interaction with local clients, which increases the risk of recognition of a permanent establishment.

The tax system in Hong Kong was and remains unchanged, but in other countries in the meantime, significant changes in the regulation of foreign companies have already begun to take place. New laws aimed at preventing tax evasion and increased attention to the residency of foreign companies and permanent offices now create completely new conditions for those who plan to open a company in Hong Kong.

If you are planning to open an international business and are considering Hong Kong as a jurisdiction, Antwort Law will help you make the most of local opportunities to achieve your goals. We provide a full range of legal, tax and banking services in this jurisdiction.

For more detailed advice and assistance, please contact our office. We are always ready to help you in solving any legal and business issues, ensuring the protection of your interests and privacy.

Lidia Ivanova

International lawyer
Antwort Law