Tax Management takes on prominence in the case of both individuals as well as companies who aim to reduce the taxes payable and further strategize on the future payments. This method, on the other hand, is incredibly important when managing the taxes and also in crafting a good estate plan.
It is just necessary to realize that although Tax Management with proper taxation may contribute to the optimization of tax liabilities, it should be differentiated from tax evasion, tax avoidance and aggressive Tax Management. Now, that we have highlighted three general areas of Tax Management, we will proceed with specific examples.
Content Outline
Hong Kong Tax Management Tax Planning
To define a Tax Management strategy for enterprises based in Hong Kong which possess substantial substance and a robust intragroup business activities, in contrast to those which could be referred to as “resident” companies with hardly any substance and those used primarily for re-invoicing purposes, is not particularly easy.
The former group of resident companies, for whom the regime can be easily invoked, shall not be obliged to pay taxes, whereas the taxable profits of the latter are likely to be done based on the residence status under the Hong Kong tax regime.
The amazing fact lies in Hong Kong’s corporate income tax of 8.25% or 16.5% ( these differ according to the assessable profits), which is commonly considered to be low based on the standards used in European countries; the local resident Hong Kong companies and those with some substance operating outside of Hong Kong and are under a foreign parent company still look for other effective ways of cutting their final tax bills. While it is possible to use local Tax Management, its need is to be carefully considered and must be supportable with appropriate documentation.
Some advisers might play with the concept of ‘bonus payments versus dividend payments’ for industry taxation purposes, some might tell to have regional offices in another jurisdiction, the others might advise on royalty types.
But on the other hand, it is necessary to be cautious and not overlook the HK case laws as well as the Hong Kong’s anti-abuse and anti-avoidance clauses.
Tax Management Issues
When Tax Management, we cannot keep energetic towards special attention to import processing vs contract processing conditions too. One of the benefits for Hong Kong company may be in their manufacturing processes which play a role of a agent with a company on Mainland China or as a sub-contractor of the company.
On the contrary, these newer deals entail that the Chinese factory would be the one to do the packing and assembling of those products. The plant will charge to the Hong Kong company an amount to be determined by their machines.
The Hong Kong firm normally sorts out the product’s completion and sometimes will also be the source of the raw materials necessary to make it. By means of DIPN 21, the Hong Kong Inland Revenue is however willing to apportion the profit made by the Hong Kong company as a result of the products sold to third parties on a 50:50 point. As this case judgments in “CG Lighting Limited vs CIR” and “Datatronics vs CIR”, it becomes even clearer that the way of structuring the arrangements is very significant.
The Court of the First Instance in the conveyed cases scrutinized the agreement of the Hong Kong companies and the Mainland China company which had involved manufacturing business of the latter either it implied the import processing or contract processing arrangements. The profit-making transactions were traffic of the goods (sale of goods), in which case the DIPN (21) is not applicable at all.
Following this, the most important aspects would be the proper communications with the authorities and also the identification of the correct transaction and the activities carried by the Hong Kong company.
For instance, one can contemplate the sales taking place not only in Hong Kong, but also outside of it, i.e. the activities of the Hong Kong Company might become consequential or the purpose of the agency structure.
Tax Management & Securities Trading
The city of Hong Kong offers 2 significant features: securities and commodity trading. Hence, the trading of such securities, as well as that of commodities, is often associated with the reason that the concerns were created as soon as the contracts of sale and purchase was done.
Suppose the location of this source is in Hong Kong to the nature of the taxation business related to Hong Kong would be fully tax exempted at rates for the corporate income tax of 16.5%.
Furthermore, besides aforementioned regulations, many case laws especially on commissions need to be considered while checking whether the real actions of the company had a great role on Hong Kong corporate income tax.
As clearly demonstrated in those case laws, for instance “Baring Securities Limited versus CIR” that had been brought forth to the court, the drafting of the underlying contracts is important but the next question is to deal with the questions such as “Where is the bill presented?” “Which company is responsible for executing it?” And “Where are the clients based?”
Implementing a well-designed tax design on security transactions could enable some Hong Kong residents to save some tax in the process of their Tax Management.
How FastLane Group can help?
Thus, Tax Management for complex international businesses should go hand in hand with a detailed clarification of local laws, potential advantages and legal variables, especially in jurisdictions like Hong Kong where rules tend to be comparatively sophisticated, at least for companies operating there on a large scale.
Regardless of the tax requirements you have to fulfill on corporate income or import processing or structuring your securities trading to your benefit, the right approach will have a great effect on your financial outcomes.
If you are among those who look for tax planning and reasonable ways to minimize the tax payment while staying in the legal bounds, we will be happy to assist you.
We are a team specialized in financial advisory and strategic planning. This means we are ready to offer you customized advice and strategic thinking services.
Get in touch with us today and let us walk you through more info and assist you with the right tax strategy.
