{"id":18232,"date":"2021-10-19T11:15:00","date_gmt":"2021-10-19T11:15:00","guid":{"rendered":"https:\/\/eodishasamachar.com\/en\/2021\/10\/19\/cheng-cheng-taxation-reveals-how-hong-kong-can-help-avoid-double-taxation-in-cross-border-business\/"},"modified":"2021-10-19T11:15:00","modified_gmt":"2021-10-19T11:15:00","slug":"cheng-cheng-taxation-reveals-how-hong-kong-can-help-avoid-double-taxation-in-cross-border-business","status":"publish","type":"post","link":"https:\/\/eodishasamachar.com\/en\/2021\/10\/19\/cheng-cheng-taxation-reveals-how-hong-kong-can-help-avoid-double-taxation-in-cross-border-business\/","title":{"rendered":"Cheng &#038; Cheng Taxation Reveals How Hong Kong Can Help Avoid Double Taxation in Cross-Border Business"},"content":{"rendered":"<p> \n<\/p>\n<div>\n<p>HONG KONG SAR &#8211;\u00a0<a href=\"https:\/\/www.media-outreach.com\/\">Media&#13;<br \/>\nOutReach<\/a>\u00a0&#8211; 19 October 2021 &#8211;\u00a0Transfer pricing and foreign withholding&#13;<br \/>\ntax are generally the two most important tax considerations when making&#13;<br \/>\noutbound investments and engaging in cross-border business. While the new Hong&#13;<br \/>\nKong transfer pricing law has been covered in August 2020 (<a href=\"https:\/\/henrykwongtax.com\/article\/hong-kong-codification-of-transfer-pricing-law\/\">https:\/\/henrykwongtax.com\/article\/hong-kong-codification-of-transfer-pricing-law\/<\/a>), Cheng &amp; Cheng Taxation&#13;<br \/>\nServices Limited (&#8220;Cheng &amp; Cheng&#8217;s Taxation&#8221;) will further reveal how a&#13;<br \/>\nHong Kong company can help multinational corporations (MNCs) reduce their&#13;<br \/>\ndouble taxation risk and thus the overall effective tax rate, with the below&#13;<br \/>\ndiscussion areas:<\/p>\n<ul>\n<li>Special&#13;<br \/>\nfeatures of the Hong Kong taxation system, <\/li>\n<li>inbound&#13;<br \/>\ninvestment into Mainland China and other Asian countries, <\/li>\n<li>three&#13;<br \/>\nexamples of how Hong Kong can reduce foreign withholding tax and double&#13;<br \/>\ntaxation risk when doing business in Asia and <\/li>\n<li>how&#13;<br \/>\nto apply for a Hong Kong Tax Residency Certificate<\/li>\n<\/ul>\n<p width=\"420\" height=\"315\" src=\"http:\/\/www.youtube.com\/embed\/Xl8n02S3p4I\" frameborder=\"0\" allowfullscreen=\"\" style=\"text-align: center\"><iframe loading=\"lazy\" width=\"420\" height=\"315\" src=\"http:\/\/www.youtube.com\/embed\/Xl8n02S3p4I\" frameborder=\"0\" allowfullscreen=\"\" style=\"text-align: center\"><a href=\"https:\/\/youtu.be\/Xl8n02S3p4I\"><img class=\"youtube-thumbnail\" src=\"https:\/\/images.media-outreach.com\/187404\/PressReleaseTMPhgbiJf.jpg#image-187404\"\/><\/a><\/iframe><\/p>\n<p>A three-minute&#13;<br \/>\nvideo relating to each discussion area have been prepared for the better&#13;<br \/>\nunderstanding of the issues. Please refer to this link\u00a0(<a href=\"https:\/\/henrykwongtax.com\/home\/trc-videos\/\">https:\/\/henrykwongtax.com\/home\/trc-videos\/<\/a>)\u00a0to access to the videos.<\/p>\n<p>\u00a0<\/p>\n<p><b><u>Special features of the Hong Kong taxation system<\/u><\/b><\/p>\n<p>\u00a0<\/p>\n<p>Hong Kong&#13;<br \/>\nis a popular jurisdiction for <u>investment holding companies<\/u> and <u>intra-group&#13;<br \/>\ntrading companies<\/u>. <\/p>\n<p>\u00a0<\/p>\n<p>Most MNCs&#13;<br \/>\nhave set up companies and maintain small-scale operations in Hong Kong even&#13;<br \/>\nthough Hong Kong is not their major market in Asia. Here the explanation of the&#13;<br \/>\nrationale.<\/p>\n<p>\u00a0<\/p>\n<p><i>Local tax&#13;<br \/>\nlaw<\/i><\/p>\n<ul>\n<li>Dividend&#13;<br \/>\nincome and capital gains are taxed at a 0% tax rate in Hong Kong;<\/li>\n<li>No&#13;<br \/>\nwithholding tax on dividends, interest, service income or trading profits are&#13;<br \/>\nimposed in Hong Kong. Only royalties are subject to withholding tax and a low&#13;<br \/>\ntax rate of 2.475% to 4.95% will usually apply; <\/li>\n<li>Hong&#13;<br \/>\nKong profits tax (corporation) and salaries tax (individual) are among the&#13;<br \/>\nlowest rates globally, with maximum tax rates set at 16.5% and 15%,&#13;<br \/>\nrespectively. For the first HK$2 million of profits, a half tax rate of 8.25%&#13;<br \/>\napplies to a Hong Kong corporation. <\/li>\n<\/ul>\n<p>&#13;<br \/>\nHong Kong adopts the territorial concept, rather than the worldwide taxation&#13;<br \/>\nsystem. Generally, only Hong Kong\u2013sourced profits are subject to tax in Hong&#13;<br \/>\nKong. This is one of the most effective ways of avoiding double taxation if the&#13;<br \/>\noperations of the Hong Kong based company are principally performed outside&#13;<br \/>\nHong Kong and foreign tax has been paid.<\/p>\n<p>\u00a0<\/p>\n<p><i>International&#13;<br \/>\npresence <\/i><\/p>\n<p>Hong Kong&#13;<br \/>\nhas an extensive Comprehensive Double Taxation Agreement (DTA) network with&#13;<br \/>\nAsian countries. A total of 45 jurisdictions have already entered into DTAs&#13;<br \/>\nwith Hong Kong. A full list of DTA partners can be found on our website: (<a href=\"https:\/\/henrykwongtax.com\/home\/hong-kong-tax-treaty-network\/\">https:\/\/henrykwongtax.com\/home\/hong-kong-tax-treaty-network\/<\/a>) <\/p>\n<p>\u00a0<\/p>\n<p>Unlike&#13;<br \/>\noffshore jurisdictions, such as the British Virgin Islands, Hong Kong is located in the heart of Asia and offers an abundance of&#13;<br \/>\nfinance and trade support professionals. Setting up substance in Hong Kong to&#13;<br \/>\nfulfil the latest international tax requirements is relatively simple and&#13;<br \/>\nconvenient. <\/p>\n<p>\u00a0<\/p>\n<p>For these&#13;<br \/>\nreasons, Hong Kong is the first place to consider when an MNC expands into&#13;<br \/>\nAsia, in particular into Mainland China.\u00a0\u00a0 <\/p>\n<p>\u00a0<\/p>\n<p><b><u>Inbound investment into Mainland China and&#13;<br \/>\nother Asian countries<\/u><\/b><\/p>\n<p>\u00a0<\/p>\n<p><i>Hong&#13;<br \/>\nKong is a good platform for an MNC to invest in Mainland China<\/i>. <\/p>\n<p>\u00a0<\/p>\n<p>As a&#13;<br \/>\ngeneral rule, an MNC would either set up a subsidiary, namely a wholly foreign-&#13;<br \/>\nowned enterprise (WFOE), or a representative office (RO) in Mainland China. Here&#13;<br \/>\nCheng &amp; Cheng&#8217;s Taxation will explain how a Hong Kong entity can help&#13;<br \/>\nreduce overall tax liabilities.<\/p>\n<p>\u00a0<\/p>\n<p><i>Subsidiary:&#13;<br \/>\nWholly foreign-owned enterprise<\/i><\/p>\n<p>When an MNC&#13;<br \/>\nplans to establish production bases or trade with customers in Mainland China, it&#13;<br \/>\nwould normally set up a WFOE there because of that country&#8217;s VAT tax system. <\/p>\n<p>\u00a0<\/p>\n<p>Typically,&#13;<br \/>\na Hong Kong intermediate holding company will be set up to invest in the WFOE&#13;<br \/>\nin Mainland China, for the following reasons:<\/p>\n<ul>\n<li>Dividends,&#13;<br \/>\ninterest and royalties paid to non-residents of Mainland China are generally&#13;<br \/>\nsubject to 10% withholding tax in that country. If the recipient is a Hong Kong&#13;<br \/>\ntax resident, the withholding tax can be reduced to between 5% and 7% under the&#13;<br \/>\nDouble Taxation Agreement (DTA) between Mainland China and Hong Kong; <\/li>\n<li>Mainland&#13;<br \/>\nChina offers preferential treatment to Hong Kong taxpayers under the DTA&#13;<br \/>\nbenefits; <\/li>\n<li>As&#13;<br \/>\nHong Kong is part of the Greater Bay Area, it is relatively easy to set up&#13;<br \/>\nsubstance in Hong Kong to support operations in Mainland China; <\/li>\n<li>As&#13;<br \/>\nmentioned above, Hong Kong does not impose tax on dividend income or capital&#13;<br \/>\ngains. There is also no withholding tax on dividends. <\/li>\n<\/ul>\n<p><i>Representative&#13;<br \/>\noffice<\/i><\/p>\n<p>When an MNC&#13;<br \/>\nwants to set up a client liaison or back office in Mainland China, they could&#13;<br \/>\ninvest in the form of a representative office (RO). An RO is not expected to&#13;<br \/>\nderive any income and is not a separate legal entity. Using a Hong Kong headquarters&#13;<br \/>\nto install an RO in Mainland China is a reasonable option.<\/p>\n<p>\u00a0<\/p>\n<p>Despite the&#13;<br \/>\nfact that it is a cost centre, an RO in Mainland China is still required to pay&#13;<br \/>\ncorporate income tax based on a deemed profits ratio. As such, double taxation&#13;<br \/>\nissues may arise. <\/p>\n<p>\u00a0<\/p>\n<p>As Hong&#13;<br \/>\nKong and Mainland China are DTA partners, Both a tax deduction on RO expenses and&#13;<br \/>\na tax credit can be claimed to offset Hong Kong profits tax liabilities,&#13;<br \/>\nprovided that the Mainland China RO assists in the operations of the Hong Kong&#13;<br \/>\nentity. This is an effective way to avoid double taxation in Hong Kong and&#13;<br \/>\nMainland China.<\/p>\n<p>\u00a0<\/p>\n<p><b><u>Doing business in Asia: Reduction of foreign withholding&#13;<br \/>\ntax<\/u><\/b><\/p>\n<p>\u00a0<\/p>\n<p><i>Hong&#13;<br \/>\nKong is in a good position to reduce foreign withholding tax in Asia as Hong&#13;<br \/>\nKong has entered into DTAs with most Asian countries.<\/i><\/p>\n<p>\u00a0<\/p>\n<p>Apart from Mainland&#13;<br \/>\nChina, other developing countries in Asia such as India and Indonesia are also attracting&#13;<br \/>\nMNCs due to their rapid economic growth. However, the problem is that, without&#13;<br \/>\na Double Taxation Agreement (DTA), withholding tax on income repatriated from&#13;<br \/>\nthese countries is generally very high. <\/p>\n<p>\u00a0<\/p>\n<p>With years&#13;<br \/>\nof experience, Cheng &amp; Cheng&#8217;s Taxation identified three common scenarios&#13;<br \/>\nin which a Hong Kong tax resident can help reduce foreign tax liabilities.<\/p>\n<p>\u00a0<\/p>\n<p class=\"ChengChengsubhead\">Scenario 1: Service fee arrangements<\/p>\n<p>Take a&#13;<br \/>\nservice provider in Hong Kong, maintaining several clients in Indonesia as an&#13;<br \/>\nexample. Many Hong Kong companies are unaware that they have paid withholding&#13;<br \/>\ntax in Indonesia on their service income, since their foreign clients typically&#13;<br \/>\nsettle the tax liabilities on their behalf. <\/p>\n<p>\u00a0<\/p>\n<p>A Hong Kong&#13;<br \/>\ncompany can help reduce their Indonesian withholding tax on service income if&#13;<br \/>\nit can present a Tax Residency Certificate (TRC) to the Indonesian Government.&#13;<br \/>\nNormally, the withholding tax of 20% can be reduced to between 5% and 10%. <\/p>\n<p>\u00a0<\/p>\n<p>Further, a&#13;<br \/>\ntax credit is available against the Indonesian withholding tax paid to offset&#13;<br \/>\nHong Kong profits tax liabilities. As such, with proper tax planning, the double&#13;<br \/>\ntaxation issue should not arise.<\/p>\n<p>\u00a0<\/p>\n<p>Last but&#13;<br \/>\nnot least, similar arrangements can also be applied to other Asian countries,&#13;<br \/>\nincluding India and Malaysia. <\/p>\n<p>\u00a0<\/p>\n<p class=\"ChengChengsubhead\">Scenario 2: Loan financing arrangements<\/p>\n<p>This scenario&#13;<br \/>\nuses a company making interest-bearing loans to its group company in Japan as&#13;<br \/>\nan example. In Japan, interest paid by a Japanese company to non-residents of&#13;<br \/>\nJapan is generally subject to 20% withholding tax. Under the DTA between Hong&#13;<br \/>\nKong and Japan, the withholding tax rate can be reduced from 20% to 10%.<\/p>\n<p>\u00a0<\/p>\n<p>As well as&#13;<br \/>\nthe tax credit method mentioned above, double taxation issues may also be&#13;<br \/>\nresolved by pursuing an offshore claim on interest income in Hong Kong. Under the&#13;<br \/>\nprovision of credit test, interest income on loans first made available to the&#13;<br \/>\nborrower outside Hong Kong could be offshore sourced and non-taxable under Hong&#13;<br \/>\nKong profits tax.<\/p>\n<p>\u00a0<\/p>\n<p>As most&#13;<br \/>\ncountries in Asia charge withholding tax on interest paid to non-residents, a&#13;<br \/>\nTRC can generally help in most of the loan arrangements.<\/p>\n<p>\u00a0<\/p>\n<p class=\"ChengChengsubhead\">Scenario 3: Royalty arrangements<\/p>\n<p>Royalty&#13;<br \/>\narrangements are common among Western brand owners when they cooperate with&#13;<br \/>\nAsian business partners to expand into the Asian market. This can involve&#13;<br \/>\nfranchise arrangements, sales of branded products, and game licensing&#13;<br \/>\narrangements.<\/p>\n<p>\u00a0<\/p>\n<p>More&#13;<br \/>\nimportantly, MNCs appear more eager to enter into royalty arrangements with&#13;<br \/>\nHong Kong entities of their Asian partners, especially when dealing with countries&#13;<br \/>\nthat have a foreign exchange control system such as in Mainland China. An MNC&#13;<br \/>\nmay request that their Asian partner establishes a Hong Kong entity to pay their&#13;<br \/>\nroyalties, which can lead to a significant income and expense mismatch as&#13;<br \/>\nthe income is earned by Mainland China or other Asian entity, while the royalty&#13;<br \/>\nexpenses are borne by the Hong Kong entity.&#13;<br \/>\nIncome and expense mismatches without thorough group recharge&#13;<br \/>\narrangements will lead to significant tax inefficiencies and risk.\u00a0 <\/p>\n<p>\u00a0<\/p>\n<p>Similar to&#13;<br \/>\ninterest income, royalties are subject to withholding tax in most Asian&#13;<br \/>\ncountries. Hong Kong also imposes a royalty withholding tax but, based on our&#13;<br \/>\nexperience, the withholding tax can be used to offset the corporate income tax&#13;<br \/>\nof the recipients in their respective Western countries. However, it is&#13;<br \/>\nimportant to examine the relevant tax administrative procedures in Hong Kong.<\/p>\n<p>\u00a0<\/p>\n<p>As royalty&#13;<br \/>\narrangements are generally very complex, it is important to look for a tax&#13;<br \/>\npartner with international tax experience in order to plan ahead effectively.<\/p>\n<p>\u00a0<\/p>\n<p><b><u>How to apply for a Hong Kong Tax&#13;<br \/>\nResidency <\/u><\/b><b><u>Certificate<\/u><\/b><\/p>\n<p>\u00a0<\/p>\n<p>In above&#13;<br \/>\ndiscussion, becoming a Hong Kong tax resident and obtaining a Tax Residency&#13;<br \/>\nCertificate (TRC) is an important part of international tax planning. Having&#13;<br \/>\nsaid that, not every Hong Kong company is a Hong Kong tax resident.<\/p>\n<p>\u00a0<\/p>\n<p>In order to&#13;<br \/>\nobtain a TRC, a company has to exercise its management and control in Hong&#13;<br \/>\nKong. There are no specific requirements set out by the Hong Kong Inland&#13;<br \/>\nRevenue Department (IRD), but in general, the IRD expects a Hong Kong tax&#13;<br \/>\nresident to maintain a Hong Kong\u2013based director and staff, as well as an office&#13;<br \/>\nlocated in Hong Kong. <\/p>\n<p>\u00a0<\/p>\n<p>As the IRD&#13;<br \/>\nis getting more stringent about issuing TRCs, it is important to seek&#13;<br \/>\nprofessional advice from tax advisor before making application.<\/p>\n<p>\u00a0<\/p>\n<p>For more&#13;<br \/>\ndetails of the TRC application process, please visit our website at (<a href=\"https:\/\/henrykwongtax.com\/home\/our-services\/hong-kong-tax-residency-certificate\/\">https:\/\/henrykwongtax.com\/home\/our-services\/hong-kong-tax-residency-certificate\/<\/a>). <\/p>\n<p>\u00a0<\/p>\n<\/p><\/div>\n\n<br \/><a href=\"https:\/\/www.media-outreach.com\/news\/2021-10-19\/99638\/cheng-cheng-taxation-reveals-how-hong-kong-can-help-avoid-double-taxation-in-cross-border-business\">Source link <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>HONG KONG SAR &#8211;\u00a0Media&#13; OutReach\u00a0&#8211; 19 October 2021 &#8211;\u00a0Transfer pricing and foreign withholding&#13; tax are generally the two most important tax considerations when making&#13; outbound investments and engaging in cross-border business. While the new Hong&#13; Kong transfer pricing law has been covered in August 2020 (https:\/\/henrykwongtax.com\/article\/hong-kong-codification-of-transfer-pricing-law\/), Cheng &amp; Cheng Taxation&#13; Services Limited (&#8220;Cheng &amp; Cheng&#8217;s &hellip;<\/p>\n","protected":false},"author":1,"featured_media":18233,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[60],"tags":[],"_links":{"self":[{"href":"https:\/\/eodishasamachar.com\/en\/wp-json\/wp\/v2\/posts\/18232"}],"collection":[{"href":"https:\/\/eodishasamachar.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/eodishasamachar.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/eodishasamachar.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/eodishasamachar.com\/en\/wp-json\/wp\/v2\/comments?post=18232"}],"version-history":[{"count":0,"href":"https:\/\/eodishasamachar.com\/en\/wp-json\/wp\/v2\/posts\/18232\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/eodishasamachar.com\/en\/wp-json\/wp\/v2\/media\/18233"}],"wp:attachment":[{"href":"https:\/\/eodishasamachar.com\/en\/wp-json\/wp\/v2\/media?parent=18232"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/eodishasamachar.com\/en\/wp-json\/wp\/v2\/categories?post=18232"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/eodishasamachar.com\/en\/wp-json\/wp\/v2\/tags?post=18232"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}