Many of our clients sway between the choices of setting up a HK company and offshore company like Seychelles, BVI before coming to us. Last time in the blog: Which Entity Will Drive More Efficient Operation - HK or Offshore Co.?, we have covered 3 important questions to ask yourself before making such decision, yet after the incorporation, from time to time, you should review whether the profits generated are derived from HK or not. If you found your HK company is generating all profits wholly outside HK, then you may be eligible to enjoy tax exemption because your profits are not liable to HK Profits Tax. Here we‘ll provide more clues for you to take a closer look.

 

 

Most entrepreneurs chose to start their HK business as they foresaw they may have business activities in HK or they valued the good reputation standing of HK company. However, we came across certain exceptional cases - some clients might realize that their company did not involve a profession or business in HK after it had been operated for some time, and would like to check if they can claim their business offshore and lodge such filing with the IRD.

Mainly there are TWO types of Offshore Claim that might be applicable to you: Profits Tax and Salaries Tax:-

>> For Profits Tax, it is essential to identify how your business profits are generated or derived from HK, please take a look at the questions below for a better understanding:

* Q1 : What is the organization structure of your business?
* Q2 : How is the service agreement made?
* Q3 : Who performs the service? Where does this person locate?
* Q4 : How is the payment made and received?

If all your answers to the above questions are concluded in: outside HK, you may consider talking to your BRIDGES consultant to see if it is worth to file an Offshore Claim.

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>> For Salaries Tax, the main point is to see whether a person’s income derived from employment is arising in HK or not. As a staff, senior management or director, check out the following 3 crucial questions to easily identify your situation:

* Q1 : Did you render services in HK? NO?
Q2 : Did you visit HK for more than 60 days? NO?
Q3 : Is your foreign tax paid? YES?

For example, if you are a foreigner being employed as the director of a HK Company (with an employment contract), and you have visited HK for 57 days only throughout a year, you can consider applying for Offshore Claim upon your employment income. It’s suggested to approach your tax consultant and get dedicated advice first for full arrangement.

 

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The above questions and examples are for your own reference only, cases have to be individually evaluated and advised by experienced tax experts. Keeping you stress-free (especially when you are aboard), the tax team here at BRIDGES can provide preliminary tax review on your company’s case and reports, and this treatment is complimentary if you are our existing accounting client.

Starting early makes it easy. Generally the whole process will last several months or even more than 1 year depending on the case complexity, thus please feel free to seek our advice now to kick start your early preparation and submission if needed. In any case you are required to submit the first Profits Tax Return (in 18 months since incorporation) with completed audit report, for which it can be arranged by us in a legitimate format. If you decide to proceed the Offshore Claim, it will be filed to the IRD and you shall receive a so-called Query Letter from them with a full list of questions for your answering within 1 month time. The appointed tax representative will then act on your behalf and handle all correspondence with the IRD by furnishing appropriate information and reply.

Provided the application is successful, it will take a few years for the IRD to assess your case again on whether your latest profits are chargeable to HK Profits Tax, so you won’t receive the local tax filing request frequently under this arrangement. Chat with our experienced team now and see if we can help save your time and hassles too!

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In the blink of an eye, it’s the beginning of a year again, which means you could start over to think about how to deploy your business plans, and at the same time, not to miss any local compliance duties that might affect your company’s operation, especially if you are a foreign entrepreneur. Ring a bell? Yes, don’t forget the principle “the earlier the better” - when it is talking about tailoring your own tax strategies and being well prepared to report your taxes to the Inland Revenue Department (IRD) on time in this year’s Apr, not too much time left honestly. 

No clues yet on where to start? Let’s take a closer look at some of the basic TAX FILING & PLANNING areas that need your attention if you have a business in Hong Kong :

 

 

Get Familiar with the Compliance

There are 3 types of annual tax returns the IRD will issue to those entrepreneurs doing business in HK for more than 1 year since the date of incorporation: Employer’s Return, Profits Tax Return and Individual Tax Return. Different tax return has different kinds of compliance. Taking Employer’s Return as an example: there are several types of document you need to file for your employees compulsorily (e.g. completed BIR56A and IR56B - the Employers’ Return of Remuneration and Pensions Forms; completed IR6036B that is about remuneration paid to persons other than employees; etc.), for which you might feel dizzy when seeing all these requirements and a little nervous that some of them could be filled out incorrectly, and your tax return will get rejected at the worst case.

So yes, if you are not familiar with HK tax compliance, it can give you a real headache (although HK tax regime is rather simple, its documentation filing requirements are relatively rigorous due to the well-developed regulatory system). For you, it could be a stress-relieving assurance if all your tax filing duties are managed by a professional and experienced agency in HK with good reputation.

 

Accurateness & Effectiveness

Please keep this in mind: if your accounts and audit reports are not built properly from the beginning, it is not easy to further execute an effective tax efficiency plan in the financial reports when you start making good profits at a more matured stage. Some people might think they can just prepare some simple bookkeeping records by themselves for their businesses since they don’t have much resources - that’s a misconception indeed - provided that every HK business is required to submit audit reports to the Government every year in general, if the full set of accounts including Profit & Loss Accounts, Balance Sheet, General Ledger, Trial Balance, etc. is not available for the auditors to assess, they just can’t finish the auditing procedure, and nearly unable to give any advice on tax compliance strategy.
In fact, getting a reliable accounting service provider to help is not as hard (and expensive) as you think, simply check out the rate here to have an idea. After your accounts and audit reports are well arranged at an early stage, next you will be able to review the whole financial picture of your business in advance, and receive the tax computation information for fixing your financial strategies in the most tax-efficient manner.

Yet, not only we need to focus on financial accurateness and optimisation, timeframe is also one of the key elements. Given that you‘ll not want to face penalties or prosecution due to late submission of tax return (or so far without noticing it at all), some agencies will even send you reminders and related advice on your coming tax reporting date and you would never, ever miss the deadline! For those outstanding service providers that are capable of doing this, it would need years of battlefront experience or in-house accounting specialists to take care of their clients, case by case, from head to toe.

 

Tax Exemption for Offshore Company?

As one of the most flourishing market in the world, HK has adopted a lot of overseas investors. Some of them (including you??) might be running an offshore business while the operation does not really take place in HK. You may wonder how your company can be claimed as an ‘offshore business’ by the IRD and it will then be able to enjoy tax exemption? To put it simply, certain criteria need to be met to qualify for such definition, e.g. the terms of the purchase and sales contracts are completely negotiated and conducted with suppliers and customers outside HK; the service is performed in a place wholly outside HK; etc. Please click here for details of qualifying for ‘offshore claims’ submission, while one important key is to prove the profits are not liable to HK Profits Tax by proper planning at the initial stage.  

As seen, there are heaps of tax compliance issues that could be affecting your final tax reporting and optimisation result. Although different accounting & tax advisors have their own specialties, how do you know which one can be trusted? For newbies, trying to go for those with word of month, years of experience and a solid foundation might help. If you are still unsure how to start or execute the whole arrangement properly, simply send a private message to us today!

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[Based on Client’s Life Experience]

When it comes to arranging accounts & audit works for your business, many people may think: I still have plenty of time! Is that really true? According to our experience, if the entrepreneurs (especially expats) didn’t have any preparation beforehand and suddenly received their first Profits Tax Return from the HK Inland Revenue Department (IRD), they might feel panic for having 3 months only to finish all financial work - 3 months could be long, but could also be too short, here’s a case sharing from one of our friends that you might be interested to hear. 

His name is Willis (alias), a smart start-up founder coming from Australia. Yes, he is astute in nurturing his fast-growing online tech business, but he has zero concept of local accounts and tax system, and didn’t pay much attention to how to consolidate his corporate financial records in a neat and so-called proper way all along. He faced some challenges after a talk with his friends...

 

 

One night he was at a pub during happy hour, and he remembered clearly it was before the HKSAR Establishment Day holiday. He was about to grab a few drinks with his buddies, who are all start-up newbies here. They chatted and suddenly Willis recalled one thing - it looked he had just received a green letter from the IRD that afternoon and his friends reminded him that should be his very first Profits Tax Return, for he had formed his business in HK for nearly 1.5 year already.

 

WHAT to Prepare?

Since that time he had no clue at all on how or what to prepare for this tax filing, he then actively seek help from his peers group, but the things were not that straightforward. He knew he should start with getting all accounting records ready with his sales invoices, expense bills, receipts, shipping documents, all bank statements, etc., even it's already a year behind. At first he thought it should be quite easy as there are so many accounting report templates online - would not be that hard to find suitable ones to fit in his bookkeeping entries. Then, along the preparation process, his questions popped up one after another.

For instance, he thought his first prepared accounting records were quite good already, or at least this draft had a good direction to base on and follow (for which he really spent some time to figure out what entry should be put and how to put), then, he realized there were so many more of his business entries in different categories he needed to add further, and some of them were quite vague to define where to put, such as how to define which one is cost and which one is expense, and he knew if he put the entry wrong, the impact on his tax computation figures could be quite large.

 

HOW to Be Well Prepared?

However, the puzzle is yet to solve. When he came to us in last July and showed us his accounts records, he finally recognised what he had prepared were far from the standard. We immediately let him know by submitting these self prepared records, the auditor can’t really process the auditing procedure, since it is a requisite for them to receive the full set of accounting records including Profit & Loss Accounts, Balance Sheet, General Ledger, Trial Balance, etc. for assessment and preparation of audit reports in the legitimate and proper format. Plus he might need to carry out a stock take as well for his tech device inventories. 

At that moment he noticed he really need an experienced local accounting advisor to guide him through, especially for the first year accounts. It proved worthwhile to spend a few thousands (here please find the rate) to get things done without the hassles. As a start-up who has been doing business for just about a year, everything is so new and he rather put more of his resources in developing his business, instead of consolidating the accounting entries for which a professional could do way better and more efficient than him. And he found out when the accounting records and audit report structure are well built, it will become an important foundation for him to execute his tax efficiency plan in the financial reports when his firm starts to make good profits at a later stage. Not to mention he will be reminded of his HK tax filing dates by the agency and he can be hands-off with these trivial issues.

 

WHAT Is the Role of a Professional?

Yes, reminding our clients to meet their tax reporting deadlines is one of our jobs, yet what we can do is much more than that. Typically we will suggest our clients to appoint the same proficient firm for handling all accounts & audit works, as well as the tax compliance part. Not only this will help improve the consistency and tidiness of the reports, but also let the advisor provide possible solution on tax computation and optimization, given that the advisor has already gone through your financial statements and known well of your accounting & audit report structure. For example, how would the handling treatment be different for a company generating profits in HK, China or from offshore places? 

Tax filing is inevitable for every entrepreneur - there could be a chunk of documents you have to deal with at the last minute if you didn’t plan early, and this could become a disaster at last. On the contrary, as a wise business person you should always start it earlier to fit the local compliance requirements. Even if your invoices and expense bills are kind of messy, we will give you precise advice and teach you how to prepare the full set of documents based on our provided checklist. Also, BRIDGES is recognized in the market for what we submit to the auditor is very neat, thanks to our internal team who will organise your documents with great caution and file them properly after you have passed to us. For offshore business owners, we will assist you in communicating with the IRD for submitting your ‘offshore claims’ if we found your firm is eligible to apply, details please refer here. You can always go back to us and look for our accountant’s prompt advice on your accounts or tax queries.

This first step in dealing with the accounting work of your business - could be troublesome, but could also be stress-relieving, depends on which path you opt for. Unquestionably when you have found a reliable yet cost-effective firm familiar with local compliance to handle all your duties from head to toe, you can put more resources and time in focusing on your business developement and growth. Any questions on how to kickstart your own accounting work, please feel free to drop us a private message and our in-house accounting and tax compliance team, providing advice not just coming from factual knowledge but also over 10 years of frontline experience in this field, will address your queries straightway and walk you through the whole preparation and submission timeline.

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