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Due to sharp competitiveness in the local markets, in order to grasp the chance of potential business opportunities so as to increase the market shares, many businessmen will use global strategy to expand their business, i.e they will provide the products or services in other countries instead of focusing locally. The crucial consideration of using globalization method is international tax issues, as different countries have different tax systems which make things more complicated.
Tax systems of current countries
Countries [Corporate Tax(%)]
South Korea [22%]
New Zealand [28%]
United Kingdom [24%]
United States [39%(federal)12%(states)3%(local)]
*** Sources from Wikipedia
The above listed countries are example of the tax rates a corporation is required to pay. However, if all the tax types are aggregated, including individual income tax, payroll taxes, as well as sales taxes, an investor has paid more than 60% of the Gross Profits already. For a scenario of a given country, a corporation has a gross profit margin of 50%, so it buys the goods at US$50 and sells at US$100. It would have a gross profit of US$50. However, it is only a before-profit tax and before administrative and selling expenses. For a transaction, it will also involve sales taxes. Simply speaking, if the gross profits are US$45 (as US$5 were paid as sales tax), the company may also require to pay dividend tax after the company has paid corporation tax as it requires to pay the dividend to the investor. Then the investor is also required to pay individual tax as he earned as personal income In final, the so called 50% gross profit margin may produce the result that the investor has received nothing or only an insignificant amount as the transactions or the company have gone through a series of tax systems of only one transaction.
Oxffshore Migration Approach
Therefore, international businessmen have to use offshore migration method for the aims that:
1) avoiding local market sharp competitiveness
2) increase market shares in global way
3) raise potential business opportunities
4) importantly, minimize the tax level both local and global ways
5) simplify incorporation procedure and with lower setup fee
Offshore migration approach is the way that it aims at achieving the above using overseas company and overseas bank account for overseas markets.
Offshore migration approach is a general name that a businessmen use an overseas company to engage businesses overseas. It does brings a lot of benefits like simple formation procedure, no initial capital requirements, lower setup fee, enjoyment of privacy, etc.
However, it does incur some difficulties like it is hard to borrow money, and difficult to register special type of businesses like insurance business.
The most importantly, for most investors, it is hard for them to proof the sources of profits which they will feel frustrated one day in the future for their successful businesses. The reasons are that: Firstly, overseas company may have no local reporting requirements so there has no income proof from overseas governments. Secondly, overseas bank account will be opened for overseas company. It produces the result that the overseas bank account will have a lot of money through unknown business transactions (as no evidence by reporting the income statement to the local tax authority). So there is a risk that the bank from local government will force to close the bank account or even seize money without notice in some days. This case does has occurred for a lot of investors. So how to solve it. Please continue reading below.
The important characteristics of overseas jurisdiction:
- Enjoy legal tax free
- Easy to open an overseas bank account
- High protection of privacy
- Provision of proof of income record
In fact, more overseas jurisdictions like BVI, Seychelles, Belize, do share some features, but not all above share above all. It is the Hong Kong company that can provide all the characteristics listed above.
Please continue reading, we will explain all to you in details.
Enjoy legal tax free and Provision of Proof of income record
Under s.14 of HK Tax Law, a company is required to pay tax if the profits were made in Hong Kong. So a company is not required to pay tax in Hong Kong if the profits were made outside Hong Kong. Under the reporting procedure, an auditor will be appointed to submit the tax return to Hong Kong Inland Revenue Department for assessment made. If the profits are offshore in nature, the assessment notice from Hong Kong Inland Revenue Department will confirm free tax for offshore business. Therefore, global investors will get protected in their money in the offshore bank account as they have proof from HK Tax Department of zero tax notice.
Easy to open an offshore bank account
More offshore jurisdictions have the problems that it has no public record. So many banks are not willing to open for such offshore companies. However, Hong Kong is an international financial center. It is a well-known international city. More banks do trust HK company, and are willing to open bank accounts for Hong Kong company.
Protection of privacy
Through special trust arrangement, full privacy can be protected for investors.
For the trust, we provide a trust scheme that we provide nominee director and nominee shareholder and will prepare for two documents, a trust agreement and the power of attorney. In the trust agreement, we will declare that we act as trustee and hold the shares for you as a beneficiary and make it stamped so that it takes legal effect. In the POA, we will sign back to you the powers of the director so that you can sign all agreements, contracts for the company.
For the bank, we will file the trust agreement and POA to the bank and will instruct to the bank that we will not sign for any bank forms and documents for the company, the signing instructions will be your signature for the company, so that the bank will direct mail the token and password to you so that you can operate on-line banking.
Easy incorporation procedure and lower setup fee
Hong Kong Company Registry have setup an online registration system that it is easy to register a company online with a little setup fee. Clients only fill up our application form, and send the passport and proof of address to us, and follow our instructions, they can get the company registered within hours.
In additional to the above, other benefits are also mentioned by HK government website. www.hketolondon.gov.hk/invest/adv.htm, the contents are listed again below:
A free Trade and Investment Policy
Upholding firmly the Rule of Law
Complete freedom of capital movement
Clean and efficient government
Low and simple taxation
A robust and efficient financial market
Close proximity to markets in Asia
Highly skilled workforce
Excellent law and order
HK government also mentions that Hong Kong is the natural gateway for trade and investment to the vast market in Mainland China. Hong Kong's geographical advantage as a launching pad to markets in Asia can be seen from its position as the world's 11th largest trading economy. Hong Kong is recognized by business people worldwide to be the best service platform through which inward investors can reap the benefits of the manufacturing powerhouse of the world - the Greater Pearl River Delta.
Closer Economic Partnership Arrangement (CEPA)
The Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) is the first free trade agreement ever concluded by the Mainland of China and Hong Kong. The main text of CEPA was signed on 29 June 2003. CEPA opens up huge markets for Hong Kong goods and services, greatly enhancing the already close economic cooperation and integration between the Mainland and Hong Kong. In brief, the Mainland has applied zero import tariff for exports from Hong Kong meeting CEPA origin rules for goods and preferential market access for Hong Kong companies in various sectors to facilitate trade in services. CEPA adopts a building block approach and institutes a mechanism for further liberalisation measures.
Hong Kong company once registered is also support by Hong Kong government for a number of ways (http://www.investhk.gov.hk/why-hong-kong/government-support-for-companies.html).
There are various programmes designed to help overseas and local SMEs set up in Hong Kong. These include:
Funds for marketing
- The Hong Kong Science & Technology Parks incubator scheme provides subsidised office space, consultancy services, investment matching and a small financial aid package to support R&D.
- The DesignSmart Initiative provides up to HK$100,000 funding for SMEs to invest in design projects.
- The Design Incubation Programme (DIP) provides office space for design tenants and other professional support.
- The incubation programmes run by Hong Kong’s Cyberport help creative digital media SMEs and start-ups realise their ideas and build their business.
Financial aid for equipment and marketing
- The SME Loan Guarantee Scheme (SGS) secures loans of up to HK$12 million for companies that need working equipment or business capital.
- The SME Export Marketing Fund (EMF) helps companies participate in overseas exhibitions and business missions and to place B2B advertising. It can fund up to 50 percent of approved expenditure, up to HK$50,000 per application.
- The SME Financing Guarantee Scheme can provide guarantee coverage of 50–70 percent on loans up to HK$12 million.
- The CreateSmart Initiative provides financial support to SMEs in the creative industries, funding them to build their brand through participation in overseas exhibitions and competitions.
Technology and Innovation funding
- The Innovation and Technology Fund (ITF) supports companies to upgrade their technology and inject innovative ideas into their business.
- The Small Entrepreneur Research Assistance Programme (SERAP) provides funding for R&D of technologies that can be brought to market within two years.
So what to do next ?
Go to HK company registration Section, and learn how to register a Hong Kong company.