CSIC corporate sponsor and China expert, Thaddaeus Mueller of www.Fiducia-China.com, in a letter to his clients and friends recently gave an excellent summary of the HK financial secretary’s annual speech. With his permission, Thad’s letter is printed below, but I would like to draw attention to some key point about “profits tax remains unchanged at 16.5%.”
As Thad points out, this is one of the lowest rates in the world and demonstrates that Hong Kong is one of, if not the most business friendly city in Asia. While even 16.5% sounds like a great rate, what many new-to-China foreign buyers do not realize is that the tax rate is 0% (yes ZERO) for Hong Kong companies on their business transaction outside of the jurisdiction of Hong Kong. For example, if a UK-owned HK sourcing office buys goods from Mainland China and sells these goods to the USA, UK, Japan or any other non-HK destination, then the profits tax is 0! Granted, in the case above, when the profits of the HK buying office are eventually repatriated to the home country there will be taxes applied in the home jurisdiction. But so long as rules about transfer pricing and “arm’s length” inter-company accounting are followed, the HK buying office is an excellent and fully legal tool to reduce or defer global taxes. At the risk of over simplifying, think of it like this. HK company buys goods in PRC for 10 USD and sell them for 50 USD. The $40 in HK is untaxed. These untaxed profits can be used to buy the next order from the PRC. In this fashion, a sourcing war-chest can be built up tax free!
Here is Thad’s full letter, and feel free to contact Fiducia if you would like to explore options for setting up in HK or China.
Dear friends and business partners,
In his fourth annual speech, Financial Secretary John Tsang has announced the 2011-12 Budget for the Hong Kong Special Administrative Region (HKSAR) on Wednesday 24th February. Please find a detailed overview of the proposed changes here.
The overarching theme this year is to combat inflation, which is at a two-and-a-half-year high of 3.6 per cent in January. Thus, despite a HKD 71.3 billion (EUR 6.7 billion) surplus for the current fiscal year, taxpayers will not be treated to a rebate as was the case in previous years. Instead, there will be a one-off injection of HKD 6,000 (EUR 560) into Mandatory Provident Fund (MPF – Hong Kong’s compulsory pension scheme for workers) accounts of each MPF scheme member. Totaling HKD 24 billion (EUR 2.2 billion), this will be the largest monetary relief measure of the Budget with the aim of “returning wealth to the people” without exacerbating price rises. With this emphasis on helping Hong Kong’s citizens, the standard rate of salaries tax remains unchanged at 15% and there will be further relief measures, such as increased allowances & deductions (see overview for figures). Property tax and stamp duty also remain unchanged.
For businesses, profits tax remains unchanged at 16.5% which is still one of the lowest rates around the world. A promising sign for businesses is the planned development of commercial buildings, with focus on increasing office supply and revitalising industrial sites. The land available for sale next year will provide a floor area of 600,000 square meters. Government departments will be relocated to the new Central Government Complex at Tamar when it comes into operation, thereby freeing up space for new Grade A offices in prime locations.
If you would like to discuss the current plans of your business in Hong Kong and China, please contact me by email at email@example.com or by phone at +852 2258 6612.
I look forward to hearing from you.
Wishing you successful China Sourcing!
Author, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book/)