I often get asked about the ins and outs of setting up a HK company to manage China purchases. I’m not a US tax expert, but here are some of my personal thoughts on jurisdictions for incorporation if you are doing business in Asia. Consult your tax guys, but for me, I am a big fan of incorporation in Hong Kong and many of my clients set up accounts in HK for the following key reasons:
1. HK is consistently voted in the top 2 most pro-business jurisdictions on a global level, thanks to things like
a) Easy of set up and annual filings
b) Ease of internet banking (I use HSBC)
c) English language based rule of law with proper accounting and respected auditing by local authorities
d) Business transacted outside of HK (buy PRC goods and sell to USA) is TAX FREE!
e) Easy to repatriate funds and corporate dividends are not heavily taxed.
f) Manpower for HK operations can easily be based in PRC to keep costs very low.
2. Unfortunately, Uncle Sam has some tight rules about arm’s length pricing/transfer pricing/ overseas earned income for US passport holders. So as a US citizen you won’t be able to avoid personal income tax legally when funds are eventually repatriated from HK to USA, BUT as I understand it, you can legally defer taxes and this has a big long term advantage when you start to recycle funds.
For example, if on order #1 profits are parked in HK, then used to purchase order #2 and so on and so on, over time, because each transaction is not being taxed, the profits start to build up in HK and only once dividends are declared or funds repatriated to US based owners, does US tax kick in.
I run my business, and recommend you run yours, in full accordance to PRC, HK and USA tax code. I go above and beyond when it comes to compliance as I want no problems w the IRS, but at the same time I am happy to take full advantage of global opportunities to limit my global tax exposure in a legal fashion. So if your project takes off, as I hope it does, you may want to closely consider HK as a place to set up shop.
For professional advice on business formation, accounting and taxation, talk to the experts at Fiducia-China.com. They are the people I go to when I need support and I would be happy to make an introduction for you.
Wishing you successful China Sourcing!
China Operations Director, PassageMaker Sourcing Solutions (3rd party assembly
& inspection to protect intellectual property and ensure quality.)
Chairman of the Advisory Board, China Sourcing Information Center