Monthly Archives: December 2016

For many people the opportunity to live and work in a foreign country is one of life’s most memorable experiences.

It can also present you with a solid gold tax planning opportunity. Here’s how/why…

Chances are if you go to work in a foreign country for a couple of years you are going to have to sign a contract of employment.

What you do is (before you sign the contract of employment) you form a nil tax Offshore Company (eg an International Business Company ie IBC).

The IBC signs the contract.

You open up a bank account for the Company in a country that does not tax banking receipts or interest earned in/on bank deposits.

(what would otherwise be) Your wages are paid into this Offshore account and receipted free from tax.

The IBC in turn engages you as a subcontractor to provide the services it has contracted with your employer to provide.

The IBC makes regular payments to you for the work you do. These payments are what you use to fund your local living costs. Accordingly this money will be paid into a bank account in the country where you are living. Depending on where you are living at the time probably this income will be reportable/taxable in the country where you are living.

The advantages to doing this are as follows:

1. You should be able to minimise the amount of tax that you would otherwise have to pay in the country where you are living
2. You can bank (and potentially invest) your savings (ie whatever you earn in excess of your local living costs) free from tax
3. You should be able to avoid or greatly minimise the amount of tax that you might otherwise have to pay to the tax authorities of your home country (ie your country of origin)
4. When you return to live in your country of origin you will have money overseas that you can invest on the quiet, without your home tax authorities knowing about it (ie you may never end up paying tax on that income).

Re 3 it should be noted (if you’re not getting paid into an IBC account whilst working overseas) if (a) you haven’t departed your home country permanently – ie if your home tax authorities regard you still as “tax resident” in that country – (ie liable to declare incomes in and pay tax there) and (b) you are living in a country which does not have a Double Taxation Avoidance Treaty (“DTAT”) with your home country you could potentially be liable to pay tax in both countries. (Or if your country of origin does have a DTAT with the country where you are working, but that country’s tax rates are lower than your country of origin, you may be called upon to pay to your country of origin the difference between what you paid in tax where you are working and what you would have had to pay at home).

(Note – if you wanted to be really clever what you could do is you could characterize your IBC as a Recruitment Agency or Labor Hire Company. Check this link fmi: https://offshoreincorporate.com/common-offshore-corporate-strategies/#9).

Local laws can have an impact. Hence it would be wise to seek local legal and financial advice before committing to incorporate an IBC for such purposes.

We are often asked What is the process for the hiring of a Lawyer by a (tax free) Offshore Company?

For the purposes of this article we will assume that your Company structure includes a Nominee Director.

Say your tax free Offshore Company (IBC) is doing business in the UK and needs to hire a UK Lawyer to read over a contract.

The first thing you would need to do here is explain  to the Company Administrator/s why your Offshore Company needs a UK/Onshore Lawyer.

Then the process would be:

1. The Company Director will ask you (say you’re based in the UK) to go shop for a UK Lawyer.
2. You would provide a report to the Director of which Lawyers or Law Firms you’ve interviewed. Your report would include a recommendation (and you would need to explain why you recommend that particular Lawyer or law firm).
3. A board meeting would be called to discuss and approve by resolution the appointment/engagement of the said Lawyer or Law Firm.
4. A minute would be drawn and signed by the Director formally noting the motion so passed.
5. Any service agreement between the Lawyer and the Company ideally should be signed Offshore by the Company (Nominee) Director.

 I’m often asked “What are the steps in setting up an Offshore Company?”

I can’t speak for other firms but when you incorporate a Company with OCI here are the steps in the process:

(a)    To set up a Company we need, via email, a signed order form + CDD docs (ie proof of your ID and residential address) per the requirements. First up you should advise us of your preferred company name/names. We will check and advise (for free) whether your preferred Company etc name is available.

(b)    Once you’ve indicated you wish to incorporate with OCI we will email you an order form (+ a guide which explains how to complete the order form) + the CDD requirements. We will also email you a banking questionnaire to complete. The answers you provide therein will give us a snapshot of you, your business and your banking requirements such as should enable us to recommend a/the bank (or banks) most likely to meet your needs.

(c)    You should complete a draft of the order form and email it to us for checking + you should email us the banking questionnaire duly completed. (At the same time you should be organizing certified copies of your CDD Docs ie your passport and a document proving your residential address)

(d)    We will review the draft order form. We will email you advising you how to complete the order form or (if there are questions in the order form that you can’t answer) we will advise of available conference times and then explain to you in a phone/video conference how to complete the order form/s

(e)    Once we’ve received the completed banking questionnaire we will email you detailed info regarding the banks which we feel are most likely to meet your needs.

(f)     You should then email us the final signed order form + your CDD docs. Once that’s received we will check all is in order and (assuming all is in order) we will email you an invoice which can be paid by bank/wire transfer, card, paypal account or Bitcoin

(g)    Once we have confirmation of payment we will prepare the incorporation request and we will email you a bank account instruction sheet

(h)    Once we have confirmation of incorporation (which for an IBC should be within 1 to 5 days max of us lodging the incorp request) we will email you the details including Company number and date of incorporation.

(i)      Once the company is incorporated we will prepare the Incorp pack docs (they should be ready for delivery within 2 to 3 days of incorporation) and arrange for Notarised/Apostilled copies of the Corporate docs to be obtained as/if required by your preferred bank. We will email you copies of all the Corporate docs. (And we will courier you the original Corporate docs as/if requested).

(j)      We will then (assuming you’ve emailed us the completed bank account instructions sheet) finalise and email the bank account application forms to you/the Director/ the account signatory for signing

(k)    Once signed we will check and submit the corporate account application to the bank. At the same time we will supply the bank with copies of the Corporate documents (depending on the bank you may also need to courier the bank the original signed Corporate Account Application + your proof of ID/Residency docs)

(l)      We will then follow up the bank (liaising with you to answer any questions they may have along the way) until the account is opened

What constitutes Hong Kong sourced profits?

The Hong Kong Inland Revenue Ordinance provides that tax will be payable in Hong Kong only on profits arising in or derived from carrying on a trade, business or profession in Hong Kong. Profits tax is not applicable to profits whose source is outside of Hong Kong. This rule of thumb does not distinguish between residents and non-residents. You might be resident in (or a Company Incorporated in) Hong Kong but if your profits are derived elsewhere (ie from OUTSIDE of HK), you will not be liable to pay any tax in HK on those profits.

General guiding principles in determining source of profits

The question of what constitutes source of profits is contentious and uncertain. Whether profits arise in or are derived from within Hong Kong depends on the nature of the profits and the transactions that give rise to such profits. In other words, the question of source of profits is a matter of fact and no universal rule applies to every scenario. However, the HK Inland Revenue Department has provided certain guiding principles based on various court rulings. The guiding principles in determining the source of profits include:

• Identifying the operations that produced the profits in question and determining where those operations took place. In determining whether profits from a business are liable for profits tax in HK, the place where the profits originate must be established. In other words, it is important to determine from where the particular activity that generated the profits was conducted. If the operations that produced the profits were carried ou in Hong Kong, the profits will be subject to tax in Hong Kong.
• Taking into consideration the place where only those business activities that directly produce gross profits take place. For example, general administration activities do not qualify as profit generating activities.
• Considering the place where the day-to-day investment/business decisions take place. The place where to day-to-day investment decisions are taken does not generally determine the source of profits.
• Taking into account the principal place of business. If an entity’s principal place of business is located in Hong Kong and there is no business presence overseas, profits earned by that entity are likely to be considered as Hong Kong sourced.

Guiding principles in determining source of specific types of profits

In addition to the broad guiding principles in determining the source of profits, the HK Inland Revenue Department has laid down certain guidelines for determining the source of specific types of profits such as trading profits, manufacturing profits, and commissions.

Guiding principles in determining source of trading profits

An important factor that helps determine the source of profits that arise from trading in goods and commodities, is the place where the contracts for purchase and sale are effected. Note that the term ‘effected’ does not exclusively refer to the legal execution of a contract but is wider in scope and covers the negotiation, conclusion and execution of the contract terms.

In determining the source of trading profits, a wider approach needs to be adopted. The ‘totality of facts’ must be taken into account before determining the source of profits. In other words, all relevant facts have to be considered. It is not simply a question of determining the place of purchase and sale of goods. Factors such as how the goods were procured and stored, how the sales were effected, how the goods were shipped, how the payment was made etc., play an important role in determining the locality of profits. The determining factor is the cause and effect of such activities on profits. Facts that are not directly related to trading activities such as renting office space, recruiting staff, etc., are considered irrelevant in determining the locality of profits.

The Inland Revenue Department has summarized various circumstances under which trading profits are subject to tax:

• If the contract of purchase and contract of sale is effected in Hong Kong, the profits are subject to tax in Hong Kong.
• If the contract of purchase and contract of sale is effected outside Hong Kong, the profits are non-taxable in Hong Kong.
• If either the contract of purchase or contract of sale is effected in Hong Kong, the initial presumption is that the profits are subject to Hong Kong tax. However, the totality of facts will have to be taken into account in order to determine the source of profits.
• If a sale is made to a Hong Kong customer/client, the sales contract is usually considered as being effected in Hong Kong.
• If the commodities or goods are purchased by a Hong Kong business from a Hong Kong supplier or manufacturer, the purchase contract is usually considered as being effected in Hong Kong.
• If the effecting of purchase and sales contracts requires no travel outside Hong Kong, but is carried out in Hong Kong via telephone, fax or Internet, the contracts will be considered as having been effected in Hong Kong.

Note that in order to prove that a contract is effected outside Hong Kong, a company must submit to the Inland Revenue Department, travel details, accommodation details and traveling expenses of its employees, in respect of each transaction occurred. If fully accredited overseas agents effect contracts, a company must provide agency agreements or other documentary evidence to prove that the agents are fully accredited.

Guiding principles in determining source of manufacturing profits

The place of manufacture of goods is the key factor in determining the source of profits for a manufacturing business. Profits that arise from the sale of goods that are manufactured in Hong Kong are subject to tax in Hong Kong. The place where the manufactured goods are sold is irrelevant.

If the process of manufacture has taken place partly in Hong Kong and partly overseas, then the profits will be apportioned on an equal basis. The portion of profits that relate to the manufacture of goods outside Hong Kong will not be regarded as being sourced in Hong Kong and thus will not be taxable in Hong Kong.

Guiding principles in determining source of sales and purchase commissions

If a business earns commissions by securing buyers for products or by securing suppliers of products required by customers, the source of commission income is the place where the activities of the commission agent are performed (regardless of whether the commission agent is based in Hong Kong). If the activities that generate commission income are performed in Hong Kong, the income is sourced in Hong Kong. Factors such as the place where the principals are located, how they are identified by the commission agent and the place where incidental activities are performed before or after earning the commission are of no consequence in determining the source of commission income.

Guiding principles in determining source of other profits

The Inland Revenue Department has listed certain tests that determine the source of certain types of profits:

• Rental income: Rental income derived from leasing property is taxable in Hong Kong only if the property is located in Hong Kong.
• Profits from the sale of property: Profits that arise from the sale of property are subject to tax in Hong Kong only if the property is located in Hong Kong.
• Profits from the purchase and sale of listed shares: Gains derived from purchasing or selling listed shares are liable to tax in Hong Kong, provided the stock exchange where the shares are bought or sold is located in Hong Kong.
• Profits accruing to a business (other than a financial institution) from the sale of securities issued outside Hong Kong and not listed on an exchange: Such gains are taxable in Hong Kong only if the contract of purchase or sale is effected in Hong Kong.
• Service fees: Service fees are subject to Hong Kong tax if the services are provided in Hong Kong.
• Interest accruing to a business (other than a financial institution): Interest income is taxable in Hong Kong only if the loan transaction takes place in Hong Kong.
• Royalties on intellectual property received from Hong Kong by a non-resident: Royalty income is taxable in Hong Kong only if the intellectual property is used in Hong Kong.

Conclusion

As discussed, there is no universal rule to determine the locality of source of income. According to the HK Inland Revenue Department, the broad guiding principle is that one needs to examine what the taxpayer has done to earn the profit in question. As there is no universal legal test that can determine the source of profits, each case needs to be considered based on its circumstances.