Lets take a look on Hong Kong’s Tax Advantages. HK has a favourable tax regime, meaning first of all it’s a territorial based tax system – only HK sourced income will be taxed in Hong Kong. Relative for a lot of Canadians they would know that as Canadian residents you’re basically subject to worldwide taxation.
Second, HK does not tax capital gains. So, again, it’s a favourable option for many, particularly when they are disposing assets and investments in the future. That’s of capital nature.
Third, it’s the withholding tax. Repatriation is the key to many overseas companies coming into the region. Again, you want to be able to bring profits back home. Without withholding tax, it does make a huge difference, because it greatly reduces your tax cost.
Fourth, Hong Kong, other than the Canada-HK double taxation agreement, also has an agreement with China. The agreement it has with China is probably one of the best double tax agreements that China has with any other jurisdictions. Hence, the combination of Canada using Hong Kong to invest in China becomes a very desirable operating model. Plus, the tax rate in the region, HK is one of the lowest. We’re looking at 16.5% right now, whereas obviously another jurisdiction people would look at is Singapore, where we’re still looking at 17%.
Using Hong Kong as a springboard
Using HK is not news to many Canadian companies who are interested in coming into the region. Hong Kong becomes a desirable location for many reasons. On top of all the good tax reasons, there’s also the non-tax reasons, including free foreign exchange control; the ease of setting up in Hong Kong; the amount of talent and resources you can recruit in Hong Kong. It’s easy to set up a company in HK, easier I’d say comparing to places like China where that could take 6-12 months depending on the type of industry you are in.
So Hong Kong itself domestically presents a good picture and a very desirable location, and it’s a great choice to many. The second advantage it has is the Canada – Hong Kong double taxation agreement that was signed a few years back and that agreement actually triggered a lot of interests from Canadian companies that we dealt with in coming into the region using HK as a springboard into the rest of the region.
Application of the Canada – Hong Kong ADTA
China itself does have a withholding tax. With the Canada-China double taxation agreement or tax treaty, the withholding tax rate is 10%. Using Hong Kong as a platform to invest into China, the advantage is that China into HK there is a withholding tax, but Hong Kong out back to Canada does not have withholding tax.
Technically speaking, when Canada invests in Hong Kong, you don’t have limits in terms of equity and debt ratios. In a lot of countries, they do have rules that will restrict interest deductions.
Again, from a tax perspective, it’s important particularly when you’re making a lot of money. You want to make sure that you’re matching the deductions. Hong Kong itself other than China is expanding its treaty network as well.
Some people did have concerns a couple years back because the number of taxation agreements were limited comparing to, for example, Singapore. As of March 2016, there were 34 tax treaties and double taxation agreements in place between HK and other parties. They’re continuing negotiating with other jurisdictions and countries, meaning that they’re expanding their network. The greater network means that overall in the investment chain, the withholding tax would be lower.
Another interesting proposal that came out was that in this year’s budget, Hong Kong has already committed to building itself as a regional hub for corporate treasury centres. It’s an interesting development because traditionally HK has certain restrictions related to interest deductions. Now they’re basically being more competitive in terms of their tax system. Hence, why we always recommend Canadian companies to look and see what your business plan is. If you do plan to expand into China, or a couple of locations in the region, you do want to set up a holding company, for tax reasons, for business reasons, and Hong Kong is a very good option.