Where is your Hong Kong company’s offshore income taxed?
There has been tightening of tax regulatory on claiming an income as sourced in offshore,
outside Hong Kong. Hong Kong Inland Revenue Department (“IRD”), the tax authority of Hong
Kong, has been sending query letters to Hong Kong corporate taxpayers who have been granted
the tax exemption of their offshore incomes in the previous Years of Assessment.
The query letter demands the taxpayer to provide supplementary documents and information to
the IRD, which can prove whether the taxpayer had substance outside of Hong Kong and, most
importantly, had reported the offshore income in question to other jurisdictions.
The action from the IRD is supporting the global battle in fighting against tax evasion and profit
shifting. Since Hong Kong is engaging in the OECD’s Country-by-Country Reporting package as
a component of the implementation of Automatic Exchange of Information, Hong Kong
taxpayers’ information is shared with other tax authorities in the participating jurisdictions while
Hong Kong IRD obtains the report of its taxpayers from other tax authorities on an automatic
basis, to determine if an offshore income is legally assessed.
If the taxpayer misses the IRD query, the IRD will demand the Profits Tax charged on the
offshore income. The updated taxpayer’s account will be shared with other tax authorities and
may receive queries from them where different tax legislation may apply.
Among the international business and financial hubs, Hong Kong is one of the jurisdictions, which
adopts the territorial principle of taxation.
We highly recommend that advisors engaged in international corporate structuring should equip themselves toward the surge of workload linked to the regulatory tightening of customers’
offshore claim of income, and other options available like proof of substance and tax presence
elsewhere, outside of Hong Kong. Most importantly, it is reporting the offshore income in
question to the other jurisdiction.
In international corporate structuring, the issue of tax payments is becoming increasingly topical,
since offshores and tax havens are no longer in style. This is due to the global battle in fighting
against tax evasion and profit shifting, and due to the banks, which are not welcoming to
offshores anymore, and, basically, refuse to work with them. The trend is in line with the
OECD’s initiative committed to the process which is called “de-offshorization”. What
conclusions can we make then? Taxes must be paid, the only question left unanswered, where
and how much?
CORPORATE TAX MIGRATION TO MALTA – OPTION FOR HONG KONG COMPANIES
Hong Kong is giving a tax rate to any firms doing business in Hong Kong, where the first HK$2
million annual profits are charged at 8.25% and 16.5% on the remaining. If this seems too high,
the immediate solution is to migrate corporate tax residency from Hong Kong to more tax
efficient jurisdiction, that also has a system of taxation and substance in place which satisfies the
The long-term goal is to also provide substance to the extent that the company will be recognized
as a center of management of your business and actually “perform” these functions.
For those who can choose to move their corporate tax residency, Malta is one of the best places
to consider. Over the past years, Malta proactively positioned itself not only as a competitive
and tax efficient place to do business but as an increasingly versatile and sophisticated
structuring hub, with a sound regulatory framework.
In case you are using a Hong Kong company, it might be a good time for a review. One option is
to upgrade your structure by moving corporate tax residency to Malta. We are pleased to offer a
solution with corporate tax migration to Malta dealing with setting up Permanent Establishment
(PE) of an overseas company in Malta. Corporate tax migration is particularly popular with
companies registered in jurisdictions without substance, which have outgrown their environment
and now seek to capitalize on Malta’s business advantages and benefits.
Corporate tax migration enables companies to avoid liquidating the existing company and
transfer business portfolio of trading agreements and assets to PE registered for that purpose in a
new jurisdiction which suits them better. By setting your Permanent Establishment (“PE”) in
Malta with a bank account in EU, you achieve those goals of tax compliance and efficiency, and
Benefits of corporate tax migration into Malta include:
– Easy and simple to register PE or start a company;
– Low effective tax rate;
– EU VAT Registration, if required;
– Participation exemption on capital gains;
– Participation exemption on qualified inbound dividends;
– No withholding tax on outbound dividends or distributions;
– No withholding tax on outbound interests;
– Member of EU, Schengen and OECD;
– EURO is official currency;
– Advanced and competitive corporate tax system;
– Strong and stable political support for the financial services industry;
– Tax refund system;
– Remittance based tax system for overseas companies;
– No transfer pricing and CFC rules;
– English is the official language;
Our experience tells that Malta is the place to consider for corporate tax residency. Malta has
been an EU member state since 2004. It is a country with a stable and predictable tax system,
which is one of the most important factors for any entrepreneur. For years, Malta has been
working on improving its tax policy, reducing bureaucracy, making its accounting simple and
comprehensible. Also, communication with state institutions is simple and predictable.
So, why is no one talking about Malta as much as about Cyprus, Ireland, or Hungary?
The answer is simple – the corporate income tax rate in Malta is 35%, which is quite high. However,
a shareholder is entitled to a refund of 6/7 ‘th of the tax paid. This means that the efficient
corporate tax rate is 5%, or even lower in case of Malta PE of Overseas Company. The dividend
or distribution tax is 0%. It is currently the lowest tax in the EU and most of the world. Malta is
also the center of online business licensing, it offers a very beneficial immigration program,
has favorable tax regimes for securitization, shipping and aircraft industries, and, it’s official and
language of Registry of Companies is English.
The above conditions make Malta a unique place for business. Low taxes, clear accounting
requirements, advanced banking, the English language, low company maintenance costs and
very advantageous geographical position are the factors that attract a modern entrepreneur to
How does tax refund work?
The business profits of a Malta company or Permanent Establishment of Overseas Company are
taxed at the statutory rate of 35%. However, the non-resident shareholders of Overseas Company
have the right of claiming a refund in the amount of 6/7’th of the Malta tax suffered on the
dividends distributed in the case when a Malta company receives income from trading activities
or active business. Tax refund procedure is simple, the refund is claimed by filing the form with
the International Tax Unit (ITU). No withholding tax is paid on any dividend distributions of the
profits of a Malta company or PE. After the tax refund above, the shareholders of Overseas
Company are left with a global effective income tax rate of 5%.
PEs of an overseas company would be taxable in Malta only on income arising in Malta and on
income arising outside Malta but remitted to Malta. No withholding taxes: PE profits are not
subject to any withholding taxes at the time of transfer or later. Such profits are only subject to
the corporate tax charge at the domestic rate.
Tax Treaties: Subject to any conditions in a tax treaty, PEs of foreign companies may use the
provisions of a relevant Malta tax treaty with another jurisdiction. Malta has an extensive tax treaty
network of more than 70 treaties in force.
Financial Statements: Every company which has registered PE or a place of business in Malta must file on an annual basis audited financial statements pertaining to the operations conducted by the Maltese PE.
How can we assist?
Our office in Valletta, the capital of Malta, provides a full range of local support services for
structuring, registering and administrating PEs of overseas companies in Malta, including:
– Local address of PE established in Malta by the overseas company;
– Appointment of a local resident in Malta authorized to represent the overseas company install matters and facilitate communication between the competent authorities and PE;
– Company secretarial services;
– Day-to-day company management and administration;
– Preparation of legal and corporate documents;
– Accounting, tax compliance and audit;
– VAT registration (if required) and filings;
– Assistance in bank account opening, and management;
– Assistance in complying with legal obligations.
Please contact us by e-mail: email@example.com to discuss the establishment of your place of
business in Malta.