We’re taking a look at some changes to the laws on fiscal reporting which will affect anyone who has set their digital business up in Hong Kong. If you have already set your business up there or you are thinking of doing so, this is for you.
Many digital nomads have set their businesses up in Hong Kong over the last few years, driven by the possible tax advantages of doing so. Hong Kong offers 0% tax on income earned offshore by qualifying companies with “offshore status”, and a company rate of 16.5% for income earned domestically – much smaller than what many European countries require.
It’s also a reputable country to headquarter your business; customers don’t tend to raise an eyebrow at invoices with a Hong Kong address attached.
In many cases, businesses have used incorporating in Hong Kong as a way to avoid paying higher taxes in their resident country, a loophole that is gradually being tightened up for European Union residents.
If you are a digital nomad in this position, you need to know about what is changing, how that could affect you, and what actions you may need to take in order to stay out of trouble with tax authorities.
What Is Happening?
While Hong Kong used to feature on the EU blacklist for third-country non-cooperative tax jurisdictions, as of October 2015, this is no longer the case. Here’s what PWC reported:
“To further defend Hong Kong as a cooperative tax jurisdiction, the HKSAR Government will;
(1) maintain ongoing dialogue with the EU to keep its Member States abreast of Hong Kong’s commitments and efforts on tax cooperation,
(2) proceed with the work on drafting the legislation for implementing the automatic exchange of information in Hong Kong and
(3) continue its effort in expanding Hong Kong’s networks of tax treaty or tax information exchange agreement.”
As part of this undertaking, Hong Kong has agreed to implement the OECD’s Automatic Exchange of Information (AEOI) by September 2018, an agreement which will see them share information with EU authorities.
AEOI is a Global Common Reporting and Due Diligence Standard (CRS), which requires member country financial institutions to report information on accounts held by all non-domiciled individuals and entities to their own domestic tax authority, which will in turn report back to the tax administration of the account holder’s country of residence.
In short? Hong Kong’s Inland Revenue Department will be reporting your information back to the tax authority in your own country of residence.
The purpose of the agreement is to assist countries with combatting tax evasion and the following information can be reported:
- Investment income.
- Sales profits from financial assets.
- Income from assets.
- Income from payments made to your bank account.
- Account balances.
Are You At Risk?
Tax evasion is a crime which can result in hefty penalties for perpetrators. The main concern that AEOI is addressing is people who are resident in one country, but register their business in another, relying on that country not reporting back on their income to determine their tax obligations in their home country.
You are at risk of getting into trouble if you reside in the EU for tax purposes but have “hidden” income in Hong Kong. There is no foreseeable way around it; either you are a tax resident of Hong Kong and required to pay tax at their regular company rates on all income, or you will have had to have proven to them why you are not a Hong Kong tax resident. You do this by providing them with required documentation as proof, and declaring the country for which you are a tax resident.
Collection of your personal information is a requirement under bank’s KYC (know your customer) rules, so you will have had to have provided those details in order to open a Hong Kong bank account in the first place. This means that it will only be a matter of time until tax authorities catch up with you if you haven’t been doing the right thing.
Some Points To Keep In Mind...
It’s often not so much a matter of deliberate tax evasion for digital nomads, but more ignorance or assumptions made about tax laws. Here are a few points to remember:
- You might still need to pay tax in your home country, even if you’ve left and are traveling. Many have laws which allow generous windows of time before you’re no longer considered a tax resident.
- Even if you’re only staying a short time in a country, you may be tax liable there on your worldwide income. This often kicks in after as little as three months.
- Most countries now tax on worldwide income, so your business in Hong Kong is not usually exempt in the country where you reside. (And you could be liable for whatever the full rate of company tax is in your country).
- You may be liable for tax in more than one country. For example, U.S. citizens must pay tax wherever they are in the world, unless they fall under an exemption. A U.S. citizen living in France who decides to take a 6 month working holiday in Hong Kong could find themselves liable for tax in the U.S., France, and Hong Kong.
- Wiring money home will alert tax authorities that you have offshore income which should be taxed.
- Using your offshore funds to purchase an asset such as property or a yacht for personal use is tax evasion territory. Lawyer up.
- You are much better off to be on the record paying tax somewhere than to have to defend your case when you haven’t been paying at all.
The first thing we would ALWAYS suggest is to talk with a qualified accountant or tax lawyer. Often people are tempted to bury their head in the sand and hope they don’t get discovered, but in the meantime your tax problem is only getting worse.
Your particular requirements are going to depend on your country of residence, so the sooner you talk to someone qualified for your country, the better. A key thing to remember is that you haven’t automatically divested yourself of tax responsibilities there just because you are traveling.
As a traveler, a qualified accountant should be your first port of call before talking to any local tax authorities. You don’t want to be dealing with them until you’re legally required to be registered as a tax resident – they will only want to know all of your personal details in order to request a check from you sooner.
Something To Consider...
Many business owners make the assumption that the reason to offshore your business is about paying less tax, but seasoned offshore business owners will often tell you that tax isn’t really the issue.
There are other drivers for offshoring, such as doing business in a less bureaucratic environment or simply having more privacy. If avoiding tax is your thing, ethical aspects should come into the decision-making too. Do you benefit from things that taxes pay for in your country of residence? Do we “owe” for things like receiving an education?
It’s fair to say that without tax funds, most countries would fall over, so should we all be doing our part? If you’re not paying taxes correctly, you’re running a gamble over if/when you get caught. It could be the choice between sleeping easy or avoiding tax.
If you’re a digital nomad, or any other offshore resident with a business registered in Hong Kong, you need to be paying attention to the new AEOI requirements.
The Hong Kong Inland Revenue Department will be required to report your financial information back to the authorities of your country of residence, meaning if you haven’t been properly declaring income and paying taxes, you could find yourself in trouble.
The best thing anyone in this situation can do right now is to seek advice from a qualified accountant or tax lawyer. The sooner you get sorted, the less likely you are to face trouble.
Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the Tax Agency.