Company Registration in Hong Kong for IT business (Part 3). Let's talk about working with contractors (customers) from the USA

The success of any undertaking depends on the reliability of the partners (s)



As we promised the readers of the LAWBOOT Lawyers & Consultants blog , we continue to develop a topic related to the registration of a company in Hong Kong (aka Hong Kong), launched in early 2015.
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Links to previous publications below:
Part 1 - About company registration.
Part 2 - About the director of the company.


The following parts of the Hong Kong series will discuss the tax consequences and other inconveniences that arise when working with contractors (customers) from different geolocations.

By counterparties, we mean customers, customers, users, etc.

I propose to consider the situation that is popular for IT entrepreneurs, where Hong Kong is a “seller” of a service, and the USA a “buyer” of a service.

There is a myth that the counterparties (customers) from the United States "are inconvenient to work" {quote} with companies from Hong Kong. The myth is that, supposedly, American corporations have problems with taxation or deducting expenses from the taxable base, and they refuse to pay to a bank account of a company from Hong Kong
Let's start with the first part of the myth about the "problems with taxation."

This myth is most likely caused by the absence of a double tax treaty between the United States and Hong Kong. (hereinafter referred to as DTC)

There is some truth here, because if the income from the activities of a Hong Kong company in the form of royalty (royalty) , interest (interests), or dividends with a place of origin in the United States, the US company is obliged to withhold this tax at a rate of 30% of all payments of such income in favor of Hong Kong.



There is a lot of information on the IRS website (US Tax Service)

If the activity does not imply income in the form of royalties, interest, or dividends, then no tax consequences will arise.

For example, outsourcing services provided by a Hong Kong company will not be taxed in the United States.

The conclusion on the first part of the myth: payments from the USA to Hong Kong do not cause negative tax consequences, even in the absence of a DTC, if the payments are not royalties, interest or dividends.

The second part of the myth suggests that US companies cannot deduct the cost of a Hong Kong company. (In the US, this is called non-deductible business expenses).

We believe that the myth originated in connection with the incorrect perception of Hong Kong's offshore status for some jurisdictions.

For reference:
Taxes in the United States are calculated by the formula: Tax = interest rate% (Income - Expense). It is logical that all companies from the United States want all their expenses to be deductible, and this is quite logical.



We are happy to announce that the jurisdiction of the company in favor of which payment from the counterparty (customer) from the USA is made does not matter.

For reference:
The determining factor in the deductible or non-deductible cost in the United States is that they meet the two criteria for business expenses. If you wish, you can read in detail about this issue here.

Conclusion on the second part of the myth: Jurisdiction does not determine the possibility of deducting expenses from the taxable base.

Summarizing the above , one can consider a company registered in Hong Kong to be an excellent IT financial instrument for an entrepreneur to work with contractors (customers) from the United States. It is important that the income was not in the form of royalties, interest or dividends.

Moreover, contractors (customers) from the United States do not see any problem in cooperation with companies from Hong Kong.
I quote a customer from the United States: "Hong Kong is the most friendly part of China for US businesses."

You can order company registration in Hong Kong for your IT business here
Consultations from LAWBOOT Lawyers & Consultants can be obtained here.