Question Split contracts between 2 companies for tax efficiency?

[NeoNeo]

Hi,

I have a Serbian company which I do IT consulting through. It is not the most tax-efficient, but I love living in Belgrade and I keep it for the purpose of residency.
I have multiple clients, so I was thinking, one client is enough to keep my Serbian company "alive", and I could have another company (e.g. Hong Kong) that gets the other contracts, with 0% corporate tax.

Does it make sense to do it? Am I missing something?

If it does make sense, any recommendation on where to incorporate that additional company? I will use it mainly for saving and investing.

TIN!

 

[KDX]

Hi,

I have a Serbian company which I do IT consulting through. It is not the most tax-efficient, but I love living in Belgrade and I keep it for the purpose of residency.
I have multiple clients, so I was thinking, one client is enough to keep my Serbian company "alive", and I could have another company (e.g. Hong Kong) that gets the other contracts, with 0% corporate tax.

Does it make sense to do it? Am I missing something?

If it does make sense, any recommendation on where to incorporate that additional company? I will use it mainly for saving and investing.

TIN!

Hi,

The HK offshore tax-exemption means that you must have a Permanent Establishment outside HK in another country where your HK company will be taxed. So you can't establish substance inside HK because it would be taxed as an onshore entity. This would likely mean establishing PE in Serbia where this entity would be taxed.

Plus, you must look at Serbian CFC and Permanent Establishment rules, as they will determine if your offshore companies are taxable in Serbia.

Look more here:

Hong Kong Offshore Tax Exemption: How To Qualify?

Hong Kong adopted a territorial tax regime, under which foreign-sourced income is exempted from tax. You can find helpful tips for applying offshore tax claim in this post.

bbcincorp.com

(BTW I'd be cautious about using bbcincorp, don't go and order a company from there before asking people here..)

Familiarize yourself with these terms: Permanent Establishment, CFC, CRS, FATCA, UBO, BEPS and you'll get an idea of what's possible and what's not.

HK is a fantastic offshore jurisdiction, but as with anything, it's not magic.

 

[NeoNeo]

Hi,

The HK offshore tax-exemption means that you must have a Permanent Establishment outside HK in another country where your HK company will be taxed. So you can't establish substance inside HK because it would be taxed as an onshore entity. This would likely mean establishing PE in Serbia where this entity would be taxed.

Plus, you must look at Serbian CFC and Permanent Establishment rules, as they will determine if your offshore companies are taxable in Serbia.

Look more here:

Hong Kong Offshore Tax Exemption: How To Qualify?

Hong Kong adopted a territorial tax regime, under which foreign-sourced income is exempted from tax. You can find helpful tips for applying offshore tax claim in this post.

bbcincorp.com

(BTW I'd be cautious about using bbcincorp, don't go and order a company from there before asking people here..)

Familiarize yourself with these terms: Permanent Establishment, CFC, CRS, FATCA, UBO, BEPS and you'll get an idea of what's possible and what's not.

HK is a fantastic offshore jurisdiction, but as with anything, it's not magic.

Thank you very much for the information!

So does that mean that in order to make an HK 0% corporate tax work, you need to have a PE in a country that doesn't tax foreign companies? Are there any common combos to make that work?

 

[KDX]

Thank you very much for the information!

So does that mean that in order to make an HK 0% corporate tax work, you need to have a PE in a country that doesn't tax foreign companies? Are there any common combos to make that work?

Yes, exactly that.

Well, the substance has to be something that satisfies both HK and Serbia, you consulting yourself would mean that the PE is always in Serbia.

The simplest way would be to setup a UAE Free zone company as a holding company for the HK operating company, but this would only be simple if you could relocate there as now you have to set up PE in the UAE.

There are of course many jurisdictions where you can pull this off, but it would most likely mean relocating in one way or another. Is that something you would be willing to consider?

 

[NeoNeo]

Yes, exactly that.

Well, the substance has to be something that satisfies both HK and Serbia, you consulting yourself would mean that the PE is always in Serbia.

The simplest way would be to setup a UAE Free zone company as a holding company for the HK operating company, but this would only be simple if you could relocate there as now you have to set up PE in the UAE.

There are of course many jurisdictions where you can pull this off, but it would most likely mean relocating in one way or another. Is that something you would be willing to consider?

Thanks! I read a lot about this topic but never understood this point until now.

Relocating to Serbia was already a big upgrade for me in terms of tax and lifestyle, so unfortunately I'm not so keen to relocate again so soon... I am open to a warmer winter destination for 2-3 months a year, if it opens up opportunities in this regard that would be awesome.

 

[KDX]

Thanks! I read a lot about this topic but never understood this point until now.

Relocating to Serbia was already a big upgrade for me in terms of tax and lifestyle, so unfortunately I'm not so keen to relocate again so soon... I am open to a warmer winter destination for 2-3 months a year, if it opens up opportunities in this regard that would be awesome.

I'm looking at it now and there doesn't seem to be any CFC rules for Serbia, this is one benefit but, I'm afraid that this will not offer much benefit to you. You will be establishing a PE in Serbia one way or another as long as you conduct business there. I'm assuming this business wouldn't have other consultants etc?

You could maybe setup this HK company and operate it and if you want to move to a lower tax jurisdiction you can then do so. But I'm not seeing much options for you here. If it's not CFC, it's PE that will catch you. Of course you can try to bend the rules but I wouldn't count on it...

 

[NeoNeo]

Yes, exactly that.

Well, the substance has to be something that satisfies both HK and Serbia, you consulting yourself would mean that the PE is always in Serbia.

The simplest way would be to setup a UAE Free zone company as a holding company for the HK operating company, but this would only be simple if you could relocate there as now you have to set up PE in the UAE.

There are of course many jurisdictions where you can pull this off, but it would most likely mean relocating in one way or another. Is that something you would be willing to consider?

This may be a dumb follow-up question to this, but if you need to have PE in a place like the UAE to unlock the benefits of a HK company, well, UAE also has 0% corporate tax no? So what do you gain by having a HK company controlled in the UAE compared to just a simple UAE company? Especially if you relocate there.

 

[KDX]

This may be a dumb follow-up question to this, but if you need to have PE in a place like the UAE to unlock the benefits of a HK company, well, UAE also has 0% corporate tax no? So what do you gain by having a HK company controlled in the UAE compared to just a simple UAE company? Especially if you relocate there.

Just used it as an example, you can always do business with just a UAE company. But if you wish to have access to HK banking/EMI and other payment processors which are not available in UAE, you may want to do so. For example, would your clients rather pay a company in Dominica or HK? There's also just the overall trustworthiness of certain jurisdictions. But, as you said, you don't need a HK company to achieve 0% taxation if you're in the UAE.

 

[NeoNeo]

Just used it as an example, you can always do business with just a UAE company. But if you wish to have access to HK banking/EMI and other payment processors which are not available in UAE, you may want to do so. For example, would your clients rather pay a company in Dominica or HK? There's also just the overall trustworthiness of certain jurisdictions. But, as you said, you don't need a HK company to achieve 0% taxation if you're in the UAE.

Ah I see, those are good examples...
Thanks for all the valuable information! Really appreciate it.