This article is for US citizens who live outside the US and operate a location-independent business.
For folks running in certain circles, forming a company in Hong Kong seems to be the trendy thing to do. But how does a Hong Kong company compare to forming a company in a place like Belize? Keep reading and we’ll dig into the details.
No US Tax Difference
The US tax consequences of operating through a Hong Kong company are identical to the US tax consequences of operating through a company formed in any other country. For US tax purposes, a non-US corporation is a non-US corporation.
See this article for an overview of the US tax aspects of operating through a non-US corporation.
Hong Kong Hassles
When you operate your business through a Hong Kong company, you have to put up with several hassles:
- The company must have a company secretary in Hong Kong. This costs money and is just a little weird (i.e., someone you don’t know is an officer of your company).
- The company must have annual audited financial statements, which must be prepared in accordance with Hong Kong accounting rules. This costs money and is a hassle every single year.
- The company must have a virtual office. This costs money and is another step in the set-up process.
- The company is nominally subject to Hong Kong tax. To avoid Hong Kong’s 16.5% income tax tax, Hong Kong companies that don’t have income from Hong Kong can apply for an exemption.
All of these Hong Kong hassles are used as revenue generators by low-cost Hong Kong incorporators. If you find a sweet deal on forming a Hong Kong company, you can bet you’ll pay out the nose for a virtual office or audited financials.
The Ease of Belize
By contrast, when you form a company in Belize (or one of the similar Caribbean jurisdictions):
- No local officers. The company is not required to have a company secretary (or any other person in Belize connected with your company). You’re the sole shareholder and sole director, and that’s the end of it.
- No audited financials. The company is not required to submit (or even prepare) annual audited financial statements. Of course, you should still have solid accounting processes in place, but you can do that however you’d like. You aren’t required to prepare financial statements in accordance with any Belize rules or pay several thousand dollars to have them audited by a Belize accountant.
- No virtual office. The company is not required to have a virtual office in Belize.
- No Belize tax. The company is explicitly free from Belize tax by law. You don’t have to apply for a tax exemption or worry about the source of your income. Belize companies are simply not subject at all to any Belize tax.
Hong Kong “Benefits”
So, forming a Hong Kong company is painful in several ways. What do you actually get in return for all that pain?
- If your business is a startup (as opposed to a lifestyle business), forming your company in Hong Kong may give it some legitimacy. It shows that you’re willing to jump through some hoops to set up your legal structure and you’re willing to deal with the rules in a “first-world” jurisdiction. (By “startup” I mean a growth-focused business with plans for venture capital funding and/or an IPO exit. By “lifestyle business” I mean a cashflow-focused business that you’ll own until you sell it or wind it down.)
- If you want to bank in Hong Kong, then forming your company in Hong Kong allows you to do that. Hong Kong banks generally don’t open accounts for companies formed outside Hong Kong.
That’s it, folks. That’s a complete list of the advantages of a Hong Kong company.
Note that Hong Kong banking is going through a rather difficult period at the moment. Bank accounts are difficult to open, and then banks make it difficult to do business (e.g., by requiring you to submit proof of the business activity underlying inflows and outflows). The “benefit” of being able to bank in Hong Kong really isn’t much of a benefit anymore.
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The Bottom Line
So, to summarize the above and add some additional info relevant to many expat entrepreneurs:
- Operating through a company in Hong Kong does absolutely nothing for a lifestyle business that doesn’t bank in Hong Kong. Some expat entrepreneurs seem to think that it lends their company legitimacy, but there’s no one to show your company’s legitimacy to. No one even needs to know that your business is held by a non-US company. Using a Hong Kong company just for “legitimacy” is like staging a play with no audience—you’re spending money to impress no one because no one cares.
- It’s not necessary for US tax purposes (or any other purpose) to bank outside the US. Some expat entrepreneurs seem to think their non-US company will be subject to US tax if it banks in the US. This may lead them to open a Hong Kong company so they can bank in Hong Kong. But this line of thinking is flawed from the beginning—simply banking in the US does not cause a non-US company to be subject to US tax. Click here for more detail on how this works.
Some special structuring is required to open a US bank account under a non-US company, and it can be difficult to open a US bank account without visiting the US in person.
If you’re putting together a start-up or you simply must bank in Hong Kong, then you get to deal with the hassle of a Hong Kong company. But there’s no need to deal with those hassles for a lifestyle business that banks in the US (or anywhere outside of Hong Kong).
Don’t Believe the Hype
Some people use the jurisdiction of their offshore corporation as a vanity metric, or they research offshore jurisdictions as a way to seem busy and feel like they’re “working on their business.”
That couldn’t be any further from the truth (and it’s pretty sad really).
If you really want to get your business started, you should actually get your business started. The legal entity that holds your business isn’t your business; it’s just one of the many start-up details you can knock out quickly if you get the right help.
Just Get it Done and Get on Down the Road
In The 7-Day Startup, Dan Norris shows why you should start your business as quickly as possible, ideally in just seven days. You’ll learn how to run your business only after you launch, so you should launch as quickly as possible instead of going down all sorts of rabbit holes in the setup process.
Dan advises founders to spend one of the seven start-up days on the legal structure for your business. That’s why I created Tax-Savvy Expat: Entrepreneur. The course is a complete resource that allows you to create the best legal structure for your business. You could easily go through the whole course and get your legal structure up and running in a single day.
If you’re stuck in the “which offshore jurisdiction is best?” rabbit hole, Tax-Savvy Expat: Entrepreneur is your ladder to freedom. Click here to read more.
Ready to become an expert on this stuff? Click here to take the US Tax Masterclass for Americans Abroad (absolutely free).