What is KYC?
Hong Kong regulations require us to identify our customers ("Know Your Customer" or KYC) in order to combat money laundering.
What is KYC?
Money laundering can be defined as any operation aimed at concealing the illicit origin of proceeds from crimes and offenses.
KYC refers to all the processes we must implement to ensure an in-depth understanding of our customers.
What are the implications of setting up a company in Hong Kong?
For every new individual client (director and/or shareholder of a company in Hong Kong), we systematically request a copy of their passport and proof of address dated within the last 3 months. In the case of a legal entity (company, foundation, etc.), we systematically require identification of the director and the beneficiaries of that entity. In the case of a nominee service and for opening a bank account, a Business Plan will be required.
The banks we work with always verify the authenticity of the passport (requesting certification abroad if the client is not present in Hong Kong, or a copy of the Immigration Department stamp if the bank account is opened locally in Hong Kong) and apply their own KYC rules.
We rigorously apply these principles, ensuring the continuity of our services for our clients and quality relationships with the Hong Kong Authorities (by complying with the legislation applicable to our profession) and with the banks (by presenting them with reliable applications). Our professionalism explains our longevity and reputation.
What the "Paradise Papers" reveal and why it is a good thing
The “Paradise Papers,” along with all the previous scandals (Panama Papers, Offshore Leaks, etc.) and probably those yet to come, reveal that the structures recommended by certain firms no longer work. In addition to their very negative impact on public opinion, these revelations show that tax authorities no longer accept tax optimization structures that do not meet what we could summarize as “Compliance” and “Substance.”
Compliance means being compliant with an Authority, an administration, a tax treaty, etc. This usually involves keeping accounts, having the accounts audited, and filing a tax return (even if it is nil).
Substance means having an office, staff, a bank account, a resident director, a computer server, etc. located in the country where the foreign company is registered. Tax authorities no longer want “letterbox” companies, but rather a “real” company from which it can be demonstrated that part of the business cycle takes place there. This point is particularly essential for benefiting from the advantages of double taxation treaties.
Although we are not a law firm but a Corporate Service Provider (we therefore do not provide legal or tax advice), we believe it is important to remind our prospects and clients that Offshore companies (as denounced by the “Paradise Papers” and which offend public opinion) no longer fit the current global legal and tax environment. The concepts of Compliance and Substance seem to us to be of paramount importance today when considering legal and sustainable tax optimization structures in advance.
Hong Kong is a suitable jurisdiction for meeting all these criteria, subject to the following conditions:
Establish a company with offices in Hong Kong
Establish a company that will have offices in Hong Kong (the corporate tax rate will then be a maximum of 16.5%);
Hire staff locally
Hire staff locally (employer contributions associated with an employee are very low in Hong Kong).
It is also worth noting that in recent years, bankers in Hong Kong have tightened the requirements for opening a bank account and are increasingly asking applicants to provide evidence of an existing business activity connected with China or Hong Kong. Having offices there greatly facilitates opening a bank account in Hong Kong.
The “Paradise Papers” are therefore a good thing because they will help explain to entrepreneurs wishing to set up a company abroad that they should avoid dubious arrangements and recognize the importance of compliance and substance. It is therefore still possible to legally reduce the tax burden of a company engaged in international business, but this will require setting up a “real” company and abandoning certain arrangements that simple common sense should already discourage.
Exchange of tax information (CRS) starting in 2018
Hong Kong is among the jurisdictions that signed the automatic exchange of tax information agreements (Common Reporting Standard - CRS) effective January 1, 2018.
We invite you to contact us if you have any questions about this, particularly to confirm whether your company and its bank account are affected.