Hong Kong Tax Guide For Artists:
An Executive Summary
This is an introductory guide for Artists, linking in to
our full Hong Kong Fact-File. If you'd rather dive right in
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Business Formation: The government has a
fairly light touch in terms of statutory requirements. You
don't need anyone's permission to start making or selling
art-works, and you won't have to register or license your
business (except for tax) unless you form a limited
company, or you are Henry Moore and need a fork-lift to
move your scuptures around. Limited companies do have to report
annually, but smaller companies don't have to be audited.
And remembering that the only two certainties in life are
death and taxes, inevitably you'll have to make annual tax
returns, whether you're a limited company or not. Smaller
enterprises don't have to submit much in the way of accounting
information with their tax returns, but as you get bigger,
it gets more arduous. One particularly good thing about Hong
Kong is that there aren't any sales taxes or VAT. Of course
if you take on staff,
life becomes more complicated!
Domestic Taxation: The only really important
decision for an independent operator is whether to be taxed
as an individual
trader or as a company,
and due to the territorial
basis of taxation in Hong Kong the differences are often
quite small. Individuals pay 16.5% on employment
income, while the self-employed pay 15% profits
tax, as do incorporated companies. But allowances
and deductions may make a big difference, so you should
study your situation carefully in advance. The special circumstances
of an artist may also have a bearing on the choice to be made;
long-term streams of royalty
income, if you are successful, may dictate the use of
a company. Husbands
and wives can't play too many games: if you employ your
spouse, it's not deductible for profits tax. Longer term,
the holy grail is to turn income into capital, since mostly
there isn't
any capital gains tax in Hong Kong. But with tax rates
so low, it's not much of an issue. Residence doesn't much
affect taxation: with territorial
taxation, what matters more is if you have a permanent
establishment (fixed place of business). If there's one
aspect of your business on which you should consider taking
paid-for advice, it's probably the tax structure. It's so
important to get it right at the beginning!
International Taxation: If an artistic creator
has a static location, she'll trade from there, but one of
the advantages of this rather special way of life is that
you're not necessarily tied to one spot, and you have the
opportunity to base yourself in a low-tax
location. If that's in Hong Kong, you may have created
a permanent establishment, and you'll pay local
tax, although with rates so low it may not seem to matter
too much. Getting royalty returns without tax may be straightforward
if you have a corporate set-up, although some countries discriminate
against low-tax locations, but it can be more complicated
because the foreign country may take a bite out of your returns,
called withholding
tax. Then you have to turn to double
tax treaties to try to get the money back, and Hong Kong
doesn't have many of them. It's all a bit of a jungle. Luckily
there is no sales tax or VAT. If you set up a branch in a
foreign country, you need to try to avoid the 'permanent establishment'
trap, and you may get bogged down in local VAT. If you send
staff - or yourself - to work in foreign countries you need
to think hard about their tax situation in advance, both in
respect of local income taxation and perhaps because of withholding
tax.
Tax-Efficient Structures: With very low
corporate
and individual
tax rates, there appears to be not much need for exotic structures
to minimize tax. But if you think that 15% is still too much
tax to pay then there is a case to be made for locating businesses
in an out-and-out low-tax, 'offshore'
jurisdiction, especially if you are eventually planning
to retire
somewhere out of Hong Kong. As yet, there are no 'CFC'
rules in Hong Kong, so that profits made in such places can
stay there. Hong Kong has its own trusts
legislation, but offshore structures are often useful
for asset
protection reasons as well, and anti-avoidance law has
not gone nearly so far in Hong Kong as in, for example, the
UK. Non-resident artistic creators meaning to trade in Hong
Kong can also use offshore structures, as long as they avoid
the 'permanent
establishment' trap.
Business Incentives: Hong Kong is extremely
welcoming to new
and incoming businesses, unlike most other jurisdictions,
and there are a number of support
schemes operated by various levels of government, offering
loans, direct grants and assistance. Some of the schemes are
particularly useful for start-up businesses. Although not
many of these will be relevant to artistic creators, it is
well worth investigating what's on offer. However, the saying:
'He who sups with the devil needs a long spoon' comes to mind.
The schemes are well-intentioned, no doubt, but they can be
intensely bureaucratic, with very intrusive qualification
procedures, and a long 'tail' of reporting requirements.
Employing People: Many businesspeople will
just tell you: 'Don't do it'. 'Marry in haste; repent at leisure',
they say, and it was never so true than when it comes to employment.
Don't kid yourself that employees will feel that they owe
you anything. Today's workers, encouraged by a slew of anti-business
legislation, and the general nannying attitude of government,
often feel that the world owes them a living, although it
must be said that Hong Kong is far better than most countries
in this respect. Many employers of course bring problems on
themselves by treating employees as little better than slaves.
At all events, try as hard as you can to use contractors (ie
self-employed
people) rather than employees. The tax authority has plenty
to say about that, of course, so if you are left with no choice,
realize that you will have to provide details of your employees
to the tax authority, operate the Mandatory
Provident Fund scheme, and conform with local employment
law, albeit that is much more liberal than elsewhere in
the world. Of course, there are plenty of exceptions to these
rather sweeping generalizations. Lucky you if you find some!
Welfare And Lifestyle: Meaning, for the
artistic creator herself. Hong Kong is much less prescriptive
in this respect than most countries. There are no
social security contributions as such, and the Mandatory
Provident Fund rules apply only to employees, and even
then not if you employ your spouse. Most creators will therefore
want to make provision for health
benefits, and almost all will want to find tax-efficient
ways of making provision for their pensions.
It's important to separate these from your business itself,
in case of failure. If you have it in mind to retire to somewhere
warmer and less highly taxed, then the time to start is now,
in terms of building up a pension away from the grasp of the
tax authorities, although individual tax rates in Hong Kong
are not very high.
International Aspects: Perhaps you plan
to live out your life as a respected and contented member
of your local community. The salt of the earth, one might
say, if that's not patronising. But some people, and perhaps
especially artistic creators, will find themselves drawn intentionally
or otherwise to an international existence, working and/or
living in other countries. There are many challenges: apart
from the difficulty of arranging your tax affairs satisfactorily,
there are the problems that go along with property
ownership, education
of your children, international removals, health
care and pension
provision, just to take some of the more obvious issues.
Of course no one can predict the future with any certainty,
but there are all too many stories of people who have trapped
themselves in the wrong investment in the wrong currency in
the wrong place, with multiple taxmen on their backs. Most
such problems are avoidable, with forethought.
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