The U.S. or Hong Kong: Registering a business in Hong Kong?

[dan1984]

My Swedish friend and I are in discussions to open a translation company together (yeah, like the world needs another one, but hey, I think we have some good ideas and we're probably going to give it a go).

 

We are still debating the pros and cons of registering in either the U.S. or Hong Kong, and this debate is still in the very early stages as neither of us has much experience on the whole business/accounting side of things - we have web design, graphic design, and all things translation related covered.

 

For that reason, I thought I'd reach out to you all here, because based on the nature of this forum and all of our collective experiences in China, perhaps some of you have dealt with this before.

 

I've been doing a ton of research, but I'd love to hear any firsthand experiences about deciding between the U.S. and Hong Kong and then how you went about doing it?

 

I always try and avoid using "agencies" at all costs, be it for finding an apartment, visa help, etc., but as neither of us will be living in Hong Kong (if that's the route we go), employing an agency probably would make our lives a lot easier - any agency recommendations?

 

Either I'll strike gold or strike out in starting this topic - any help or suggestions would be much appreciated!

 

Thanks~~

 

Dan

 

 

[tsap seui]

I have no answers to your questions, but, I want to encourage you to follow your dreams. I love to see young people give entrepreneurship a try. My life was headed nowhere and I was unhappy until I took the chance and started my own business. I worked hard, and was very lucky beyond anything I could have asked for.

 

Good luck amigo...follow your dreams.

 

tsap seui

[Guest ExChinaExpat]

Dan, without compromising your business model, can you explain what kind of translation services you plan to provide? Oral translation? Written translation? Expat assistance?

[dan1984]

I have no answers to your questions, but, I want to encourage you to follow your dreams. I love to see young people give entrepreneurship a try. My life was headed nowhere and I was unhappy until I took the chance and started my own business. I worked hard, and was very lucky beyond anything I could have asked for.

 

Good luck amigo...follow your dreams.

 

tsap seui

 

Thanks Tsapper! It is somewhat daunting, but I feel its the best way to go, and like you said, if I'm not going to try and grab life by the horns at this point in time, what else am I waiting for!

 

It's people like you who give me the confidence to go forward and give something like this a try.

 

There are millions of people unhappy with life but so few try and do anything about it. That's not to say I'm unhappy with life, most of us here are very lucky with what we have, BUT, I'm just trying to do what I want to do and create the best life possible. In addition, with so many lifelong friends as well as my lady's family here in China, from here on out until my final days I will inevitably have a life on both sides of the planet. Working for myself and trying to keep it US-China related will give me the best opportunity to spend time in both places.

 

I always heard that you don't really understand the U.S. (or any country for that matter) until you leave it, and I've found that to be so true. Beyond just understanding better the U.S. as a country and everything I previously took for granted, one thing that has become crystal clear to me since I moved to China is that people often times burden themselves with unnecessary anxiety, problems, or "what should be done because that's just the way it is." I know life at times can be very hard, but since distancing myself from everything I once knew to be true (via my move to China), I think once you free yourself of that mindset and way to live life, you'll become much happier.....I know I have.

 

Wow, I've officially barged through the gates of hippy-ville and taken a seat.

 

I know it probably all sounds quite idealistic, but, I guess I always have been more of an optimist than pessimist.

 

Thanks for the encouragement once again, Tsapper! Best of luck to you and yours there!

 

dan~

Edited January 20, 2014 by dan1984 (see edit history)

[dan1984]

Dan, without compromising your business model, can you explain what kind of translation services you plan to provide? Oral translation? Written translation? Expat assistance?

 

From the start we plan to offer written translation services, get ourselves established and the business running (because we'll probably need to keep our day jobs at the start until we begin to make a bit of money through the translation business), and then from there branch out into more languages, other services, etc. I don't envision us ever moving into oral translation services or interpreting based on our current business model, but, I guess its always good to keep an open mind and never say never.

[b.c]

I did some research of this a few years back. Link below should be of interest to you:

 

http://www.youngmoneychina.com/2013/11/how-to-open-a-hong-kong-company/

 

HK has a lot of advantages in the areas of taxation, protection, and flexibility. It is also relatively easy and cheap to set up, although setting up an LLC in the US is going to be easier and less expensive. I would recommend going with an agent if you choose HK, mainly because you will need a company representative/address there and the agent can typically provide that.

[dan1984]

I did some research of this a few years back. Link below should be of interest to you:

 

http://www.youngmoneychina.com/2013/11/how-to-open-a-hong-kong-company/

 

HK has a lot of advantages in the areas of taxation, protection, and flexibility. It is also relatively easy and cheap to set up, although setting up an LLC in the US is going to be easier and less expensive. I would recommend going with an agent if you choose HK, mainly because you will need a company representative/address there and the agent can typically provide that.

 

Thanks for the link, I will definitely check it out.

 

We have been looking into a number of different agencies in Hong Kong, and like you said, that would definitely be the way to go. Using the agency would make initially going through Hong Kong more expensive than doing everything yourself in the U.S., but it seems as if the process is actually more easy and straightforward in Hong Kong. In the U.S. actually registering is quite easy, but the paperwork and book-keeping required after registration is much more of a pain, and could require the help of a lawyer or accountant - doesn't seem to be very DIY - which in the long-run would make incorporating in the U.S. more expensive. In Hong Kong everything is more simple and on top of that the agency takes care of it for you. Do you see it a different way?

 

Also, do you have any experience or knowledge as it relates to taxes? The income I currently earn in China from working as an employee is not taxed in the U.S., what about the income I would earn for being a foreign business owner? As long as it is under the $90,000+ threshold for foreign income, would the income I earn from being a foreign business owner not be taxed in the U.S.?

 

Thanks for any help!!

 

Dan

[Andelu]

dan - congrats on taking the leap to open your own business! setting up shop in HK is much, much easier both with setup, annual carrying costs and taxation. A HK company will require annual tax return and an audit which most accountants can do as part of setting up the company and annual filings.

 

As a side note - the income you currently earn in China IS declarable to the US on your annual tax returns even if under the Foreign Earned Income Exclusion. If over the limit you are able to claim a credit for any taxes paid to China on that income.

[Randy W]

Yes - as a U.S. citizen, you report and are taxed on ALL worldwide income. The "Foreign Earned Income Exclusion" doesn't EXCLUDE anything. It's actually a tax credit which USUALLY allows you to pay zero taxes on your U.S. return, but if you additionally have substantial U.S.-based income NOT qualifying for the exclusion, you will pay taxes on both, but at a reduced rate on the foreign income.

[dan1984]

Thanks Randy and Andelu!

 

Absolutely, I know what you guys are saying but perhaps didn't express myself clearly. Each year I do declare the income I earn here in China on my taxes but because it is under the Foreign Earned Income Exclusion I have not had to pay any taxes.

 

I'm still not clear on if there is any distinction between the foreign income I earn as an employee and what I will (hopefully) earn as a business owner; and in addition, how I will report this income earned from being a business owner abroad in filling out my yearly tax papers - TurboTax has been good to me, hopefully it won't fail me now. I guess time for some more research and ideally finding some answers.

[Randy W]

Thanks Randy and Andelu!

 

Absolutely, I know what you guys are saying but perhaps didn't express myself clearly. Each year I do declare the income I earn here in China on my taxes but because it is under the Foreign Earned Income Exclusion I have not had to pay any taxes.

 

I'm still not clear on if there is any distinction between the foreign income I earn as an employee and what I will (hopefully) earn as a business owner; and in addition, how I will report this income earned from being a business owner abroad in filling out my yearly tax papers - TurboTax has been good to me, hopefully it won't fail me now. I guess time for some more research and ideally finding some answers.

 

Credzba and I had some discussion there. TurboTax I believe will simply take the fact that you are living (and working) in China as evidence that you qualify for the Foreign Earned Income Exclusion.

 

My own guess is that as long as you are subject to taxation by another country, then you are in good shape as far as claiming the "exclusion". If you don't fall under either the Chinese or the Hong Kong tax umbrellas, then you may face some questions by the IRS. That's just my own guess there, and doesn't qualify as any sort of legal advice and DOESN'T reflect any meaningful research. Be prepared and do your own research there - credzba may have some advice for you there.

 

Whether your business would need to file anything in the U.S. may be another issue to look into.

[dan1984]

 

Thanks Randy and Andelu!

 

Absolutely, I know what you guys are saying but perhaps didn't express myself clearly. Each year I do declare the income I earn here in China on my taxes but because it is under the Foreign Earned Income Exclusion I have not had to pay any taxes.

 

I'm still not clear on if there is any distinction between the foreign income I earn as an employee and what I will (hopefully) earn as a business owner; and in addition, how I will report this income earned from being a business owner abroad in filling out my yearly tax papers - TurboTax has been good to me, hopefully it won't fail me now. I guess time for some more research and ideally finding some answers.

 

Credzba and I had some discussion there. TurboTax I believe will simply take the fact that you are living (and working) in China as evidence that you qualify for the Foreign Earned Income Exclusion.

 

My own guess is that as long as you are subject to taxation by another country, then you are in good shape as far as claiming the "exclusion". If you don't fall under either the Chinese or the Hong Kong tax umbrellas, then you may face some questions by the IRS. That's just my own guess there, and doesn't qualify as any sort of legal advice and DOESN'T reflect any meaningful research. Be prepared and do your own research there - credzba may have some advice for you there.

 

Whether your business would need to file anything in the U.S. may be another issue to look into.

 

 

Thanks again, Randy. My line of thinking is the same as yours (as I'm under the Hong Kong tax umbrella that puts me in good shape for claiming the 'exclusion'), but I have not been able to find any concrete confirmation of this as of yet, so, the search continues.

 

I just received this reply from a 'Tax Professional' at TurboTax:

 

""If the Hong Kong entity is a corporation, then you would need to report any income from the company to you (e.g. salaries paid by the company to you, interest on any loan that you give to the company, dividends paid by company). You would not be reporting or filing any tax returns for the company in US, unless the company did business or had a presence in US.

 

However, as a US citizen with a substantial interest in a foreign corporation, you may be required to file Form 5471 Information Return of U.S. Persons With Respect To Certain Foreign Corporations http://www.irs.gov/pub/irs-pdf/f5471.pdf

 

TurboTax does not support Form 5471.""

 

Based on this response, although not explicitly stated, it appears that I will have to report the money I earn and in turn I can file this under the Foreign Earned Income Exclusion.

 

Form 5471is something I else I will have to look into.

[dan1984]

Received another response from the tax professional at TurboTax, and this is what he/she wrote:

 

“"The HK business is a separate entity and will pay it's own taxes based on HK laws.

On your return, you will need to report worldwide income, including any salaries, interest , dividends etc.that you personally receive from this HK entity.

The foreign earned income exclusion is only for earned income and if all the tests for the exclusion of the income apply, you can exclude the amounts that are received by you as salaries.

Any other foreign income, e.g. interest, dividends, capital gains etc. cannot be excluded for the foreign earned income exclusion.

There is a limit to the exclusion ($97,600 for 2013). If your foreign earned income exceeds that amount, the excess will be subject to tax. If you have paid foreign taxes on the foreign income , you may be entitled to a foreign tax credit on the portion of the income that has not been excluded under the foreign earned income exclusion.

I hope that clarifies the situation a little more.

Thank you for using TurboTax.""

 

That seems to answer most of my concerns and give me peace of mind.

 

HOWEVER, have any of you guys ever heard of this dreaded Form 5471?? Even though it appears to be nothing more than a declaration form, it is rather involved and the estimated preparation times are rather absurd. I've searched for some "how to guidelines online" but I have yet to find anything useful.

[Randy W]

Received another response from the tax professional at TurboTax, and this is what he/she wrote:

 

“"The HK business is a separate entity and will pay it's own taxes based on HK laws.

 

On your return, you will need to report worldwide income, including any salaries, interest , dividends etc.that you personally receive from this HK entity.

 

The foreign earned income exclusion is only for earned income and if all the tests for the exclusion of the income apply, you can exclude the amounts that are received by you as salaries.

 

Any other foreign income, e.g. interest, dividends, capital gains etc. cannot be excluded for the foreign earned income exclusion.

 

There is a limit to the exclusion ($97,600 for 2013). If your foreign earned income exceeds that amount, the excess will be subject to tax. If you have paid foreign taxes on the foreign income , you may be entitled to a foreign tax credit on the portion of the income that has not been excluded under the foreign earned income exclusion.

 

I hope that clarifies the situation a little more.

 

Thank you for using TurboTax.""

 

That seems to answer most of my concerns and give me peace of mind.

 

HOWEVER, have any of you guys ever heard of this dreaded Form 5471?? Even though it appears to be nothing more than a declaration form, it is rather involved and the estimated preparation times are rather absurd. I've searched for some "how to guidelines online" but I have yet to find anything useful.

 

 

Yes, exactly. YOU (not your corporation) are an American citizen, subject to the taxation laws of the United States. This form is apparently where your corporation enters that picture. Can't say I know anything more about it. Let us know what you find out.

 

I can imagine it would be complex - it's basically informing the IRS of this foreign corporation which otherwise does not come anywhere near their umbrella.

 

But put your tax figures through TurboTax - it will show where the guy is WRONG. You DO figure a tax on the "excluded" income - and it's not necessarily $0, especially if you have unearned income to report (like the guy pointed out, this income would not qualify for the inclusion).

 

The Form 1040 Instructions tell you this little gem - "But if you are filing Form 2555 or 2555-EZ, you must use the Foreign Earned Income Tax Worksheet instead." when it comes to figuring your actual taxes. The Turbo Tax software is aware of (and uses) this worksheet

[dan1984]

 

Received another response from the tax professional at TurboTax, and this is what he/she wrote:

 

“"The HK business is a separate entity and will pay it's own taxes based on HK laws.

 

On your return, you will need to report worldwide income, including any salaries, interest , dividends etc.that you personally receive from this HK entity.

 

The foreign earned income exclusion is only for earned income and if all the tests for the exclusion of the income apply, you can exclude the amounts that are received by you as salaries.

 

Any other foreign income, e.g. interest, dividends, capital gains etc. cannot be excluded for the foreign earned income exclusion.

 

There is a limit to the exclusion ($97,600 for 2013). If your foreign earned income exceeds that amount, the excess will be subject to tax. If you have paid foreign taxes on the foreign income , you may be entitled to a foreign tax credit on the portion of the income that has not been excluded under the foreign earned income exclusion.

 

I hope that clarifies the situation a little more.

 

Thank you for using TurboTax.""

 

That seems to answer most of my concerns and give me peace of mind.

 

HOWEVER, have any of you guys ever heard of this dreaded Form 5471?? Even though it appears to be nothing more than a declaration form, it is rather involved and the estimated preparation times are rather absurd. I've searched for some "how to guidelines online" but I have yet to find anything useful.

 

 

Yes, exactly. YOU (not your corporation) are an American citizen, subject to the taxation laws of the United States. This form is apparently where your corporation enters that picture. Can't say I know anything more about it. Let us know what you find out.

 

I can imagine it would be complex - it's basically informing the IRS of this foreign corporation which otherwise does not come anywhere near their umbrella.

 

But put your tax figures through TurboTax - it will show where the guy is WRONG. You DO figure a tax on the "excluded" income - and it's not necessarily $0, especially if you have unearned income to report (like the guy pointed out, this income would not qualify for the inclusion).

 

The Form 1040 Instructions tell you this little gem - "But if you are filing Form 2555 or 2555-EZ, you must use the Foreign Earned Income Tax Worksheet instead." when it comes to figuring your actual taxes. The Turbo Tax software is aware of (and uses) this worksheet

 

 

Hmmmm, lots to wrap my head around - it's going to be a bumpy ride.

 

Thanks for all the help Randy and talking me through it.