Entity Set Up – a Hong Kong or a Singapore Company?
Hong Kong and Singapore have always been seen as two fierce competitors that try to attract foreign investments. Both are similar in many ways, and yet, individually possesses competitive advantages over the other.
Hong Kong is a Special Administrative Region (“SAR”) of China. Under China’s “one country, two systems” concept, Hong Kong retains its owns judicial and economic framework and sets its economic policies under the management of its Chief Executive.
Singapore, on the other hand, gained independence from British rule, and, as a result, inherited the British judicial system and political framework, very similar to Hong Kong.
The guide sets out the features and advantages that each city may have as a holding company location, in terms of tax efficiency, administrative requirements and other relevant factors.
Incorporation cost and requirements
The cost of incorporating a company in Hong Kong and Singapore are largely similar. According to the World Bank’s 2016 “Ease of Doing Business” index, Singapore scored #2, while Hong Kong scored #4. Score of #1 = most business-friendly regulations.
There is no minimum capital requirement for setting up a Hong Kong entity, while Singapore requires a minimum of SGD 1.
Audit and Tax filing costs
Statutory annual audit and tax filing costs do not differ significantly between the two locations, as the corporation laws and tax requirements are similar.
On-going accounting/compliance costs
The on-going compliance costs of Singapore are slightly higher than that in Hong Kong, mainly because of the quarterly GST filing requirement in Singapore (if revenue thresholds are met). Otherwise, compliance and filing requirements are largely similar.
Director and Shareholder requirements
Currently, a Hong Kong private limited company is only required to have one shareholder and one director (whereas a Hong Kong public listed company is required to have one shareholder and two directors at a minimum). There is no restriction regarding the citizenship of the director and shareholder. The same person can act as both director and shareholder of a Hong Kong company.
A Singapore Company can be incorporated with a minimum of 1 director. There must be at least one director who is a Singapore resident, i.e., a Singapore citizen, permanent resident, or employment pass holder. If the Singapore Company has more than 1 director, the other directors may be non-resident foreign nationals.
A Singapore company can have only one shareholder who may be an individual or a corporate entity. Similar to Hong Kong, the same person can act both as a director and a shareholder of the Singapore Company. There is no restriction on foreign equity participation in a Singapore company.
Employee payroll tax compliance
In Hong Kong, there is currently no obligation on an employer to withhold personal income tax at source. There are employer reporting requirements, which include an annual return for each employee on remunerations paid, and a return when any employee joins or leaves. The Mandatory Provident Fund (MPF) pension scheme requirements can be administered by third-party providers.
Similar to Hong Kong, there is no requirement for a Singapore employer to withholding personal income tax. The employer needs to file an annual employer return that summarizes the total payroll amount for each year. The employee is responsible for his/her personal income tax reporting.
Central Provident Fund (pension) is mandatory and comprises contributions made by employers and employees at periodically-adjusted rates based on the remuneration of employees who are Singaporeans or Singapore permanent residents.
In terms of corporate tax, Hong Kong has some significant tax advantages as a holding company location:
- Low corporate tax rate: Hong Kong’s 16.5% for year of assessment 2017, compared to Singapore’s 17%;
- Hong Kong does not impose a tax on dividend or (potentially) interest income. Comparatively, Singapore levies tax on foreign dividends received in certain cases, subject to double taxation relief;
- There is no tax on any other offshore income in Hong Kong, whereas Singapore imposes tax on such income when they are remitted into Singapore;
- There is no capital gains tax in either country;
- There are no withholding taxes (except a small withholding on certain royalties) in Hong Kong. Comparatively, Singapore imposes withholding tax on royalties and interest;
- There is no VAT/GST in Hong Kong, whereas Singapore imposes a 7% GST;
- For employees of the holding company, both Hong Kong and Singapore have relatively low personal income tax rates;
- Hong Kong generally has a simple and straightforward tax system;
- Comparatively, Singapore has a more complex system with potential tax incentives and exemptions.
Other relevant commercial factors
Other factors to consider include the following:
- Both locations have market-driven, business-friendly environments, with low government interference;
- Stable currencies: Hong Kong currency (HK$) is pegged to the US$; Singapore dollar (S$) is considered a safe haven, backed by Singapore’s deep foreign reserves;
- No foreign exchange controls are in force at either location;
- No restrictions on repatriations of capital/earnings from Hong Kong or Singapore;
- Both are already the location of choice for many regional headquarters operations:
– Hong Kong’s central location in relation to the major Asian markets;
– Singapore has established itself as a financial services hub.
In summary, given the absence of a tax on offshore income streams, no capital gains tax on disposals, and no withholding taxes on payments out, a Hong Kong holding company may be tax neutral with no tax cost attributable to the flow-through of funds.
While a Singapore holding company may offer a similar tax result for a single investment, it is likely to be less attractive where multiple investments in a variety of jurisdictions are involved due to its tax rules.
The two common perceived disadvantages of Hong Kong are: (i) lack of tax incentives; and (ii) absence of an extensive tax treaty network. Specifically:
- The lack of tax incentives is because Hong Kong has a low tax rate/exemption of offshore income – thus it may not be necessary to provide incentives to be tax-attractive;
- The Hong Kong Government has been actively negotiating Avoidance of Double Taxation Agreement (“DTA”) with various countries in recent years.
Hong Kong also has the advantage of having the China-Hong Kong Closer Economic Partnership Agreement (“CEPA”). CEPA provides market access privileges to China including reduced financial and ownership restrictions and lower entry thresholds.
Wherever your destination will be, we can get your operations in a new location set up and running quicker and smoother. Blueback Global elaborated an integrated model of the entity set up and operations support that provides a one-stop solution. This is made possible by combining accounting, legal, HR and tax resources into a connected process.
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