Some more context or information may be needed as to your location or the location for which you would like information. You mentioned that "I have recently registered a HK company which I will use to bill for my personal IT services."
Your mention of transfer pricing might infer that you are asking about United States income tax rules but from the description neither of the companies mentioned are subject to US income tax though there may be facts missing that make one or both subject to US income tax.
Do you need information about Hong Kong income tax on the recently registered company or are you a US citizen that wants to know about individual income tax or what?
I seem to have gotten two answers but only one place to reply. Thanks for both your replies.
jgordosea: I have no fixed location, I have never been to the US and dont have any business there. If transfer pricing is a US only issue then its not relevant to me.
I am not resident in HK, and do not work there. I am not an employee of my company, just a director that is paid dividend. At the moment I am deciding where I should be tax resident for income tax, I might not have to pay income tax since I am perpetually traveling and working online. Advice on that aspect is welcome also.
rakhi.v : thanks you also for your answer.
To be honest I am a bit surprised, because I thought that for re-invoicing to apply. My HK company would have to have financial transactions with the Belarus company. I thought I might be safe for now but wanted to check. In addition from what I have read online about transfer-pricing, its normally based on transactions between companies.
I am happy to accept your advice, in terms of:
> much better in fact that you bill your clients through your HK company entirely while paying your Belarus company internally for whatever services that you take from it.
but to me, this seems more clearly to a re-invoicing situation, since I would be only paying the operational costs in Belarus and keeping the profit in HK.
If I can do that legally, maybe I can post another question on how I should go about it. I have an accountant in HK and Belarus but neither seem to be knowledgable about this topic.
My main question now is why is that a better structure.
If I take your recommendation I have another legal issue in that I could be sued by the minority share holder in Belarus as his share would not yield a dividend. Wether he would win is another matter.
I am happy to pay more for additional questions to get to the bottom of this, please advise in your reply.
There is a really important other factor to this situation. I originally worked for my client through a IT services company in London. We then decided to open the company in Belarus as a partnership. It has so transpired that he has not taken his share of the company. So on paper its my company, but we have a verbal agreement (and documented) that he will take his share at some point.
Hopefully I havent lost you, but, its important to say that the company in Belarus has limited value to me, the payments from the UK client are aligned to cover costs and thats it. In addition if all the money comes to my HK account first. I have additional banking and accounting charges which are significant, and there is questionable value in keeping my share in Belarus.
So as a final question, to avoid a lot of legal and accounting headache should I just relinquish my share in Belarus and transact purely in HK?
I have added a lot of complexity here so happy to answer different questions or add bonuses. Please advise.
Sorry for little delay in getting back. Here I go....
To begin with, I started the conversation because the earlier expert "jgordosea" had opted out and was no longer working in this issue.
Now, coming to the point.
Yes, You are correct. Transfer pricing primarily and normally based on / concerns with transactions between companies. However, what I tried to convey is that the pattern in which you do it, I mean double invoicing your clients shows your specific intent to structure this in a manner than you evade tax. Transfer pricing transaction may involve invoicing clients from separate companies, but for the same nature of work, I am sure taxmen would not like to see it in proper spirit and you may be liable for such transfer pricing technicalities / complexities.
Because of this, I tried to focus more on "realignment" of the way you would do business. I mean, billing your customers entirely by HK company and paying the Belarus company its bills for the services taken.
This would certainly make your transactions easy and less complex to handle.
I take your point that this may spell trouble from minority shareholder of 5% stake in your Belarus company who would never earn a dividend. To counter this, I suggest to pay Belarus company for the services that it has rendered to the extent that it remains nominally in profit. You will declare dividend there if you wish as it would have a very very nominal impact as bulk of that dividend would come to you back as you are the majority share holder.
This will have double benefits. ONE - You will keep your minority stake holder away from making any noise -- TWO -- You will still keep ALL of your transactions simple, less complex all within one company and avoid any complexities arising from issues like re-invoicing and transfer pricing.
To answer your specific question -- THIS should be proposed structure and operations of your companies.
Now coming to your below point.
"............There is a really important other factor to this situation. I originally worked for my client through a IT services company in London. We then decided to open the company in Belarus as a partnership. It has so transpired that he has not taken his share of the company. So on paper its my company, but we have a verbal agreement (and documented) that he will take his share at some point........."
In this case, you still have all the more advantage to this proposed structure. He will have no point of making any accusation that you have not deliberately kept this company away from making profits. You can keep the Belarus company in minor profits to tackle with this situation. Once he takes his share on paper, you can bring this more into profit. But still I would strongly suggest to keep the structure as suggested.
Taking your question further... I was about to come to this point. I was about to suggest that if you have a very limited interest in the Belarus company and have NO strategic advantage of owning it, better relinquish it and streamline ALL your transactions dealings in your HK company. This will have operational advantage as well as add better value to it.
If you have any other questions, you may rate this positively and post another question in this thread itself if you do not want to open new thread. You will reach me directly here. For a new thread, begin your question prefixing "For Rakhivasavada...." and you will reach me.
After rating this positively, if you are done with this in particular and if you need to pay more for services, you will have option to add bonus.
Alternatively feel absolutely free to revert with more queries if you have.Warm Regards
I will rate and accept ur answer after this post but I just wanted to make a few points.
> This would certainly make your transactions easy and less complex to handle.
No, its not going to, because at the moment money comes directly from my client to Belarus and all the accounting and management happens between them, at my clients cost.
> as bulk of that dividend would come to you back as you are the majority share holder
I dont think that is wise, I have a verbal agreement with my client that he has the same share as myself in Belarus, any profit paid to Belarus becomes a grey area. On paper hes not entitled to any dividend in Belarus. How will Belarus make a profit, where will the money come from? Why would my client pay more money? If he pays the same amount, then it will be my money earned in HK that needs to keep Belarus in profit.
If all the money comes to me its higher accounting and banking fees and thats coming out of the money I am charging for my personal work.
> within one company and avoid any complexities arising from issues like re-invoicing and transfer pricing
I dont think going through HK removes these issues.
> He will have no point of making any accusation that you have not deliberately kept this company away from making profits
No, thats not correct, my client and myself have a verbal agreement that he is a 50% share holder of the Belarus company. We have another local shareholder who has 5%.
My client has no interest in Belarus seeing a profit since all the money is coming from him anyway. Any profit in Belarus is money he has to share. In fact on paper he gets nothing.
What my client will pay me in HK is my money paid for my service. I dont want to add accounting and banking charges that then come out of this money. I also dont want to take some of my money and send it to Belarus.
It seems that I dont have many real options.
After rating this positively, if you are done with this in particular and if you wish to pay more for services, you will have option to add bonus.
I got an email to rate this, and its already rated. If I need to do something then get back to me