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rakhi.v
rakhi.v, Tax Attorney
Category: Tax
Satisfied Customers: 3889
Experience:  Have graduated in Law with specialization & emphasis in Financial Laws and has working experience of over a decade.
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I think I need a tax attorney to answer this.I have a company

Customer Question

I think I need a tax attorney to answer this.

I have a company in Belarus with 5 employees which services my UK client. The company was established to support my UK client and assist my service delivery.

I have recently registered a HK company which I will use to bill for my personal IT services.

The Belarus company has no profit and all money has gone to buy assets or pay expenses.

Both companies service the same client but its billed separately for slightly different work.

The HK company will show some profit and it will pay profit tax in HK after expenses and it will pay me Dividend payments.

The HK and Belarus company currently have no financial transactions between them.

I have not setup this structure to do transfer pricing or re-invoicing but since I recently heard about these concepts I want to make sure that I am not liable on these fronts

I am 100% shareholder of the HK company but in Belarus there is a local shareholder with 5%

I would also like to know, if I get more clients in the future, I might bill them directly in HK and then make payments to Belarus for work that I delegate to there.

Keen to know where I stand with these factors and what I need to be careful of.
Submitted: 1 year ago.
Category: Tax
Expert:  jgordosea replied 1 year ago.

Greetings,

 

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?

Expert:  rakhi.v replied 1 year ago.
Dear Friend,

I have gone through your question in detail. Let me try and throw some light on issues in a manner that it does not get complicated.

First of all, I understood how your Belarus and HK company works.

From what I understand from your situation, you are the majority shareholder except the 5% that the local person holds, whereas you hold 100% in HK company. Also, I understand that you do not live or work in Belarus and also you would not want to be paid dividend in Belarus as the money.

Having said this, I believe that prima facie, your structure of both the companies appear as if they have been created to artificially allocated profits with benefits in taxation. I very clearly feel that you might have (almost sure...) ransfer pricing or re-invoicing and might make your liable.

Keeping this in mind, I strongly feel that your working model should be realigned. It would be better, 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.

Further to this, even if you take a look at the corporate tax rate, HK is cheaper, i.e.16.5% as against Belarus 26.3%. The following is for your general reference.

http://www.belarus.by/en/invest/investment-climate/taxation

http://www.pwchk.com/home/eng/tax_hk_corptax.html

So far as taking care of some factors is concerned, the only thing that you need to take care of is that invoice and bill your customers in such a way that your structure should not look as one created specifically to evade taxes. I am sure transfer pricing and re-invoicing and such complex issues would arise.

I am sure this would help.

You may please leave a positive rating if this helps as that is the only way we receive credit for assisting you. Alternatively feel absolutely free to revert with more queries if you have.

Warm Regards

Customer: replied 1 year ago.

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.


 

Expert:  rakhi.v replied 1 year ago.
Dear Friend,

kindly remain online for a while as I prepare a detailed reply.

warm Regards
Expert:  rakhi.v replied 1 year ago.

Dear Friend,

 

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

Customer: replied 1 year ago.

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.


 


 

Expert:  rakhi.v replied 1 year ago.
Dear Friend,

Hello and welcome again. Thank you for your follow up question.

I think I did not convey properly.

I suggested entire invoicing through the HK company. SO, money comes directly to your HK company and not Belarus as you understood.

I understand your verbal agreement. Here, your client will NOT pay more money. I suggested paying slightly more by the HK company to the Belarus company in order to keep it slightly profitable. Even if you have to part with some dividend for that. This will not make the Belarus company "purposefully out of profit" and also enable you you to directly invoice entire transactions with your client through HK Company. You are not charging more from the Client. It is HK company which is paying slightly more.

I understand your Clients are not concerned seeing profit in Belarus Company. That is the reason, I suggest in the preceeding paragraph so that you do not keep the Belarus company purposefully out of profit.

I understand that you do not want to add accounting and banking charges as well as do not want to take some of your money and send it to Belarus. This is the very reason, my observation is that you do not have any strategic benefit in this structure. My suggestion, therefore would be to relinquish your Belarus company if it is not offering / adding any value.

I am sorry, but these are the only options that you have. I have tried my level best to assist you.

f 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 wish 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

rakhi.v, Tax Attorney
Category: Tax
Satisfied Customers: 3889
Experience: Have graduated in Law with specialization & emphasis in Financial Laws and has working experience of over a decade.
rakhi.v and 3 other Tax Specialists are ready to help you
Customer: replied 1 year ago.

I got an email to rate this, and its already rated. If I need to do something then get back to me

Expert:  rakhi.v replied 1 year ago.
Dear Friend,

Hello and welcome. Thank you for your follow up question.

If you have already rated this positively, there is nothing that you need to do as of now.

To continue conversation, you can return to this thread, OR create / post a new question prefixing "For Rakhivasavada......." and you will reach me.

Hope to assist you in future and wish you good luck.

Warm Regards

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