When I first started looking to set up a company to hold my consulting and freelance business, many pundits and advice articles recommended the jurisdiction of Hong Kong. It was touted as a great spot for digital nomads and location independent entrepreneurs. It was fast and easy to setup online. What was not to love? My experience however has not lived up to their claims.
It’s cheap and easy to set up, but NOT cheap to run a Hong Kong company.
I know I was distracted by the startup cost for a Hong Kong company, to my detriment. Between secretary fees for regulatory things here and there, auditor fees, and accounting fees it feels like death by a thousand paper-cuts. Contrast that with my experiences running a US LLC which, while not perfect, has been far cheaper and more hassle-free.
Hong Kong has a lot of inefficiencies that are not location independent conductive.
Hong Kong is an amazing, vibrant city, with many technological advances. However, some processes in the business world have not caught up with the times, things such as:
- Needing to show up in person to open bank accounts
- To chop seal documents (NB: signatures are allowed in some cases)
- To submit a cross signed, physical check for payment of taxes
These are the types of issues that can cause headaches for the digital nomad, especially one who might not be based in Asia or can get to Hong Kong to take care of things.
Banking in Hong Kong is HARD to get into.
If you’re like many digital nomads, you are probably not running a giant company with a million dollar turnover. Hong Kong banks don’t want to deal with small business. Can you blame them? With all the money and wealth from China next door why bother with a smaller, foreign company that will just mean more paperwork for them? If you’re an American, that’s yet another strike against you (thanks to FACTA regulations).
So…without a Hong Kong bank account what can you do? You are now in the not so enviable position of needing to open a bank account as a foreign entity somewhere offshore. It can be a real mess to sort out. We got our issues sorted out only after dishing out some money to consultants for advice and more advanced planning.
Hong Kong requires annual audits by a CPA accountant.
Now, this point is not a bad thing. If you’re running a business, you should keep a set of books and getting them audited is a good way to stay “legit”.
My qualm lies in dealing with the auditing process itself, particular to Hong Kong. Hong Kong auditors, LOVE paper and receipts. They love them so much they expect one for EVERY transaction.
Granted I had most of ours in electronic form, so sending them over wasn’t too much hassle. The rude awakening came a day later when I learned the auditor wanted something for documentation for ALL the transactions. It forced me to email several contractors, suppliers and vendors to request they supply us with an invoice.
Difficulty in availing the often touted 0% tax for Offshore Hong Kong companies.
A major motivating factor in my decision to setup the company in Hong Kong was due to the territoriality nature of its business tax system. This, in theory, would allow our business to claim a 0% rate on the income tax, so long as every took place entirely outside of Hong Kong like:
- Not physically operating in Hong Kong (offices, warehouses, etc).
- Have business dealings with clients/customers in Hong Kong.
- Company products do not enter Hong Kong.
- Company provides no services in Hong Kong.
This seemed like a great opportunity for a digital nomad, running a location independent business with no real ties to Hong Kong, other than being registered there!
What I found out was that qualifying for the rate was a long and drawn out process. It was also expensive, as you needed to have someone to be your contact with the IRD (remember that item about things being old-school in a lot of ways?). Records must be kept that prove and demonstrate how and where our company operated. Getting the said special rate was not guaranteed after all the work and expenses.
The final nail in the coffin for me was that the status was only temporary and had to be renewed. For a small business like mine, it was easier to just pay the income tax at the standard rate of 16.5% (which is pretty reasonable as far as business tax rates go) than to deal with the additional headache. I know many other Hong Kong small business owners that have opted for the same, either on their own conclusions or from the advice of their secretary firms.
There’s a bright side…
Often, we learn the most from our failures and hardships than from our successes. Working through these issues has taught me a lot as an entrepreneur and international citizen of the world.
Running a business from Hong Kong has taught me a lot about setting up and running a business internationally, from day 1. This is something that I that would not have learned otherwise had I opted for a less ‘exotic’ jurisdiction and stayed on-shore in the US. It taught me the value of really researching and understanding the pros and cons of different jurisdictions when it comes to businesses.
It has taught me how large businesses are supposed to run, by virtue of having to comply with the same standards as one. I still feel like I’m faking it most of the time, signing “Director” after my name. Only now, I fully understand and appreciate the legal weight the title carries.
Hong Kong is really not for everyone like some articles have tried to claim and certainly not a jurisdiction I would recommend for small business, digital nomads, knowing what I know now.
There are far better, lesser known jurisdictions that can serve digital nomads and location independent businesses far better than Hong Kong can. I’ll be expanding on some of the places I think are better suited for a small digital nomad business in the future as I document the research and progress made with setting up another business.
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