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Sole Propietorship for Dummies

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  1. #31

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    Pay "less tax" after switching from an employee to a sole proprietor

    Disclaimer: for this question, agree that you should consult a professional accountant for one to one advisory service as the answer should be depending on a case by case situation.

    Let’s break the question into two parts:

    (1) Whether a sole proprietor can claim rent and utilities from home office and health insurance as deductible expenses?

    The quick answer is NO unless you can show proofs to IRD and convince the case officer that such expenses are used for business purpose, a general explanation as below

    https://www.ird.gov.hk/eng/tax/bus_p...f=geoexpat.com
    Non-deductible Items
    In computing the assessable profits deduction is specifically prohibited in respect of the following:-
    • domestic or private expenses and any sums not expended for the purpose of producing the profits;
    • any loss or withdrawal of capital, the cost of improvements and any expenditure of a capital nature;
    • any sum recoverable under insurance or contract of indemnity;
    • rent of or expenses relating to premises not occupied or used for the purpose of producing the profits;
    • taxes payable under the I.R.O., except Salaries Tax paid in respect of employees' remuneration;
    • any remuneration or interest on capital or loans payable to or, subject to section 16AA, contribution made to a mandatory provident fund scheme in respect of the proprietor or the proprietor's spouse or, in case of a partnership, to its partners or their spouses.


    If you would like to argue with IRD that the expenses had a dual purpose, below is a more technical explanation from the DIPN for your reference, you have to prove that the intention and the major use of the expenses are business related

    https://www.ird.gov.hk/eng/pdf/dipn0...f=geoexpat.com
    Godfrey J agreed in Anthony Patrick Fahy trading as A.P. Fahy & Co. v. CIR 3 HKTC 695 that if an outgoing or expense had a dual purpose, partly of a domestic or private nature and partly for business purpose, it was not allowable to the extent that the outgoing or expense was a domestic or private character. He ruled that there could not be any sensible apportionment of medical expenses if those elements of the purpose could not be distinguished and the expense was one indivisible matter.

    (2) Whether you will pay “less tax” after switching from an employee to a sole proprietor?

    https://www.gov.hk/en/residents/taxe...f=geoexpat.com
    A straightforward calculation, basic tax concerns are the salaries tax, first HKD200,000, tax amount is HKD16,000 (Effective tax rate at 8%), then, thereafter at 17%, or adopting a standard rate of 15%; then the profits tax, 8.25% on the assessable profits of first HKD2,000,000, thereafter 16.5%.

    Because there are personal allowances and deductions under salaries tax, to enjoy the maximum tax benefits, we need to assume that you will hire yourself as an employer of your sole proprietor afterwards, that means:


    • First portion of the new business income falls into the HKD200,000 + Your Personal Deductions and Allowances as taxable as salaries tax;
    • Remaining portion of the new business income falls into the 8.25% profits tax rate


    So, to enjoy “paying less tax” after switching from an employee to a sole proprietor, your New Business Income needs to be much higher than your current salary because you need to cover all the business expenses thereafter:

    New Business Income – ALL business expenses (at 8.25%) > HKD200,000 + Your Personal Deductions and Allowances (at 8%)

    Not to forget, for business expenses, there are tons of monetary, non-monetary and intangible elements that you need to consider, below with some examples
    • Benefits and compensation (bonus, yearly salary increment, OT, allowances, holidays, medical benefits, employee compensation insurance, long service payment/awards, other retirement protection, MPF, training, professional license fees, … etc.)
    • All of the fixed and variable expenses (office rent, tools, work equipment, furniture, raw materials, insurances, transportation)
    • Additional time cost to handle business affairs (accounting, bank matters, company affairs, procurement)
    • Intangible cost on bearing the business risk (1-2 months payment in lieu for finding a new job, any potential legal issue or third-party claim, cost on delay or redo the job due to any unpredictable reason (Typhoon, Protest, Wuhan Flu))


    Most of the practical cases, in the end, even a person earns HKD50,000 a month won’t get much tax benefits. In general, instead of calculating the tax benefits, we will try to help our customers to calculate the possibility of creating other business incomes with potential growth to increase the overall income in the near future.

    When you making the answer become a "YES", you are thinking about starting a business of your own with a ready customer, rather than putting high risk on commencing a business empty-handed.

    Finally, the sole proprietor structure should only be used for a transitional time; with more customers, always consider to set up a limited company to avoid any personal liability in doing business.

  2. #32
    Quote Originally Posted by CatcherBiz:
    Let’s break the question into two parts:
    Awesome post. I don't know if this can be stickied or something, but that's great stuff.
    HK_Katherine and Jackie1 like this.

  3. #33

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    Quote Originally Posted by CharSiuNow:
    Awesome post. I don't know if this can be stickied or something, but that's great stuff.
    Grateful that this helps .

    When it comes to commencing business in Hong Kong, for technical parts such as the formation of the company, tax reporting, selection between a sole proprietor and limited company ... etc are, of course, requires professional advisory for a clear answer.

    What often omitted is that a wise business decision also requires professional advisory and consultancy. Instead of giving a simple YES or NO, justifications and resources should be presented on a plain, easy to understand manner for the business owner in making the right (matching) decision, and that's how we work. Sadly, this is not the selection criteria in our industry and we are also looking for clues on how we can differentiate ourselves in the market, sigh ...
    CharSiuNow and rkenia852 like this.

  4. #34

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    Oct 2019
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    Thank you CatcherBiz


  5. #35

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    Thanks bhoods,

    The economy is getting worse, be aware. If possible, it would be better to wait until the current situation stabilized.
    Of course, when there is no choice, your employer forces you to become self-employed, trying to negotiate for a transitional plan instead of a clear cut, for example


    • 3/4 salary to keep the job with less working time or an additional one day off, then put 1/4 or 1/5 (discounted offer) of the amount transfer as a contact for your business. This allows you to keep all the compensations and benefits (at least the medical insurance) as an employee while enabling you some own time to develop your business; or
    • Asking for a 4-6 months transitional period to stay as an employee, because you need more time to establish and prepare for your business, gathering tools, ready with the invoices, receipts, contracts, accounting templates for your business ... etc.;


    The principle is to grab the employee status as a safety net during this downturn and take the time to develop your business asap.

    Best wishes to you, your health and your business.
    This is a difficult time, any assistance you need, feel free to share and will try my best to reply, cheers.

  6. #36

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    May 2015
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    Quote Originally Posted by CharSiuNow:
    I am a free-lancer, with an oversees company paying my bills. I registered as a company here, but when I asked an accountant to help me with the tax declaration, he told me in my particular case it would be more beneficial to simply pay tax as an "employee". The main point was that some of my expenses are also reimbursed, so I wouldn't benefit from that, and in the end there was no benefit for me to register as a company.
    Did you ask IRD? I was in your situation and I never set up a company. Nor did I pay a cent of tax. IRD said this was totally ok because all my income originated offshore.

  7. #37

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    Quote Originally Posted by monomono:
    Did you ask IRD? I was in your situation and I never set up a company. Nor did I pay a cent of tax. IRD said this was totally ok because all my income originated offshore.
    The tax exemption is applicable if the services are rendered outside Hong Kong as well, for detail, please refers to the link and extracts. Agree with monomono that for any doubt, it is better to cross-check with IRD for any chances of exemption is available.

    https://www.gov.hk/en/residents/taxe...f=geoexpat.com

    Non-Hong Kong Employment

    If your source of employment is outside Hong Kong, e.g. you are assigned to work in Hong Kong for a few years by your non-Hong Kong employer and you have to perform part of your duties in other countries, you are only assessed on the income attributable to the services you rendered in Hong Kong, including leave pay attributable to such services, and generally according to the number of days you were in Hong Kong (day-in-day-out basis) in a year of assessment.
    When calculating leave pay under these circumstances, leave days attributable to services rendered in Hong Kong are computed as follows:
    Leave days attributable to services rendered in Hong Kong =

    Business days in Hong Kong + Business days outside Hong Kong + leave days = 365 or 366

  8. #38

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    May 2015
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    In my case I was doing remote software development work. Money paid into my HK personal account. So I was worried there would be a question of services rendered in HK. But IRD were adamant, don't submit a tax return, don't pay anything. Sounds too good to be true but I'm not complaining


  9. #39
    Quote Originally Posted by monomono:
    In my case I was doing remote software development work. Money paid into my HK personal account. So I was worried there would be a question of services rendered in HK. But IRD were adamant, don't submit a tax return, don't pay anything. Sounds too good to be true but I'm not complaining
    I do assume you may be taxed in your country of origin at some point though (or the origin of the payments).
    In my case my services are rendered here for local clients, so a fairly clear situation I'd say.

  10. #40

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    I think a call to the IRD wouldn't hurt in any case.

    I declared non-resident status when I left Canada so no tax payable there. Income comes from Malaysia where I have no status so no tax there I assume (I'm not going to ask).

    In the link posted earlier are the 3 criteria IRD use to determine "source of employment". If all of these occur outside HK, no tax:

    - the place where the contract of employment was negotiated and entered into, and is enforceable;
    - the employer’s place of residence; and
    - the place of payment of the employee’s remuneration.

    Nonetheless not all of these where true for me but still I didn't need to pay.

    Last edited by monomono; 13-03-2020 at 05:26 PM.

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