You own a company registered in one of the worlds’ financial centers. As jurisdiction however, the EU looks to you more appealing. And indeed, doing business with an EU company can be a lot easier (and even safer) in many aspects. It is also more prestigious and can also result in lower tax load.
Although the EU is in general considered as high-tax area, there are few small jewels in the European Crown that offer very low corporate tax rates. Namely, Cyprus and Bulgaria are the countries that are known to offer sustainable low tax rates of 12,5% and 10% respectively. While there are also other EU member states to offer low taxation (ie Hungary), Cyprus and Bulgaria are definitely the top choices due to their low personal tax rates, ease of doing business and corporate traditions.
Euroformat.eu, through its parent company Citizenship and Investments, is deeply involved in different projects in Hong Kong. We are proud member of the Hong Kong General Chamber of Commerce and have been frequently commissioned to assist in redomiciliation of Hong Kong businesses to the EU.
For that reason, we will discuss below what the advantages and the shortcomings of redomiciliation of a HK company to the EU are. The arguments are also valid for any other non-EU company that wishes to move to the EU.
The most obvious advantage is that you will continue to operate through your good old HK company. You will be also thinking that your past business history (turnover, etc.) will play to your advantage when you move your company to Europe. In fact the only real advantage is that you will no longer need to maintain your company in HK, as it will become truly EU entity. So no more accountancy and fillings in HK, no more compliance duties in HK (unless there are problems, as you will see below).
Another, as we call it “pseudo advantage”, is that you may be able to pay relatively low corporate tax (ie 12,5% in Cyprus). The advantage is indeed “pseudo”, not only because in HK taxation can be quite low (in some cases). It is “pseudo”, because you can get the ultra low EU corporate tax (in Bulgaria is even lower than in Cyprus, namely 10%) even without moving your HK company and striking it off the register (more on that below).
But if the advantages are so limited, who can then benefit from the option to move his HK company to the EU?
Well, the truth is that the very idea of redomiciliation of a company is very, very outdated. The redomiciliation of a company was born in the days when “offshore” was a hype. It was invented to enable classic offshore companies to continue its existence one day as a “normal” onshore companies in more respected jurisdictions. The whole idea of redomiciliation was born in the times when company formation was a “big thing”. People were making companies with a (very) long term expectations. One would, back in those times, need solid seed capital, which was not available to everybody. Nowadays, companies can be created easily (even in the EU). Moving an old company to new jurisdiction is simply not worth the hassle, as you will find out below.
Company redomiciliation is still suitable for corporate giants, such as “Burger King” or “Phizer”, but this is subject for another analysis.
The drawbacks of redomiciliation of a HK company to the EU are manifold. We will outline only the most important reasons why you should think twice before moving your company from HK to the EU.
Each country has its own legal system with its own particularities. Even within the EU, different member states have different national laws. These are indeed, being constantly harmonized on EU level. A country like HK however has completely different legal framework than Cyprus, for example. When re-domiciliating a company, you will be required to change your company’s Articles in accordance to the Cypriot law. This will be however close to impossible, bearing in mind that these changes may not be legally backed in HK. The caveat here is that even if you make the necessary adjustments in the Articles, at any time later, the HK authorities can put a claim against the company for non-compliance, that will have dire consequences (even if the company is already moved to the EU).
Your ex-HK company in EU will be the black sheep in the eyes of the national tax authorities. Company redomiciliation is not immediately tax-evasion, but the EU tax authorities see it like that. And their attitude is logical in a way. Imagine every Cypriot company may be subject to easy and straightforward tax inspections for the last 10 years. But a company with tax history back in HK is not.
The fiscal past in HK shouldn’t be of concern to the EU tax authorities you will say? But it is. Tax laws are complicated. Many operations are passed on throughout the years – dividends, accumulated profits, income for future periods, amortization, investments, just name it. And the local authorities have very little clue about the real fiscal past of a company that has been moved to the EU. Unfortunately for you, the taxman will deem everything that he can’t verify to be in his favor (in favor of the state budget).
On top of all that, your company will be subject to tax inspections on average 12 times more often than a local company.
EU banks hate any sort of irregularities. And they fear companies that have been re-domiciliated. Chances are that your company will not be able to even open bank account. But even if it does, it will be subject to such a monitoring that your day-to-day banking operations will turn into a reporting nightmare. And we know what are we talking about from first hand experience.
As result, any irregular transaction (in the eyes of the bankers), will immediately result into account freeze. Something that you will definitely prefer to avoid.
Back in the 1980’s companies from the global financial centers were more than welcome in Europe. In the times when “tax evasion” was the norm among Europeans, life was different. Now, at the end of 2020, nobody in EU would be happy to transact with company that has been re-domiciliated from a non- EU country. Any such company will immediately raise a red flag as possible tax evasion vehicle. And in the EU, transacting with such company may be considered a crime. At the very least, no EU business would like to take the risk of being investigated by the tax authorities as business partner of a company with questionable reputation (again, in the eyes of the taxman).
There are many agents on the internet that will persuade you to re-domiciliate your company from HK to the EU. They will draw you a nice rosy image of how good this idea is. But if you fall into this belief, you are most likely to regret it deeply. This is our professional opinion and we do not expect you to take it at face value.
If you are so inclined to re-domiciliate your company to the EU even after having read our warnings, then so be it. You can use the services of any third party or you can contact us for a competitive offer.
If you have however realized all the pitfalls of a redomiciliation, then there is much better way forward. Please contact us for more information about how to setup a subsidiary in the EU and have the taxman, the banker and all your business partners on your side.