US LLC vs. Hong Kong Company: Which to choose as a digital nomad?

US LLC versus Hong Kong company:
Which legal entity is better for whom and why?

We will discuss this in this article.
If you have any further questions about a Hong Kong company,
book a free consultation call with one of our legal experts.

Introduction:

“How can I receive my salary as a digital nomad?”
This is a typical question of many digital nomads.

Who is this article for?

Foreigners who have an online business and look for a way to collect payments or send invoices to their customers and clients.

How this article will help you?

Online business owners or digital nomads usually open companies in one of these countries:

• Singapore,
• Dubai,
• USA,
• Estonia,
• Cyprus, and
• Hong Kong.

Which one is the best option: It depends, e.g.:

• your personality (risk-takers vs. risk-averse),
• your citizenship (American vs. Non-American), and
• your residency  (no residency, territorial taxation, world-income taxation)

In this article, we will compare US LLCs and Hong Kong companies and when to choose which.
You can also read a comparison between Singapore and a Hong Kong company here.

In the end, we will show you a life hack to use international tax law as an unfair advantage.

Side note:
US LLCs are not beneficial for digital nomads with US citizenship.
For more information on how a Hong Kong company can help Americans, book a call with our legal experts.

 

1 – Why do digital nomads choose to open a company?

Before we dive into the topic, here is a fact:
Anyone can open almost anywhere in the world.

There is a common misconception that opening a company in a country requires either 

• to live in the country (obtaining a residency), or
• to have that country’s nationality.

For many countries around the world, none of these are required.
This is why you can open a company anywhere in the world – yes, even as a digital nomad.

The only factors to take into account are the costs of

• incorporation (opening a company), 
• maintenance (auditing, accounting, bookkeeping), 
• taxation, and
• other costs (Accounting and audit service, etc.)

Let us go over the reason why many digital nomads open a company, regardless of the costs and work involved.

1.1 – Reason 1: Businesses may not accept invoices from individuals

If you are not working as an employee, and instead you are working as a self-employed, the very first thing to learn is how to write an invoice.  (By the way, here are invoice templates in Excel in case you need them.)

Most businesses and enterprises prefer invoices from other businesses instead of an individual.
This is called B2B (Business-to-Business) and the tax authorities make less hassle about accepting these invoices.

So opening a company can work wonders as there are fewer obstacles for companies to work with you.

1.2 – Reason 2: Banks may close your account.

If you bill companies as an individual, you will receive the money in your account.
Many banks prohibit the use of the personal bank account for business purposes.

How can they find out?
If large amounts of money come into your account, the banks have algorithms to warn the bank employees or their system due to money laundering.

This can lead to an account closure.
This can hit digital nomads especially hard, as it is already hard to open personal bank accounts without residency.

On the other hand, with a company, you can receive any amount regardless of the amount.
Furthermore, you have many bank choices available, such as traditional or digital banks.

 

1.3 – Reason 3: Outplay the tax system

Employees cannot reduce the tax on their income as they only receive a salary, and they can’t optimize the tax on it.
But as a company owner, you have two variables to play with

1. Salary to the CEO and
2. Dividends to the stakeholder of the company (read more on what dividends are)

Dividends can grant a lot of benefits, such as:

• Fewer taxes on dividends than on salary (e.g. dividends in Hong Kong are tax-free)
• No social or pension contributions to dividends

So, many Hong Kong company owners (stakeholders) try to keep their salaries low and increase their dividends to reduce their taxes. 

2 – Why do US LLCs or Hong Kong Companies attract digital nomads?

2.1 – Reason 1: Reputation

American and Hong Kong companies are among the companies around the world that are regarded as reputable legal entities.

This makes it easier for businesses to do business with you, as the invoices from your company will be accepted by the local tax authorities.

2.2 – Reason 2: Payment Gateway

Thanks to the reputation of both companies, it is also easy to set up payment gateways (e.g. Stripe) for customers to be able to pay online on your website.

Both legal entities (US LLC, Hong Kong company) can be connected to PayPal and Stripe.
This in particular can be important for e-commerce companies that heavily rely on these payment gateways.

2.3 – Reason 3: Tax Reduction

US LLCs and Hong Kong companies can lead to 0% taxes if the conditions and the setup are correct. A company can lead to paying more taxes if the setup is not right.

In the next section, we discuss which conditions have to be met in order to guarantee 0% tax payment.

 

2 – US LLC vs. Hong Kong Company: Understanding the setups

2.1 – US LLC vs. Hong Kong Company: How does the 0%-tax work legally?

Both settings are well known for their possibility of paying 0% on the net profits, however, the actual tax system and logic are completely different. 

US LLC: How to obtain 0%?

Prerequisites:

1. Do not hold US citizenship or a US green card
2. Be one of these two groups
   1. Have no residency (digital nomad) or 
   2. live in a country with a territorial tax system

If you have those two prerequisites, then you don’t have to pay tax on your income.

Reason:
As a foreign owner of a US LLC, you and the US LLC are legally not a separate entity, while the US LLC will be treated as a disregarded entity.
This means all the profit and loss from the business under US LLC will pass through to your personal income. 

If you are not doing business in the USA and you are not living in the US as well, you will not be subject to the personal income tax in the US. 

In other words, you are neither liable to the profit tax under US LLC nor personal level if you can meet the above conditions. Because of the relaxed tax situation, running a US LLC this kind of pass-through entity is always giving the public a concept of tax loophole.

 

Hong Kong Company: How to obtain 0%?

Prerequisites:

1. Clients and suppliers are Non-Hong Kong companies
2. Be in one of these three categories:
   1. People without residency (usually called digital nomads)
   2. People living in a country with a territorial tax system, e.g. Thailand (this means taxes are paid only on money that is earned within that country)
   3. People living in a country with no taxes on dividends, e.g. Vietnam.

Reason:
In Hong Kong, the case is different from the one of a US LLC.

The limited company is a 100% separate legal entity between the shareholders and directors. Paying profit tax is an “in-default” mindset, while the company registered in the US is in default, being treated as a US resident. 

Therefore, obtaining a 0% tax exemption is not as easy as you need to overcome two to three obstacles (CIT, PIT, or taxes on dividends). 

We make use of three legal laws to obtain 0%:

• Law 1: CIT 0%
  The CIT is under the territorial tax, which means any sales that come through a Non-Hong Kong company are tax-exempt and therefore 0%.

• Law 2: Tax on dividends 0%
  Dividends from a foreign-owned Hong Kong Company are tax-free.

• Law 3: Tax in your country of residency 0%
  When you pay yourself out the dividends, this has to be then again taxed in the county of residency. But for these three cases, it will not be taxed:

1. 1. If you have no residency, then no country feels responsible for that income
   2. If you live in a country with a territorial tax system on income, then it is a foreign source of income and again not taxed.
   3. If you live in a country that does not tax dividends, then it is again 0%.

 

2.2 – US LLC vs. Hong Kong: Analysis of both tax systems

A 0% tax is great and everyone likes it.
Above, we discussed the conditions to obtain it and why it is possible.

But as a business owner, you know that governments like taxes as well.
So it is important to understand whether the 0%-tax is created intentionally or unintentionally (loophole).

Especially, the latter can often be a short-term situation until the government realizes the loophole.

US LLC: A tax analysis.
Such a loophole exists through the US LLC.

The concept of a tax loophole arises from the unique treatment of US LLCs as pass-through entities. This means that the profits and losses of the LLC “pass-through” to the personal tax returns of the owners, without being subject to corporate-level taxation. As a result, if a foreign owner of a US LLC conducts business outside the United States and is not a US resident, they may potentially avoid paying both corporate and personal income taxes in the US.

This structure has been criticized by some as a tax loophole because it allows foreign owners to benefit from the absence of US tax liability, even while operating businesses that generate revenue from US customers. Critics argue that this creates an unfair advantage for foreign entrepreneurs, as they can effectively avoid US taxes while still accessing the US market and utilizing its infrastructure.

Also, the tax loophole can have two risks:
Firstly, the tax implications can be uncertain and subject to potential changes in US tax regulations. By keeping funds in the LLC, owners expose themselves to the risk of unforeseen tax liabilities. 

Secondly, international tax compliance and reporting requirements can be complex when funds are held within a foreign-owned US LLC. Different countries have different tax laws and regulations, making it challenging to navigate these complexities and ensure compliance both in the US and the owner’s home country. Transferring funds to the owner’s personal account provides more flexibility and control over the funds, allowing for easier financial management and potential investment opportunities outside the US. Therefore, it is generally advisable to transfer funds from a foreign-owned US LLC to the owner’s personal account to mitigate tax risks and enhance financial control.

Hong Kong Company: A tax analysis.
In contrast to foreign-owned US LLCs, Hong Kong operates under a territorial tax system. This means that income earned within Hong Kong is subject to taxation, while income generated from outside Hong Kong is generally exempt from taxation. Hong Kong has intentionally adopted this system to attract foreign investment and foster economic growth.

However, this is not a default case and the company is still liable to file the profit tax return annually and go through the annual mandatory audit of the financial statements prepared by a Hong Kong CPA. As a result, which means, the company will still obtain a full set of tax documents.

The territorial tax system in Hong Kong is not considered a loophole but rather a deliberate tax policy. It aims to create a business-friendly environment and incentivize companies to establish their operations in the region. By exempting foreign-source income from taxation, Hong Kong limited companies enjoy a competitive edge and encourage international business activities.

3 – US LLC vs. Hong Kong Company: Advantages and Disadvantages.

3.1 – US LLC: Advantages and Disadvantages 

Advantages

Advantage 1: 0% Tax.
A US LLC is considered a pass-through entity. 

This means that all revenue is shifted to the shareholder.
As digital nomads (non-American citizenship) have no residency, this means there is also no personal income tax, which then leads to 0% tax overall.

As an American citizen, it is not possible to take advantage of this loophole.

Advantage 2: Cheap maintenance
The US LLC is relatively cheap for non-US residents or nationals as there are not many documents (bookkeeping, audit) that usual companies have to file.

Advantage 3: Easy maintenance
As there is no bookkeeping and audit, the maintenance is also quite easy to process or almost non-existent. Every year, there are three forms to be filled:

1. Form FBAR
2. Form 1120/5472
3. Form Annual Report

Another advantage is the access to US banks and payment gateways, which facilitates smoother financial transactions, especially when selling to US clients. 

However, foreign-owned US LLCs may face challenges in meeting the stringent requirements imposed by financial institutions, including anti-money laundering and know-your-customer regulations. These challenges can result in delays or restricted access to banking services.

Disadvantages.

Disadvantage 1: Tax loophole may hide risks
The tax loophole can lead to a risk for your business and you as an individual.

Business risk:
Operating a US LLC with a potential tax loophole can pose business risks.
Stricter regulations to combat tax evasion have made financial institutions (e.g. banks, payment gateways) more cautious in their due diligence processes. They may require extensive ownership and tax information.
This becomes challenging for a tax-exempt US LLC to provide.
Failure to provide satisfactory evidence can hinder the opening and maintenance of business accounts with banks and payment gateways.

Personal risk:
It may raise international tax risks or potentially create hidden tax burdens in the owner’s home country or the country they reside in, as the pass-through profit is treated as personal income without any US tax assessment record.

For example, if you live in a country like Vietnam that taxes worldwide income, it will be a game of luck whether the income will be regarded as personal income or dividends.
Depending on the person and their level of risk, this may not be the right option, as the legal grounds are unclear and open to interpretation.

Disadvantage 2: Difficulties with bank accounts
You can open bank accounts with banks like Mercury or Wise.

But there are usually a few problems.

1. Banks are becoming stricter with US LLCs for non-Americans and not many banks allow you to have a company bank account with them.
2. Banks have strict regulations and expect you to either go to the US in person or to do business with American clients.
3. And when you can finally open a bank account, some of them are not able to provide a company credit card, which makes it very inconvenient in terms of company spending.

 

Disadvantage 3: No tax certificate
As the US LLC has no obligations to pay any company taxes and as a digital nomad you don’t pay any tax either, there is a lack of a tax certificate.

This can become difficult when immigrating back to your home country if there is due diligence on where you have been paying your taxes.

 

3.2 – Hong Kong Company: Advantages and Disadvantages 

Advantages.

Advantage 1: 0% tax.
Hong Kong has a simple tax system with relatively low tax rates. 

If you also fulfill the prerequisites, then it can be reduced to 0% under offshore exemption.

The territorial tax regime allows for the exemption of foreign-sourced profits from Hong Kong taxation, setting a wonderful place for foreign investment. 

Advantage 2: Bullet-proof legal setup
Hong Kong maintains a serious approach to company maintenance, it combines with the licensed company secretary and auditor. Even for SMEs and limited companies, annual audits are required, providing clear documentation and trustworthy audited financial statements by licensed CPAs. The licensed company secretary is also here to keep the company in compliance with AML and KYC rules. This solidifies the credibility of the business and serves as proof for various purposes. 

Moreover, the official tax department provides a full set of tax assessment documents, ensuring transparency and clarity whenever you need them. 

This is a fully bullet-proof setup for more risk-averse people. 

 

Advantage 3: World-class banking services
Hong Kong offers access to world-class banking services, with a wide range of international banks and financial institutions operating within its jurisdiction. This provides remote businesses with convenient access to efficient banking solutions, including robust online banking platforms, international wire transfers, and various payment gateways. 

 

Disadvantages.

Disadvantage 1: More paperwork.
It’s important to note that compared to a US LLC, tax reporting in Hong Kong can be more complex.
It involves

• auditing procedures for annual financial statements. 
• tax return filing (requires careful attention as the Hong Kong tax authority places a strong emphasis on its tax return filing, which may require careful attention and compliance, which means more costs.

This is usually how we help our clients to have a hassle-free accounting experience and focus on their business (apart from a few signatures per year). If you want us to check whether we can also help you, please book a consultation call with one of our CPAs.

Disadvantage 2: More costs.
The yearly tasks involved, such as

• auditing,
• tax filing, and 
• accounting services

also mean more costs than a US LLC, where these do not exist.
In return, you have a very strong legal foundation.

Disadvantage 3: Strict Know-Your-Customer regulations.
Foreign-owned Hong Kong incorporation may still encounter challenges in meeting the stringent compliance requirements imposed by financial institutions, particularly related to anti-money laundering and know-your-customer regulations.

 

4 – Life Hacks: Outplay the international tax system.

4.1 – In Theory

It is common for people to use a combination of a Hong Kong company and a US LLC to run their business, particularly for international business operations. Here’s how it can work:

Establishing the Hong Kong Limited Company: The business owner sets up a Hong Kong Limited Company, which serves as the main operating entity. The Hong Kong company can be used to conduct sales, provide services, manage day-to-day operations, and most importantly, file for income tax reporting.

Setting up the US LLC: The business owner also establishes a US LLC. The primary purpose of the US LLC is to handle certain aspects of the business, such as receiving client payments and managing expenses in the US. 

Client Payments: The US LLC can be used as a payment gateway, with clients making payments to the US LLC’s bank account or the payment gateways under the US LLC, like Stripe or PayPal. 

This arrangement simplifies the payment process for clients, as they can send funds to a US-based entity, plus enjoy the possibly cheaper processing fees. Also, it can probably diversify the payment processing risk by opening a separate account for the US market. 

Expense Management: The US LLC can be responsible for paying certain expenses related to the business, such as software subscriptions, marketing expenses, or contractor fees. It acts as a centralized entity to manage and track expenses. It may also have less hassle on the paperwork thanks to fewer accounting requirements for US LLCs.

Intercompany Transactions: To ensure proper tax reporting and compliance, the US LLC can enter into intercompany agreements with the Hong Kong company. This includes agreements for services rendered, licensing arrangements, or any other legitimate business transactions between the two entities.

Fee Transfers: Regularly, the US LLC can transfer fees or royalties to the Hong Kong company for the services or intellectual property provided. This transfer can be structured as a legitimate expense for the US LLC, reducing its taxable income, and as revenue for the Hong Kong company, subject to the appropriate tax regulations in Hong Kong.

4.2 – In Practice

Our client is a French national residing in Lisbon, Portugal, under the Golden Visa program. As an online software seller with a global customer base, including the United States, and freelancers located in the Philippines, Thailand, and the USA, he sought to optimize his business structure and tax reporting.

Hong Kong Incorporation as the “Headquarters”
To consolidate his assets, including the intellectual property rights of the software and cash flow, the client established a Hong Kong incorporation. He efficiently manages his online store using Shopify through the Hong Kong company, with Stripe and PayPal serving as the payment gateways for sales transactions worldwide.

US LLC as a “Subsidiary”
Recognizing the benefits and cost advantages, the client also established a US LLC to hold a US bank account for US customers and facilitate Stripe payments within the US.

US LLC as a Cost Center for US Vendors
The client utilizes the US LLC’s bank account for payments to US vendors and subscription fees due to the streamlined banking processes and occasional requirement for paper check payments.

Profits Funneling from US LLC to Hong Kong Incorporation
After settling vendor payments, the remaining funds are transferred to the Hong Kong company’s bank account through intercompany transactions, billing the US LLC accordingly.

Tax Reporting under the Hong Kong Company
Since all profits are passed through to the Hong Kong company, it assumes the responsibility of filing annual profits tax returns, accompanied by audited financial statements. Meanwhile, the US LLC reports zero tax liability, as no funds are retained in its bank account. 

The company’s income can be treated as offshore profit and would be therefore tax exempted. However, he chooses to pay profits tax in Hong Kong at a rate of 8.25% for net profits below two million HKD to receive a clear tax residency. He collects the necessary tax documents, including the tax certificate, tax assessment, and audited financial statements.

Tax-Free Dividend Withdrawals from the Hong Kong Company
To access the funds, the client transfers money from the Hong Kong company’s bank account to his personal account in Lisbon, Hong Kong, and also Singapore for other investment projects. 

Simultaneously, he declares an equivalent amount as dividends through the Hong Kong company. As Hong Kong does not impose tax on dividend income (0% tax rate), the client is not subject to dividend tax in Hong Kong. Furthermore, under visa conditions, the Portuguese government considers the dividend income as foreign source income, exempting it from dividend taxation.

Advantages of the Business Structure
Overall, the client appreciates the advantages of this setup. He benefits from the convenience of conducting business in the US through the US LLC while enjoying the comprehensive and transparent tax system of the Hong Kong company. By ensuring proper reporting and taxation, supported by official documentation, the client maintains a reputable and legitimate business operation.

If the client had solely used a US LLC instead of a Hong Kong Company, then due to the pass-through income, his revenue would have not been interpreted as dividends.

Therefore, the income would have been subject to taxation in Portugal.

5 – Conclusion & next steps

There are a lot of choices out there to structure your business, US LLC is no doubt an easy and cost-efficient way to start your business worldwide, especially when you have US customers. However, the pass-through entity makes a tax loophole to your personal income tax. 

Proper structuring between Hong Kong incorporation and US LLC will allow for greater control and security over the funds, mitigating potential tax implications and providing peace of mind for the business owner.

As your next steps, do these:
Step 1: Go through the checklist, whether you fulfill all conditions of having the perk of a tax exemption with a US LLC or a Hong Kong Company.

Step 2: If both setups are possible, weigh out the advantages and disadvantages of each of them.

Step 3: Once you have made a decision, have a consultation call with experts in both settings to make sure that you have not overlooked anything. To talk to one of our legal experts, click here.

 

Questions other readers have asked:

1 – Can I obtain a tax certificate for my foreign-owned US LLC?

No, a US LLC is a pass-through entity. Therefore, there is no company tax for a US LLC and  also no tax certificate.

2 – Can I obtain a tax certificate for my foreign-owned Hong Kong company?

Yes, you will receive a complete set of taxation documents, including audited financial statements, for your Hong Kong company.

3 – Can I transfer funds from my US LLC to my Hong Kong Incorporation in USD?

Yes, most Hong Kong business bank accounts support multiple currencies, including USD.

4 – Can I keep funds in my Hong Kong company’s bank account? Are there any tax implications?

You can freely keep funds in your Hong Kong business account without tax implications. Hong Kong does not have capital gains tax, and the Hong Kong company is only subject to tax for profit made through business with other Hong Kong companies.

5 – What official documents can I obtain for my Hong Kong company and US LLC?

Under the Hong Kong company ordinance, your Hong Kong company is required to have annual audited financial statements, profits tax return filing, and so tax assessment will be received as official documents. However, for a US LLC, the requirements are generally simpler, and you may not receive as many official documents unless you are subject to US tax obligations.

6 – Is a US LLC a viable alternative to a Hong Kong incorporation? 

It is not an apple-to-apple comparison because the tax status of both setups is completely different. A US LLC functions as a pass-through company for foreigners, where it is not considered a separate entity between the owner and the LLC. In other words, the owner and the US LLC are treated as the same person for tax purposes. On the other hand, a Hong Kong limited company is a separate entity with its tax residency status in Hong Kong, enjoying independent tax treatment between its shareholders or directors.

7 – Who should avoid US LLC? 

If you have the following concerns, you may need to avoid US LLC in your business structure:- 

Tax Information Exchange Concerns

Some individuals, like Canadian expats, may avoid forming a US LLC due to concerns about tax information exchange between the US and their home country.

Currency Exchange Challenges

Those who primarily trade in currencies other than USD may find the currency exchange process through the US banking system inconvenient and costly.

Limited Tax Proof with US LLCs

US LLCs, as pass-through entities, may not provide the comprehensive tax proof required by certain businesses, making alternative business structures with more robust tax reporting and documentation a better choice.