Doing business in Asia: aligning business strategy and tax compliance with a Hong Kong-company

Introduction
For Dutch companies expanding into Asia, the Netherlands–Hong Kong corporate structure is a well-established framework. A classic example is a Dutch BV using a Hong Kong company (HK Co) to contract with a Chinese manufacturer. While this structure remains relevant, the focus has shifted from tax optimisation to demonstrable global compliance and objectively verifiable business functions. This article briefly explains the modern principles for a compliant structure that aligns governance with predictable tax treatment.

The Hong Kong Framework: The Principle of Territoriality
Hong Kong operates on a territorial source principle, taxing only profits that arise in or are derived from Hong Kong, or are deemed as such. Consequently, profits from business activities conducted entirely outside its borders are not subject to Hong Kong profits tax. This allows a Dutch-owned subsidiary to allocate profits to where activities like manufacturing, sales or service occur. From a Hong Kong perspective, the key compliance challenge is to maintain robust documentation that clearly demonstrates to the Hong Kong Inland Revenue Department that the source of the income is genuinely outside Hong Kong.

With respect to passive foreign-source income, a different tax regime applies. This income is subject to Hong Kong profits tax, unless exemptions apply.

The Role of Transfer Pricing: Justifying Profit Allocation
All transactions between the HK Co and its Dutch parent must adhere to the arm's length principle, meaning they are priced as if between unrelated companies. The profit justifiably allocated to HK Co is therefore directly dependent on the functions it performs and the risks it assumes. A limited role warrants only a modest profit, whereas a more substantial contribution can justify a larger share. Strict adherence to the arm’s length principle, supported by a comprehensive functional analysis and reliable benchmarking, is essential to satisfy the requirements of both Dutch and Hong Kong tax authorities.

The full publication is available upon request. Our dedicated tax team is happy to assist.