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I am considering to start up an IT consultancy company in Hong Kong. I would work as a freelancer with clients anywhere in the world, but I currently have a specific client in Europe in mind (Belgium).

I've read that not only do I not have to charge 21% VAT to my client from Belgium, but that my client does not need to pay it as well because I will be outside of EU. (source in Dutch) This means that neither Belgium nor Hong Kong is receiving any VAT. Can I get some confirmation that this is true?

It seems weird to me that my client would have to pay VAT to a company anywhere in the EU, but that this tax would disappear when you purchase a service from outside of EU. Isn't the point of Europe to provide benefits to the countries within it? This seems like the opposite is happening.

I have another question specifically about Hong Kong company tax. It is listed to range from 8.25% - 16.5%, but foreign sourced income is not taxed. That means that my earnings from Europe effectively enjoy 0% tax. But I've read from an individual that this exemption from tax only applies if I am not earning it from Hong Kong. I have not been able to find this rule anywhere. Does anyone know whether or not this is true?

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  • guidemehongkong.com/business-guides/supporting-a-business/….
    – Valorum
    Commented May 2, 2021 at 7:40
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    I'm no expert in Hong Kong taxes, but it certainly appears as though you're correct. Services provided from outside the EU to a non-EU country don't attract VAT and the link above suggests that profit derived from outside Hong Kong is taxed at a zero rate.
    – Valorum
    Commented May 2, 2021 at 7:41
  • I've consulted a few more sources that are confirming the same (one source is from Europe itself, so it couldn't get any more credible): europa.eu/youreurope/business/taxation/vat/cross-border-vat/… and quaderno.io/blog/… The latter source describes the counterintuitive feeling I had about Europe VAT being exempt for non-EU, but it is really that way for some reason. The European client still needs to mention it on their VAT declaration, but does not need to pay it.
    – Babyburger
    Commented May 2, 2021 at 10:33

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I have become more clear on the topic over the course of the past week (with advise from experts in the field).

For the first question: Why do EU countries not pay VAT to non-EU but do pay VAT to EU companies?

A: They actually don't pay it in either case. EU businesses purchasing products or services are exempt from VAT all the time, but the manner of invoicing differs depending on if the company you're purchasing from is located within the EU or not.

If the company you're buying from is within the EU, then they charge you VAT and you recover it when filing your taxes. So in the end it balances out.

If the company you're buying from is outside of the EU, then they do not charge you VAT. You must indicate it when filing your taxes, but you don't pay it in this case either.

It's different if you're buying products/services as an European end user as opposed to a corporate business, but that deserves a topic of its own.

Second question: Do I still pay corporate tax in Hong Kong when earning money from a foreign business?

A: It's unfortunately not that easy anymore to enjoy the Offshore Exemption Tax since 2019. There was a lot of abuse going on and the rules have become pretty strict about that. You only enjoy the 0% tax rate if you paid corporate tax in another country. You don't get away with paying no taxes anywhere, which is both logical and ethical.

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