If we´re interested in the offshore world and take a look at some blogs, we´ll soon come across many articles discussing the advantages of setting up a business in Hong Kong or Delaware.

We´ll find lots of different success stories and we´ll want to imitate them. In principle, there is nothing wrong with that and having a company in Delaware can be very advantageous, but only if we consider the fact that times change, as well as characteristics and fiscal requirements.

The problem with business bank accounts for companies in Hong Kong

The biggest weakness of LLCs in Delaware and Limiteds in Hong Kong is nothing to do with the legal, tax, or even the financial side of things, it´s bank accounts.

But, what exactly is the problem?

The problem isn´t so serious in the case of the Hong Kong Ltd since these companies will still find it very easy to open business accounts throughout the world. But that is precisely the problem, all over the world, just not in Hong Kong.

And this is a problem, because generally one of the decisive reasons for choosing a location over another is the strength of the banks in that jurisdiction. But whats even more important is having payment services available, such as Paypal.

If you have a company in Hong Kong but you can´t use Paypal to receive payments from your customers (remember that, as we previously mentioned in our article about payment services, Paypal only allows you to withdraw funds to accounts in the country of residence, in this case in Hong Kong) you end up with a company that doesn´t pay taxes, but can´t receive payments from customers either.

Although its possible for a person to have several Paypal accounts, precisely in regards to money flows from tax havens alarm bells start to ring and your Paypal account can end up being frozen, especially when it comes to large amounts of money (another option would be to set up a payment subsidiary).

So, if you wanted to avoid problems with your company in Hong Kong you would have to get a business account. You could therefore process the payments directly, with more ease and less expenses, instead of doing it through third parties.

And, why is it almost impossible to obtain bank accounts in Hong Kong? There are several reasons for this.

Until not very long ago everything was relatively simple. Although you had to go in person, the norm was always going and talking to a banker and showing him your business plan. Major banks such as HSBC opened business accounts to companies without major difficulties, including for offshore companies outside of Hong Kong.

Since the beginning of 2016, HSBC and many other banks have greatly increased their requirements and conditions. Before, if you had a business with a turnover of around $50,000, you could try to obtain a business account. These days, don´t even bother trying if you have a turnover of less than 500,000 dollars (except for activities in China, for example).

If having a deposit of only $1000 in the bank was enough to open a private account before, today you´ll need around $100,000 to be taken seriously and to be allowed to open one.

We can only speculate about the reasons for this relatively abrupt change in requirements. On the one hand, it could be due to the Common Reporting Standard. Customers with businesses in industries that are more difficult to control such as the “internet” require greater effort.

If this is seen in the context of the massive losses incurred by major banks in the financial center of Hong Kong, such as HSBC and Standard Chartered, we could interpret this as them having decided to limit their clientele to only those with more profitable businesses.

After all, thanks to its popularity, banks in Hong Kong don´t have customer problems. Even if they made their requirements ten times stricter, there would still be more than enough international companies easily meeting this new criteria.

All in all, small entrepreneurs or freelancers have limited options of opening an account.

Yes, you can, if you have a Limited company in Hong Kong, open a bank account in Europe, in the Caribbean or even in other Asian countries.

With the Hong Kong Ltd being an offshore company with a good reputation, it generally doesn´t present any great difficulties. But the fundamental question that I want to ask you is this; if you have a company in Hong Kong but open your company bank accounts in other countries, what advantages do you have compared to other offshore business solutions?

Comparatively, a Hong Kong Limited company is, after all, more expensive to maintain, as well as the fact that you must keep accounts and being subject to audits.

The impossibility of deducting invoices in some countries (if you don’t have a real office in Hong Kong), the lack of double taxation agreements with certain important countries and the limited possibility of using payment gateways such as Paypal, Stripe, Braintree or Paymill (since you can´t open business accounts in the country) considerably increases expenses due to the need for additional corporate structures.

So, if we can´t open a bank account in Hong Kong, we’d better set up our offshore company somewhere else. Maybe an LLC in Delaware, as one might think of first …

[We have partnered with an agency that can help you set up a business in Hong Kong with a bank account in your own country. If you think you may be interested, read this article in full, especially the section on when setting up a business in Hong Kong may make sense and contact us.]

The problem with business bank accounts with LLC´s in Delaware

At first glance, Delaware may seem much more advantageous than Hong Kong. Limited Liability Companies are not only tax-free (as long as it doesn´t have income in the United States), but, in practice, they also aren´t required to keep accounts.

It´s quite anonymous (at least for countries outside of the USA), it’s very easy to set up and relatively cheap, (you can set it up for around 1,500 dollars), and, with 550 USD per year for maintenance, it costs a fraction of what would be expected in Hong Kong.

In principle you won´t have problems with payment providers such as Stripe and Paypal, thanks to its location in the US. Nor will you have problems with billing European customers. The largest tax haven in the world, the United States, is not considered as such.

The problem of business accounts also arises in the case of Delaware companies, although in another way.

If you wanted to open a business account for your LLC outside of the USA, the Foreign Account Tax Compliance Act (FATCA) would make your life very complicated.  Banks around the world no longer want to have Americans among their customers (this includes both companies and individuals), and, of course, no LLC companies either, even if they´re managed by non-resident foreigners.

This makes it almost impossible to open a business account for an LLC outside of the US.  Given the additional expenses of reporting, it will only be worthwhile for banks to consider opening an account for you if you have a high sales volume (approximately $200,000) or deposits ($50,000).

Now that FATCA has been around for some time, banks are beginning to adapt and to open up little by little. But it will still be a while until small LLCs also have the opportunity to open bank accounts.

Apart from all this, banks in the United States require physical presence, so you will have to be able to go to the country and complete the procedures in person.

And why not an account in the United States? This will also be difficult for an LLC to obtain if it’s a pure shell company.

US banks require a fiscal number (EIN) and generally require proof of economic activity within the country. But this is exactly what you want to avoid; having economic activity in the US.

Selling in the US would mean that the LLC would be subject to taxes on profits obtained there (30%) and would have to keep their accounting of all the income obtained worldwide.

In order to open an account there you would have to go in person, which means you would have to travel to the USA.

So, with the requirement of having to keep accounts and pay taxes, and the need to have a high income in order to be able to even open an account, Delaware will have lost its greatest advantage. Just like in the case of Hong Kong, we can find better alternatives.

In any case, a solution is usually to use a private bank account and link it with Paypal or Stripe, there are also some fintech companies that can be useful. Although Paypal also offers cheque payments in the USA, this is almost impossible to carry out.

If you want to set up an LLC in Delaware it doesn´t have to be your best option, you can find exactly the same advantages for a much cheaper price in the State of Wyoming. You only pay $500 there instead of $1,500 for the establishment of a company and you can set it up along with a bank account. The only advantage of Delaware resides in a more flexible corporate law, which is mainly aimed at stock quotes however, and is something that online entrepreneurs never usually need.

By the way, one aspect that many company formation agents conceal is that if you own a US LLC, each economic beneficiary must declare the foreign accounts that they own around the world once a year (from a combined sum of 10,000). This is the case even if the entrepreneur has nothing to do with the US.

As a matter of fact, since the US already has all your financial information without you giving it to them, the FBAR form shouldn´t be a major problem. You can complete it online once a year and it only takes a few minutes, but it´s important to take it into account.

Cases in which a company in Hong Kong or Delaware still make sense

As we previously mentioned, setting up a company in Hong Kong is a good idea in certain cases. For example, its a good idea if you have Asian customers and you want a reputable company (although in this case a company in Malaysia would probably be a better idea) or if you trade with cryptocurrency.

An Ltd in Hong Kong may also be worth it for the import and export businesses of merchandise from China. In these cases, in addition to that, the opening of business bank accounts in Hong Kong is usually much easier.

A Hong Kong Limited can be useful to you if you can charge customers through transfers and they don´t need to pay with card. You won´t pay taxes while you´re selling abroad, but you will have to keep complex accounting and your company will be submitted to audits.

In short, if you don´t have a very obvious reason to do it, don´t forget that there are other alternatives that are generally cheaper than Hong Kong.

Undoubtedly, the typical digital nomad should stay away from a Hong Kong company and consider one of the many alternative solutions that you can read about in Tax Free Today.

As for Delaware, it may be a good option as long as you don´t sell in the US market. Although remember that in this case, Wyoming is also an equally valid option.

It´s worth hiring an agency to open a business account. Although there is never a full guarantee that you´ll be able to open a bank account, the possibilities considerably increase if you have the necessary contacts.

And that was our article for today. As you already know, you can book a consultation to discuss entreprise creation and how this would affect your personal situation, or if you already know all this we can help you with the direct creation of your business in Delaware, Wyoming or Hong Kong, get in touch with us for help with this.