MANY people have requested further details on Hong Kong service companies since a recent Money Matters article on tax planning. I am grateful in particular to Tyndall-FK Corporate Services for contacting Money Matters directly with much of the information contained below. A Hong Kong service company is a Hong Kong incorporated company that employs one or more staff and provides the services of those staff to a separate business organisation. For professional reasons, some businesses have to operate as partnerships with unlimited liability. If these professional partnerships get together to establish service companies to provide management services to the partnership, the costs are then tax deductible. The service company employs the equity partners of the firm, which permits them to enjoy favourable tax treatment in respect of personal living costs. The concept has been extended over the years to provide the services of not only partners, but also senior employees. In order to give maximum flexibility it is also not uncommon for each partner or senior employee to have his own service company and to provide his services to the partnership or business organisation through that company. The cost associated with employing a given individual must be reasonable in context to the contribution he makes to his employer. Subject to that, any costs should be fully tax deductible to his employer (the service company that provides services to therelevant business organisation). In turn all payments, subject to certain specific exceptions, made to an employee by the service company in connection with his employment will be subject to salaries tax. The major exceptions to this rule are accommodation; holiday travel; car; superannuation; and other benefits. In general terms, an employee is not subject to salaries tax on the amount paid by the service company in respect of personal accommodation. But his total salary is increased by a notional figure, normally 10 per cent, to reflect the provision of accommodation. The cost to the service company of providing holiday travel to both the employee and his family is specifically exempt from salaries tax and, within reasonable limits, is fully tax deductible. As long as a car is owned by the service company, the cost should be fully tax depreciable to the service company without any tax being levied on the employee. Running costs - such as insurance and petrol, providing they are directly borne by the servicecompany - should also be fully tax deductible without any tax being payable by the employee. Reasonable levels of superannuation fund contributions are deductible to the service company without any immediate tax being payable by the employee. Some restrictions do apply to the level of deductibility in respect of contributions to an ''approved'' superannuation fund. No such restrictions apply to an ''unapproved'' superannuation fund but, as and when the service company's contributions are paidout to the employee, a tax charge arises. However, unapproved schemes will be phased out over the next two years. The general rule in Hong Kong is that the cost of a benefit provided directly by the employer is not subject to salaries tax despite the employee possibly receiving an economic benefit. It is, however, crucial that the contractual arrangements in respect of the benefit be between the provider of services and the service company, with payments being made directly by the service company. It should be noted that when the service company provides education benefits to an employee's children, the cost will be subject to salaries tax whatever contractual arrangements are made between the company, the employee and the school concerned. There is little point in going to the expense of having a service company if the ultimate employing organisation is prepared to enter into highly flexible remuneration packages with its employees. However, the cost of administering such a package is high and few organisations have a policy of adopting personalised remuneration packages, even for senior executives. The use of a service company permits a senior employee effectively to design his ownbenefits package and to make a significant Hong Kong tax saving. The arrangements must be properly documented and administered. Accurate accounts, which are subject to a statutory audit, must be maintained. The level of benefits made available by the service company must be carefully reviewed to ensure that they are reasonable and, where superannuation is funded by the service company, it is essential the scheme is also properly administered. While service companies can become substantially attractive they must be established and operated correctly. If you have any queries or practices you wish to have answered or investigated, please contact me confidentially by facsimile on 565-1423. The need, therefore, to solicit competent ongoing advice is of paramount importance and this is not an occasion to be ''cent wise, dollar foolish''.