Anyone who is interested in setting up a company in Hong Kong will benefit from learning about the taxation system in the territory. Below please find five main facts about the matter.
1. There is no currency control in Hong Kong
This means that there are no requirements nor any restrictions as far as foreign investments are concerned. Foreign investors can bring as much money as they like to Hong Kong and they can also disinvest any amounts. The Inland Revenue Department (IRD) is in charge of corporate taxation in the country.
2. A single tier tax system in applied in Hong Kong
Companies pay taxes on their incomes only once. When dividends are distributed to the shareholders, no taxes are levied. For this reason, there is no double taxation problem in Hong Kong. Nevertheless, the country has signed more than forty bilateral treaties on avoidance of double taxation with various states. These lessen the tax burden on transboundary deals. Some of the countries that Hong Kong has signed treaties with include Luxemburg, Korea, Hungary, Latvia, the UAE, Indonesia, Great Britain, Malta, Switzerland, Belarus, Russia, and China.
No VAT is levied in Hong Kong and the capital gains tax is levied only when disposal of assets has a commercial character.
3. Territorial taxation system is applied in Hong Kong
The corporate tax rates are as follows in the country:
- 8.25% on the first 2 million Hong Kong dollars (US$ 285,000) in profit;
- 16.5% on the profit above this amount.
Sole proprietors and partnership pay 7.5% and 15%, correspondingly.
The profit is calculated after all the costs have been deducted. A serious advantage of the Hong Kong tax system is that various kinds of costs can be deducted. There include but are not limited to the following ones:
- Office and other space rent and repairs;
- Purchase of equipment especially if you buy energy saving equipment or some equipment that contributes to environmental protection in any way helping to reduce air pollution, for example;
- Insurance premiums;
- Advertisement costs;
- Contributions to the pension fund;
- Personnel salaries and training costs;
- Depreciation costs of many kinds;
- Representation expenses (meetings with clients, directors’ travel, board and lodging and so on).
Besides, the authorities allow deducting up to 75% of the tax charged (but not more than 20,000 Hong Kong dollars). In 2019/ 2020 every company is eligible for up to 100% exemption from corporate tax if the exemption sum does not exceed 20,000 Hong Kong dollars. This means that the first 242,000 Hong Kong dollars earned this financial year is corporate tax exempt.
In addition to that, there are tax incentives for certain industries such as financial services, air and marine shipment, and others. R&D companies can deduct up to 300% of the R&D expenses.
This all is applicable only to the companies that derive profits from their operation in Hong Kong. If a company does no business in the jurisdiction, it can apply for an offshore company status and pay 0% as the corporate tax.
4. There are various criteria that define whether the profit is taxable or not
When deciding if a certain company is taxable, the tax authorities of Hong Kong take several factors into consideration:
- What types of business activities the company is engaged it;
- Whether it has international branches or not;
- The geographical location where the products are manufactured or stored;
- The places where deals are made;
- The locations of the company clients.
If the company deals with clients from Hong Kong, its profits are taxable in any case.
In order to understand if your profit is going to be taxed in Hong Kong, you have to answer the following questions:
- Does the company have an active office or a warehouse in Hong Kong?
- Are the business negotiations conducted in Hong Kong?
- Is the profit derived from Hong Kong clients?
- Has the company made any agreements with Hong Kong-based companies or individuals who are residents of the jurisdiction?
- Does the company sell its products or services via a website while the servers are located in Hong Kong?
If the answer to any of these questions is ‘yes’, your profit is taxable in Hong Kong in all likelihood.
5. The tax-exempt status is nor assigned to companies automatically in Hong Kong
You can apply for the offshore company status when filing the tax declaration. All Hong Kong companies must keep financial records and go under audit every year. The results of the audit serve as the basis for the tax declaration.
Determining if the company falls under the territorial taxation system requirements rests with the auditor. If the auditor finds that the commercial operations of the company are not related to Hong Kong in any way, he or she will conclude that the company has made a zero taxable profit.
When the IRD obtains the auditor’s conclusion, it will assign the offshore company status to the particular company in an official letter. However, the same letter will state that the IRD reserves the right to conduct its own inspection too.
The inspection can be conducted immediately or in a couple of years. Often the IRD inspects several reporting periods in one go. If you successfully pass the first inspection, you should expect the next one in three to five years.
The IRD inspection has the form of a list of questions. The Department will want to find out about the locations of the company office, warehouse, employees, business negotiations, contract execution, and so on.
All the answers must be supported with relevant documents. This is why all Hong Kong companies are obliged to keep all the records for seven years including messages to and from partners and clients.
As Hong Kong has signed international agreements on the combat against money laundering and terrorism financing, the IRD will also ask questions related to illegal activities:
- Why is the company registered in Hong Kong if it carries out business operation in other jurisdictions?
- Where does the company pay taxes if not in Hong Kong?
Company officers can interact with the IRD officials on their own or via a trusted agent. The auditor will normally act as the trusted agent. Please take the matter of selecting the auditor seriously: understanding of your business structure and thus the success of the audit procedures will largely depend on his/ her professionalism and experience.
The taxation system in Hong Kong offers a number of various tax incentives. Please apply for our consultations to understand which of them your company can qualify for. We will be happy to assist you in setting up a company in Hong Kong, opening a corporate account in a suitable bank, and optimizing the tax burden on your business. Please contact us by email, live chat or WhatsApp. We reply promptly!
Does a bank account in Hong Kong have any impact on how the company in the jurisdiction is taxed?
Not in any way. The tax inspection only wants to know where the payments come from and go to. It does not care where the company has the bank account.
How can I pay the corporate tax in Hong Kong?
There are multiple ways to pay the corporate tax in Hong Kong: via an online banking application, by phone, via an ATM, by mail, or via an intermediary. We will gladly help you with choosing the way to pay the corporate tax in Hong Kong.
How can my company become tax-exempt in Hong Kong?
In order to make your company tax-exempt in the jurisdiction you have to supply documents certifying that no business operations have been conducted on the territory of Hong Kong over the reporting period. The auditor will check these documents when submitting the audit report to the tax department. If the company does not pay any taxes in Hong Kong, it must be able to prove that it pays taxes in some other jurisdiction (that is, that it is not evading taxes).