Hong Kong provides tax advantages such as a simple tax regime, an opportunity to gain tax-free profits, and low taxation rates for companies engaging in the business world.
As a great location for international businesses searching for a tax-friendly environment, Hong Kong is no doubt an exceptional choice.
5 Major Features of the Taxation System in Hong Kong
Hong Kong’s taxation system is based on source and not on a residency concept. Unlike other countries such as the United States, Canada and China, which tax their tax residents on worldwide income, Hong Kong has a simple tax system in which only income arising in or derived from Hong Kong is taxable. Offshore income is not taxable. The distinction between resident and non-resident companies is generally not relevant under the Hong Kong taxation system.
2、Low rate of taxation
Hong Kong profits tax rate is 16.5%, which is one of the lowest in the world. Effective from the year of assessment 2018/19, the two-tiered profits tax rates regime is enacted. The first HK$2 million of profits is taxed at 8.25%, and the remaining profits continue to be taxed at 16.5%, with certain exceptions.
3、Simple tax administration
The tax administration is very simple in Hong Kong. There are only three types of direct taxes in Hong Kong, namely, profits tax, salaries tax and property tax. There is no turnover tax, i.e. VAT or goods and services tax, which is common in most developed countries.
4、No capital tax regime
5、No withholding tax system
Hong Kong Company Income Tax Planning
Opportunities Hong Kong Offshore Profit Tax Exemption
Only profits which have a source in Hong Kong are taxable here. Profits sourced elsewhere are notsubject to Hong Kong Profits Tax. The principle itself is very clear but its application in particularcases can be, at times, contentious.
To clarify the operation of the principle, we have prepared thissimple guide on the territorial source principle of taxation.
Hong Kong Companies Income sourced outside Hong Kong are not taxable
The Courts have over the years considered the subject of the source of profits. The followingprinciples have emerged from authoritative court decisions.
Matter of fact
The question of locality of profits is a hard, practical matter of fact. No universal rule can apply toevery scenario. Whether profits arise in or are derived from Hong Kong depends on the nature ofthe profits and of the transactions which give rise to such profits.
The operations test
The broad guiding principle is that one looks to see what the taxpayer has done to earn the profitsin question and where he has done it. In other words, the proper approach is to identify theoperations which produced the relevant profits and ascertain where those operations took place.The source of profits must be attributed to the operations of the taxpayer which produce them andnot to the operations of other members of the taxpayer’s group.
Antecedent or incidental activities
The relevant operations do not comprise the whole of the taxpayer’s activities. The focus is on establishing the geographical location of the taxpayer’s profit-producing transactions as distinct from activities antecedent or incidental to those transactions.
Place where decision is made
The place where the day-to-day investment/business decisions take place is only one factor whichhas to be taken into account in determining the source of profits. It is not usually the deciding factor.
Gross profits from transactions
The distinction between Hong Kong profits and offshore profits is made by reference to the grossprofits arising from individual transactions
Business presence overseas
A business may maintain a presence overseas which earns profits outside Hong Kong but theabsence of a business presence overseas does not, of itself, mean that all the profits of a HongKong business invariably arise in or are derived from Hong Kong. However, in the vast majority ofcases where the principal place of business is located in Hong Kong and there is no businesspresence overseas, profits earned by that business are likely to be chargeable to Profits Tax in HongKong.
Domestic Tax Planning Strategies
Capital gain claim
Financial year-end date
Interest income taxability
Utilization of companies with tax losses
Apportionment of onshore and offshore profits and expenses
Segregation of onshore and offshore businesses and profits
Capital expenditure timing and classification
Expenses deduction, etc
International Tax Planning Strategies
Risks and taxation exposure segregation
Holding structures, etc
Tax Planning is very complicated
operation in Hong Kong
If you wish to explore the subject in greater depth,
we recommend that you contact our consultant