Taxation of Hong Kong companies is based on a territorial source principle rather than based on residency. This translates to individuals and companies incorporated in Hong Kong paying tax only on income or profits earned or sourced in Hong Kong.
The taxation system is relatively straightforward with the following major categories:
- Profits tax capped at 16.5 percent
- Salaries tax maximum of 15 percent
- Property tax 15 percent
There are no taxes on capital gains, no withholding taxes on dividends or interest and no sales taxes.
Profits Tax of Hong Kong Companies
Profits tax of Hong Kong companies is levied at the rate of 16.5% on taxable profits arising in Hong Kong. Deductions are given for expenses incurred in earning assessable profits.
The determination of where profits are earned is the key to whether profits are taxable in Hong Kong. If profits are earned from activities that take place entirely outside of Hong Kong then these profits would not be taxable in Hong Kong. It is possible for certain 'back office' functions to take place in Hong Kong without creating a tax liability; it is even possible for funds to be received and paid out of the company's bank account in Hong Kong without jeopardizing the tax status.
In determining whether a Hong Kong company’s operations are carried out in Hong Kong, all the company’s operations (starting from customers’ enquiries about product prices, place of orders from the customer, place of a purchase order to completion of sale and purchase) will be considered to find out which processes are carried out in and outside Hong Kong. A Hong Kong Trading company will not be subject to Hong Kong taxes if:
- it has no real office in Hong Kong and only maintains a registered office
- it has an overseas office in which the company’s directors and staff are working
- it has no staff in Hong Kong, its staff and directors rarely come to Hong Kong, e.g. about 2 weeks per annum
- it negotiates and concludes contracts with suppliers and customers outside Hong Kong
- shipment does not go through Hong Kong and arrangement of shipment is not done in Hong Kong
- physical inspection of goods is not carried out in Hong Kong
However, any Hong Kong involvement will increase the possibility of being subject to Hong Kong taxes.
It should be noted that the offshore profits tax exemption outlined above is a legal exemption and is not achieved through non-disclosure. There is a well developed case law and it is even possible to obtain advance rulings from the Hong Kong tax authorities.
Whether profits are subject to Hong Kong taxes is a matter of fact and not a matter of law, so it depends on the evidence you can provide. As the Hong Kong Inland Revenue Department will require the Company to submit its audited accounts annually and select some transactions and request all the documents relating to these transactions to be submitted to ensure that all the company’s operations are carried out outside Hong Kong. Therefore, you are recommended to keep all correspondence for all transactions, e.g. faxes, emails, telephone bills, memos of meetings, purchase orders, sales orders, shipping documents, etc., to answer the tax queries of the Tax Authority.
Under the Inland Revenue Ordinance Section 51(1), each company is required to file a profit tax return, together with profits tax computation. Upon receiving the tax assessment it has to pay the tax demanded. In recent years the Inland Revenue Department (IRD) would issue enquiry letters to most of the companies after they receive the profit tax returns. Some of the common questions would be about account disclosure or position adopted in the tax return. During the last years the IRD had more enquiry letters focusing on the offshore claims.