As one of the world’s most business-friendly jurisdictions, Hong Kong is famous for its easy and low-tax system. Income tax rates, the corporation tax system, the profits tax return, and tax benefits for businesses in Hong Kong are all covered extensively in this article, so keep reading.
The official name for the Hong Kong tax system is profit tax, which is based on the territorial and flat-rate premise. Hong Kong has also been bolstered as an investment destination in the Asia-Pacific region, and its competitiveness has been enhanced by introduction tax incentives.
Types of Corporate Taxes
Territorial Corporate Tax System
Hong Kong tax rate is based on territory. To rephrase, only earnings from activities performed in Hong Kong will be subject to taxation. Earnings from a Hong Kong source are exempt from profits tax. Therefore, regardless of whether the earnings have been sent to Hong Kong Kong, if you run a company in Hong Kong but are made in another country, you won’t have to pay gains tax on them.
There is no differentiation between permanent residents and transients under the territorial concept. There are no taxes on foreign earnings, even if you reside there. The same holds for non-residents: they must pay the Hong Kong profits tax if they make money there. Read more about the full guide to paying taxes in Hong Kong in 2024.
Flat Corporate Tax Rate
Starting with the 2018–2019 fiscal year, a two-tier system of profit tax rates will be in place. Companies in Hong Kong may choose from two different profit tax rates.
Single-Tier Corporate Tax System
Companies are subject to a 16.5% tax on their assessable earnings under the Single-Tier Corporate Tax System. In contrast, sole proprietors and small enterprises are subject to a 15% tax.
Two-Tier Profits Tax Regime
The tax rate is reduced for the first $2 million in assessable profits under the Two-Tier Profits Tax Regime, which applies to corporations and unincorporated entities. To alleviate the financial strain on most taxpaying small and medium-sized businesses (SMEs), a two -tier profits tax system was implemented beginning with the 2018–2019 assessment year (ie, on a taxpayer’s financial year concluding between 1 April 2018 and 31 March 2019).
A company will be subject to a Hong Kong tax rate of half its present rate (ie, 8.25%) on its first $2 million in earnings, while the previous rate of 16.5% will apply to all further income.
Businesses that do not have a legal presence in Hong Kong are subject to a tax rate of 15% on all earnings, with the first $2 million of income being taxed at a rate half of the present rate (7.5%).
If there is a collection of “connected entities,” only one may take advantage of the two-tier tariffs. To do this, the group must determine which entity stands to gain and then cast their ballots in that direction.
Who Pay Taxes in Hong Kong? Corporate Edition
Investments
There is no need to pay taxes on interest that does not come from investing company money and on dividends in general.
Interest and dividends given to non-residents are not subject to withholding taxes in Hong Kong. A two-tiered profits tax rates regime applies to royalties given to people who are not residents for the use of intellectual property owned in Hong Kong. If the individuals have been elected to be subject to this regime, the first HKD2 million of royalty income is subject to an operational withholding tax rate of 2.25%, and the remaining royalty income is subject to 4.5%.
Royalties paid out are subject to a higher withholding tax rate of 7.5% if the receiver is related to the payer and 15% if the intellectual property rights in question were formerly owned by an individual engaged in a profession, commerce, or business in Hong Kong (as defined by the two-tiered profits tax regime).
Business Revenue
Profits tax is levied on income that originates in or is generated from Hong Kong by anybody engaged in a profession, trade, or business in Hong Kong. To calculate taxable income, GAAP is used, with the necessary modifications made by the tax code and principles established by case law.
Individuals may deduct business losses from future income in the same business or from additional sources of income within personal assessment; the rules are the same for both types of deductions. You can’t get your money back in either situation.
An individual’s rental income is subject to property tax instead of profits tax if the rental operations do not form a company. Rental income is subject to a 15% property tax rate, with a 20% standard deduction already deducted.
0% Corporate Tax For Offshore Companies
The idea that a government may make money by providing services is the basis of Hong Kong’s territorial tax system. This is why HKSAR only applies its tax system to money that originates from inside the territory. Therefore, it is not possible to establish a trading corporation in Hong Kong that purchases items from Bangladesh and then sells them to markets in the European Union without incurring taxes in Hong Kong.
Land value generates substantial cash for Hong Kong, allowing them to provide 0% tax for offshore corporations. The People’s Republic of China owns all of the land in Hong Kong and only grants leases on it. When the value of a property increases, the amount that leaseholders are required to pay also increases. This ensures a steady revenue stream for the state and keeps incorporation costs low for prospective business owners in the area.
To get the 0% tax rate while conducting business abroad, you must show the Inland Revenue Department (IRD), Hong Kong’s tax agency, that you’re running your company entirely outside the country. “Offshore” here denotes somewhere other than Hong Kong .
A more thorough examination by the tax authorities is part of the qualifying process, which may take up to six months. But keep in mind that 0% corporation tax is the payoff for handling some scrutiny.
The primary concern of the IRD is ensuring that your company is not getting any advantages from or selling to any local businesses or people in Hong Kong. That includes providing evidence that you are not doing business in Hong Kong or have any physical presence there.
Tax Incentives in Hong Kong
Hong Kong offers a profit tax exemption to certain types of funds, including those operating onshore and offshore. The following are examples of tax incentives:
- A 100% write-off for new spending on plant and equipment expressly connected to manufacturing and computer hardware and software held by the end-users is offered as an inducement for investment in high-value manufacturing enterprises.
- A tax break for businesses investing in building renovations or refurbishments for five years.
- Mutual funds and trusts are eligible for tax advantages.
- Interest earned on deposits made in Hong Kong with an approved institution after June 22, 1998, is free from taxes (this exemption does not apply to interest received or accrued to financial institutions, however).
- A one-hundred percent tax break for green cars and other gear used to preserve the environment
- Capital expenditures in connection with environmental protection facilities are eligible for a full 100% profits tax deduction if incurred in an assessment year starting on or after 1 April 2018.
- Investments in environmentally friendly automobiles are eligible for a full tax refund in the fiscal year of buying, beginning with the assessment year. 2010 and 2011
- As of the assessment year, captive insurers are eligible for a tax break that reduces the profits tax on offshore risk insurance operations by half from 2013–14
- Qualifying aircraft lessors and managers are eligible to have half of their qualifying earnings taxed at the corporate gains Hong Kong tax rate as of 1 April 2017. To make up for not being able to claim depreciation allowances on their aircraft, qualified aircraft lessors may get a tax break that reduces their taxable income by 20% of the net lease fees.
- Starting from 1 April 2019, all funds based in Hong Kong are eligible for a profit tax exemption on certain asset transactions, provided they meet certain criteria. This applies independently of the fund’s construction, the place of central administration and control, size, or purpose . Moreover, a fund’s investments in private enterprises, whether domestic or international, are excluded from earnings tax.
- Businesses can deduct the cost of intellectual property (IP) rights (such as trademarks, expertise, copyrights, registered layouts, registered trademarks, intellectual property (IP) rights in plant varieties, IP rights in performances, and IP rights in the topography of integrated circuits) from their capital expenditures as of April 1, 2018.
Hong Kong Tax Payment Procedures
Typically, individuals are asked to fill out composite tax forms, and they are obligated to disclose all of their income that is liable for profits tax, salary tax, or property tax. Each spouse in a married relationship is required by law to pay their income tax on their salary. But suppose a married couple doesn’t want to pay taxes individually. In that case, they may choose to have their earnings evaluated jointly or, if it’s better for them, have all their incomes pooled under personal assessment.
Except for taxpayers planning to leave Hong Kong for more than a month (unrelated to their job), no withholding or payroll taxes need to be paid to pay wages tax. The provisional tax system is the backbone of the profit, property, and salary tax systems. Estimated at 75% of the tax liability from the previous year, the provisional assessment for the current year is due in two installments: the first, in the last quarter of the applicable tax year, is for the remaining 25% of the tax liability, and the second, three months later, is for the remaining 25%.
A final tax assessment is provided when the real income for the tax year is ascertained, which allows for the credit of any provisional tax that has already been paid. The final tax assessment and the provisional assessment for the subsequent year are combined. Payment of the final tax and the 75% installment of the provisional tax for the subsequent year is due simultaneously.
Filling Hong Kong Corporate Tax Rate Return
On the first business day of April annually, the Hong Kong Inland Revenue Department (IRD) typically releases the returns for corporate profits tax. In most cases, a business will request a deadline extension no later than one month after receiving the Profit Tax Return ( PTR).
- Typical releasing date: first business day in April of the evaluation year following
- Year ended for accounting: From April 1st through November 30th, December 1st through December 31st, and January 1st through March 31st
- Unrepresented or represented cases: May 2, 2 May / 15 August of each year, and 2 May / 15 November often have attorneys or no attorneys at all.
- Payment by the specified date on the assessment notice, typically between November and April of the year after the return’s issuance.
Income Tax Audit Exemption Requirements
A company is excused from filing an audited financial statement with its profit and loss statement if it meets the following criteria:
- Dormant companies, as defined by the Companies Ordinance Hong Kong( those with “no relevant accounting transactions” during a fiscal year), are granted an exemption from audit preparation requirements solely upon filing a special resolution with the Company Registry to apply for official dormant status .
- Additionally, corporations incorporated in a jurisdiction where the laws do not mandate audited accounts are exempt from this requirement.
Suppose the following details are included with the return. In that case, the Hong Kong branch of an international corporation may process it:
- The foreign company’s place of incorporation, whether the company’s worldwide accounts are required to be audited by law, the results of any such audits, a synopsis of the accounting and financial records kept by the Hong Kong branch, and a certified copy of those records
- An audit is still obligatory for small companies, although they are exempt from filing with the Tax Authority if their total gross revenue for the base period is below HKD two million.
Withholding Tax Rules
Withholding tax is applied to the assessable earnings of non-resident performers’ royalties and fees for their performances in Hong Kong. Interest and dividends are not subject to withholding taxes.
Any money that a non-resident performer or sportsman makes from performances in Hong Kong, whether for a business event or not, is subject to the Hong Kong Profits Tax.
As part of this performance:
- Any appearance made by the athlete or entertainer to promote such an event;
- Any activities in which the athlete or entertainer takes part, whether live or recorded, in creating sound recordings, movies, videos, radio, or television.
Relief from Double Taxation
The term ” double taxation ” describes the situation in which a person’s income is liable to taxes in both their home nation and the country from whence they earned it. There are treaties and agreements called double taxation agreements to promote investment across jurisdictions and remove double taxation agreements.
Local businesses will not be double taxed on money they make outside of Hong Kong since the territorial system of taxes is in place there. This means that only money made in Hong Kong is subject to taxes.
In addition, you may claim as a tax deduction any money you pay in taxes outside of Hong Kong on money that you have to pay in taxes here. Further tax reliefs and lower rates are provided via Hong Kong’s network of more than 35 double tax treaties .
Tax Treatment of Losses
A company that engages in more than one trade may have its losses from one trade offset against its earnings from another trade. However, if a loss is generated in an accounting year, it may only be carried forward and used against future profits of that trade .
Group alleviation of losses, or the transfer of losses across firms in the same corporate group, is not allowed in Hong Kong. It is not possible to recoup losses. You cannot deduct capital loss expenditures.
There are specific rules regarding the differentiation of losses between concessionary and non-concessional trading operations for profits or liable to a concessionary tax rate. A person may deduct their losses trading loss from their overall income if they claim Personal Assessment and suffer a loss.
Conclusion – Low Hong Kong Tax Rates
Hong Kong is a popular location for companies to do business and for foreigners to place their money due to its advantageous Hong Kong tax system . As a result of its advantageous tax structure and persistent commitment to protecting investor privacy, Hong Kong has grown into one of the most prominent financial centers in the world.
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