(This article was published on https://www.pwfo.org/blog/Various-Tax-Aspects-on-Doing-Business-in-Hong-Kong)
The tax regime of HK is on a territorial basis i.e., only profits derived from Hong Kong are taxable. Whether part or all of the profits can claim themselves to be offshore and hence exempt from paying HK corporate tax is subject to the consent of the Inland Revenue Department (IRD). Companies may need to disclose their tax residency if they wish to enjoy tax exemption in HK. Simply put, zero tax is not feasible.
HK has recently introduced a 2-tier corporate tax system. The first HK$2 million of profit is taxed at 8.25% with the balance 16.5%. Filing of corporate tax return is a yearly exercise. Although the fiscal year end of the Government of the HK Special Administrative Region (HKSAR) is the 31 March each year, companies can pick any date as their fiscal year end date. If a company has not commenced business since the date of incorporation or is suffering losses, IRD may only issue tax returns every 3 years to enquire if it has commenced business or its financial figures have returned to the black. Taxpayers have an obligation to inform the IRD once their company starts making profits for IRD to issue corporate tax return for completion and filing. One of the reasons why foreign businesses favor establishing legal entities in HK is its simple and easily managed tax system.
There is a provisional tax payment system here. If a company has profits, the tax payment demand note will include the actual tax based on the profits made and the assessed provisional tax amount. The provisional tax payment will be used to offset the subsequent tax payment. Corporate tax is the primary source of revenue for the HKSAR.
For employees, there is a need to file Tax Return – Individuals and pay salaries tax for remuneration derived from HK. The return is on an annual basis and issued around April/May. The tax rate is calculated at progressive rates from 2% to 17% or at a standard rate of 15%, whichever is the lower. For married couples, they can select separate or joint assessment. Again, provisional tax payment is also applicable. This is one of the top revenues for our government.
Individuals may also carry-on business in the form of sole proprietorship or form partnerships with others. The tax rate is 15%. Sole proprietorship / partnership does not afford legal shield to their owner(s). Sizable business is usually conducted by companies incorporated in HK or foreign companies registered as non-Hong Kong companies.
Purchase and sale of shares is subject to a 0.26% stamp duty on the higher of the consideration or the fair market value of the shares. Stamp duty on the conveyancing of property ranges from 1.5% to 8.5%. Buyer’s stamp duty and special stamp duty may also be payable on residential properties depending on the status of the buyer / seller e.g., first time buyer or holding period of the seller. HKSAR also receives premium for the sale of land to property developers. Stamp duty and land premium constitute another major source of revenue for the HKSAR. Rental and property prices seem to be adjusting downward in recent months. This source of revenue may decrease in the coming years.
As HK is an international financial center, all the international tax initiatives are also adopted here. The automatic exchange of financial information and common reporting standard are now in force. Minimum tax rate proposed by OECD is to be introduced in 2024, the earliest.
HK has been expanding the number of Double Taxation Agreements to ensure that companies and / or citizens of other countries conducting business or working in HK have clear definition of their tax rights also to avoid tax evasion. There is currently 40+ agreements in place and more are under negotiations.
HK also aims to become an innovation and technological world-class city. Re-industrialization is on full steam. In support of these objectives, Research & Development (R&D) expenditures are given more tax credits. Qualified R&D expenses may enjoy tax deduction of 300% for the first HK$2 million and 200% for the balance. These expenses include payments made to designated local research institutions approved by the Innovation and Technology Commission and some other consumable items. Staff costs could also be included. Other R&D expenditures not falling into this category still enjoy 100% deduction.
In addition to the HK Science & Technology Park and Cyberport, the building development of the HK-Shenzhen Innovation and Technology Park (HSITP) as well as the San Tin Technopole is under way. HK$10 billion has been earmarked for the Innolife Healthtech Hub in HSITP. The nearby San Tin Technopole will add to the size and strength of HSITP. Startups and enterprises to operate in these areas could make use of the R&D tax deduction to a much greater extent to help them build up and scale up
The tax base of HK is rather narrow. There is no withholding tax, sales tax nor inheritance tax. Disposal of fixed assets of a capital nature is not chargeable to tax. Dividend receipts are not subject to tax. In October 2021, European Union (EU) put HK into the watchlist because of the possibility of double non-taxation. Passive income – dividends, disposal gains, interest and intellectual properties income – has to be re-examined to ensure that tax is levied. The HKSAR has proposed a foreign source income exemption regime (Regime) to handle the EU concerns. Amendment bill is expected to be published in October 2022 to make this Regime effective in January 2023. Further details are expected from the IRD towards the end of this year on the interpretation and implementation of this Regime.
Useful link: https://www.ird.gov.hk/eng/welcome.htm
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