Although Hong Kong is considered by many to be an ‘offshore’ jurisdiction this is not the how the government classifies it. It is instead a low tax area with a territorial tax system. The tax laws are relatively simple therefore Hong Kong can be summarised as having an advantageous low tax rate coupled with a territorial tax system.
Corporation tax: The corporation tax rate is currently 16.5%.
Income tax: Hong Kong operates territorial taxation principle so any income earned outside of Hong Kong is not a subject to Hong Kong income tax. Taxpayers are taxed not on a residence status but on territorial principle i.e.: where profit was earned.
Foreign source income is exempt from income tax in Hong Kong. Income is not considered to be derived from Hong Kong if:
- A contract is concluded and signed outside of Hong Kong.
- Services are rendered outside of Hong Kong.
- Capital is employed outside of Hong Kong.
- Title of goods is passed outside of Hong Kong.
- Payment of expenses incurred in provision of services or delivery of goods is done outside of Hong Kong.
- The location where goods are stored and maintained is outside of Hong Kong.
- Hong Kong income and deemed Hong Kong source income is subject to income tax.
If any of the above activities are performed in Hong Kong then the revenue generated will be classified as Hong Kong income and therefore subject to income tax.
It is worth noting that the purchase or sales of commodities manufactured in Hong Kong is treated as a Hong Kong based income. Trade in commodities is considered as wholly offshore or onshore for a tax assessment purpose so even a small amount of trading activity in Hong Kong leads to the whole profit classified as originating onshore and therefore subject to Hong Kong income tax. With regards to the issue of agency agreements, the source of income is where duties are performed.
Capital gain tax (CGT): There is no capital gains tax in Hong Kong.
Withholding tax: Royalty income received from Hong Kong source is subject to income tax however generally there is no withholding tax on interest paid to non-residents.
Dividends: Dividend income is excluded from income tax and is no withholding tax on outgoing dividends.
Capital duties: Capital duty on increase of share capital is 0.01%.
International aspects of Hong Kong taxation:
- Anti-avoidance regulation: Hong Kong tax code replicates the Australian Income tax model for anti-avoidance rules.
- Transfer pricing: There is specific transfer pricing legislation in Hong Kong which is based on 1918 UK tax regulation.
Double taxation treaties:
Until June 2001 Hong Kong had no comprehensive double taxation treaties in place. This was due to the territorial tax system that operates whereby only income / profit sourced in Hong Kong is subject is subject to tax. Income derived from outside Hong Kong is not taxed in Hong Kong. This principle therefore negates the need for double taxation treaties.
The Hong Kong Special Administrative Region Government however does recognise that there are merits in concluding double taxation agreements as it will provide advantages such as a greater certainty to investors on taxing rights, help investors to assess potential tax liabilities on certain economic activities and provide an incentive for overseas companies to do business in Hong Kong. In April 2010 the Commissioner of Inland Revenue of Hong Kong stated that the territory had entered into a new phase and would be actively be pursuing agreeing double taxation agreements with a number of countries. Under Article 151 of the Basic Law the territory can negotiate its own double taxation treaties independently from China as Hong Kong has the right to maintain an independent taxation system free from interference from the mainland until 2047.
Double taxation agreements are currently in force between Hong Kong and the following countries:
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In March 2010 Hong Kong signed treaties with Brunei, the Netherlands and Indonesia.
Double taxation agreements between Hong Kong and the following countries await ratification: Austria, Hungary, Ireland, Kuwait and the UK.
If you would like additional information on Hong Kong double taxation agreements please contact us.
Annual reporting requirements:
- All Hong Kong companies are required to keep accounts.
- Accounts are required to be audited on an annual basis.
Opening a bank account in Hong Kong:
Eltoma Coporate Services work with the following Hong Kong banks: