Hong Kong is known for having one of the world’s simplest and most business-friendly tax systems.
This is why so many entrepreneurs choose to start onshore and offshore companies based in Hong Kong.
An offshore company refers to a company that engages in business activities outside of the jurisdiction where the company is incorporated.
An onshore company conducts business where it is incorporated.
A major difference between an offshore company and an onshore company in Hong Kong is that offshore companies are exempt from paying taxes, whereas onshore companies must pay a corporate tax.
Offshore companies are exempt from paying taxes as long as the company’s income is sourced from outside of Hong Kong.
Offshore companies are not permitted to do business with locals.
An onshore company that was incorporated by a non-resident pays a corporate tax rate of 16.5%.
However, in Hong Kong, there are no value-added taxes, sales taxes, or dividend taxes.
There are no capital gains taxes in Hong Kong, which are taxes on non-inventory asset profits.
Dividend income is not taxed, no matter if the dividends are from Hong Kong or from overseas.
There are personal income taxes that start at 2% for a net chargeable income of 1-50,000 HKD and cap at 17% for net chargeable incomes over 200,000 HKD.
Value-Added Tax (VAT), otherwise known as the goods and services tax, is not enforced in Hong Kong, therefore there is also no sales tax.
Hong Kong’s corporate tax system is commonly referred to as profits tax and follows a flat-rate and territorial principle.
There are also a number of tax incentives that have been established in order to make incorporation in Hong Kong more desirable.
Hong Kong’s Territorial Corporate Tax System
Hong Kong’s territorial taxation system establishes that taxes are based on profits that are derived from a trade or business conducted in Hong Kong.
In the case that the company is established within Hong Kong, but the profits are derived from outside of Hong Kong, the corporation does not need to pay a profit tax.
Provisional Profits Tax
As the profits tax is based on the assessable profits of each year, there are sometimes estimated taxes that are issued based on the last year’s profits.
The provisional profits tax should be paid in two separate installments.
75% of the amount should be paid in the first installment, with the last 25% paid after three months.
After the assessable profits of the year have been determined, the company receives a credit for what was paid.
The following year will then have any excess or outstanding amounts added or subtracted to the first installment.
Companies that qualify for the provisional profits tax must apply during the necessary time.
Flat-Rate Corporate Tax System
A flat-rate tax system means that there is only one tax rate.
There are two profit tax rate options for corporations: single-tier and two-tier.
This tax regime taxes corporations at 16.5% based on assessable profits.
Companies that are not incorporated are taxed at 15%.
The double-tier tax regime for incorporated and unincorporated companies lowers the tax rate for those with assessable profits within the first $2 million.
This is mainly useful for small and medium-sized enterprises as it reduces their profit taxes but is only effective from the year of assessment 2018/2019.
Corporations under this tax regime have profits under the first $2 million taxed at only 8.25%.
Any remaining profits above the $2 million will be taxed at 16.5%.
Unincorporated companies will have profits under the first $2 million taxes at 7.5%, while all other profits above the first $2 million will be taxed at 15%.
Tax Incentives in Hong Kong
Hong Kong offers a 100% write-off for expenses from plant and machinery mainly related to manufacturing and computer hardware and software.
This is an incentive for high-value manufacturing businesses investments.
There is a write-off period of five years for expenses for renovating or refurbishing a businesses’ grounds or building.
Expenses from machinery made for environmental protection and environmentally-friendly vehicles receive a 100% deduction.
In addition, there is a 100% deduction on profits tax offered for environmental protection installation costs as long as the expense occurred on or after April 1, 2018.
Tax concessions are offered for mutual funds and trusts.
There are profit tax deductions for expenses earned by companies that sold the intellectual property, mainly patents, copyrights, rights in performances, etc.
Hong Kong-operated funds are eligible for tax exemption on transactions relating to assets that are subject to specific conditions, regardless of structure, size, purpose, or location of management.
Profit tax exemptions are also offered on investments in local and overseas private companies.
Filing Profits and Corporate Tax Returns
Corporate profits tax returns are issued by the Inland Revenue Department (IRD) of Hong Kong in April each year.
Tax payments are generally due between November and April of the following year.
For businesses that are newly registered, 18 months after the date of incorporation, the IRD of Hong Kong will issue profit tax returns.
What is the assessment period for profit taxes in Hong Kong?
The period of assessment for profits takes place between April 1st and March 31st of each year.
Are shareholder profits taxable in Hong Kong?
Dividend taxes are not imposed in Hong Kong; therefore shareholders do not have to pay taxes on any profits and dividends they receive from any onshore company.
Do I still need to file a profits tax return even if my company made no profits this year?
All companies must file annual tax returns even if no profits were made in accordance with the Inland Revenue Department’s rules and regulations.
Are there business record requirements in Hong Kong?
All companies that are conducting business in Hong Kong are required to keep business records according to the Inland Revenue Ordinance.
Records should be kept for at least seven years in order to determine assessable profits.
Failure to keep sufficient records can result in a penalty of HK$100,000.
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