Hong Kong is known for having one of the world's simplest and most business-friendly tax systems, making the city a preferred choice for conducting international business in Asia.
Many entrepreneurs choose to open a company in Hong Kong, either having an onshore or offshore business.
As the tax regime in Hong Kong takes into account the source of the profit, only the profits arising from the operations happening inside Hong Kong are deemed taxable.
Therefore, it is important to identify the way your company conducts its business and earns its profits. The following article will discuss this point and provide more details about the Hong Kong tax system.
Understanding your Hong Kong corporate tax rate according to your business
As mentioned above, the taxable profit is recognized from the source of income. Therefore, we will analyze the key points in how the Hong Kong profits tax is recognized.
Offshore Company - Having offshore operations
The word "offshore" has become quite popular in recent years, but it is often confused or associated with low taxes or not paying taxes at all.
For this article, we will refer to an offshore company as an entity that runs its main business activities outside the jurisdiction where it was incorporated, in this case, Hong Kong.
Onshore Company - Having onshore operations
In contrast, an onshore company is an entity that conducts its main business activity inside the jurisdiction where it is incorporated.
Differences between offshore and onshore
A significant key difference between these models of operation in Hong Kong is that an offshore company can apply for special status to be exempt from paying taxes. In contrast, an onshore company must pay taxes according to its taxable income.
Contrary to popular belief, the term "offshore" is a status that a company registered in Hong Kong can obtain.
It allows them not to pay taxes as long as there is substantial proof that the source of income came from outside of Hong Kong and no business activities were performed in Hong Kong to generate this income, such as providing a service or selling goods.
In this sense, a company cannot automatically become offshore from the moment of incorporation, just from being an entity registered in Hong Kong. There must be an application and a review to obtain the status from the Hong Kong Inland Revenue Department.
An Overview of the Hong Kong Tax System
Now that we have dissected two scenarios of operations for Hong Kong-incorporated companies, let's see an overview of the tax system in Hong Kong:
- Hong Kong's corporate tax system is commonly referred to as profits tax and follows a flat-rate and territorial principle.
- The normal Profits Tax Rate in Hong Kong is 16.5% for Corporate Income Tax.
Starting from the 2018 fiscal period, the Hong Kong authorities introduced the Two-tier tax system, allowing companies to have a preferential tax rate for a set amount of profit. More details will be explained below.
The interest income from running operations in Hong Kong falls under the profit tax and should be taxable.
- There is no Value-Added Tax (VAT) or Sales Tax for most of the services and items in Hong Kong.
- There is no Capital Gain Tax in Hong Kong.
- Dividends are not subject to withholding taxes, whether generated in Hong Kong or overseas.
- The Personal Income tax or the Salaries Tax Rate is charged according to the individual's income. For more information, please check our article on the Salaries Tax.
- Individuals who make a profit from owning land or buildings in Hong Kong are subject to the Property Tax Rate, which is set at 15% of the assessable value of the property.
As we have enlisted the most common types of taxes in Hong Kong, it is important to mention that many tax incentives have been established to make incorporation in Hong Kong more desirable.
Hong Kong Corporate Tax
As discussed above, Hong Kong's taxation falls into the territorial system, where the taxes are based on profits derived from a trade or business conducted in Hong Kong.
In the case that a company is established within Hong Kong, but the profits are made from outside of Hong Kong, the business owners can decide to apply for special status to access a rate of 0% on profit taxes.
Provisional Profits Tax
As the profits tax is based on the assessable profits of each fiscal period, which usually consists of 12 months, there are sometimes estimated assessments on taxes that are issued based on the last year's profits.
This means that the provisional profits tax paid can be performed in two separate installments. The first installment is approximate and covers 75%, while the remaining 25% should be paid after three months.
After the assessable profits of the year have been determined, the company can receive a tax credit for the amount that was paid. Any excess amount paid can be credited to the company for the next fiscal period.
For any clarification with the authorities, companies that qualify for the provisional profits tax can apply for the clarification during a valid period. Typically, this period is one month before the due date or two weeks after the payment notice.
Flat-Rate Corporate Tax System
Another element that is followed in Hong Kong's tax system is the principle of a flat-rate tax, which means that the tax rate is not progressive or increases in respect of the profit amount. The Hong Kong Inland Revenue Department offers two profit tax rates for companies, the single-tier and the two-tier.
- This option gives a rate of 16.5% based on assessable profits for companies.
- However, for unincorporated companies, the rate is 15%.
- The second option, for incorporated and unincorporated companies, lowers the tax rate for assessable profits within the first $2 million Hong Kong Dollars.
- This rate can be helpful for small and medium-sized enterprises, as it reduces the amount of taxes to pay, starting the year of assessment 2018/2019. To consult the tax rates in Hong Kong, please see the following link from the tax authority.
- Companies with profits under the first $2 million cap get a concessionary tax rate of 8.25%. Any remaining profits above $2 million will be taxed at 16.5%.
- Unincorporated businesses with profits under the first $2 million are taxed at 7.5%, while all other profits above the first $2 million will be taxed at 15%.
Tax Incentives in Hong Kong
To make Hong Kong company incorporations more attractive, the local authorities have created incentives; here we will enlist them:
- Hong Kong offers a 100% write-off for expenses from purchasing machinery, mainly related to manufacturing and computer hardware and software.
- A period of five years to write off expenses for renovating or refurbishing a business's grounds or building.
- Expenses from purchasing 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 is incurred 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 sell intellectual property, mainly patents, copyrights, rights in performances, etc.
- Hong Kong-operated funds are eligible for tax exemption on transactions relating to assets subject to specific conditions, regardless of structure, size, purpose, or management location.
- Profit tax exemptions are also offered on investments in local and overseas private companies.
Filing the Profits Tax Return
Following the line of a simple tax regime, the Hong Kong Inland Revenue Department issues the Profit Tax Returns for companies every year during April without delay.
However, according to the chosen fiscal year-end of the company, the due date to submit the declaration can change from April to November of the following year.
Although extensions can be requested from the tax authority, it is important to prepare beforehand and submit all the supporting documents and forms in due time.
Failing to submit the forms in time can generate penalties, fees, and additional assessment from the Inland Revenue Department.
For newly registered businesses, there is a grace period of 18 months after the date of incorporation, in which the Hong Kong Inland Revenue Department issues the first profit tax return.
While one of the many attractive features of Hong Kong is its simple tax system, some options allow companies to maximize their profits.
However, it should not be forgotten that compliance is king. The preparation of submitting everything before the deadlines can save your business time and, more importantly, money by avoiding unnecessary penalties.
If you need a company to support you with tax planning, you can visit our Company Secretary Review page and find the right service provider for your company.