HONG KONG CORPORATE TAXATION

Understanding the Hong Kong corporate tax 2023 system is essential for businesses operating in the city, as it can have a significant impact on the financial success of a company. Hong Kong is known for its low and simple tax policy, making it an attractive location for businesses around the world.

The corporate income tax rate for corporations in Hong Kong is 16.5%. This rate applies to both resident and non-resident companies, and it applies to both local and foreign-sourced income. Additionally, there is no distinction made between active and passive income for tax purposes.

Additionally, there are several tax benefits and exemptions available for businesses operating in certain industries or meeting certain criteria. For example, profits derived from offshore activities are not subject to Hong Kong corporate tax, and there are also tax deductions available for research and development expenses.

It is important to note that Hong Kong operates on a territorial basis for tax purposes, meaning that only income derived from Hong Kong is subject to corporate income tax. Additionally, the city does not have a capital gains tax or a withholding tax on dividends.

At Relin Consultants, we have extensive experience in helping international clients with tax planning and restructuring their Hong Kong companies to achieve tax efficiency. Our team of professionals can provide guidance on the tax benefits and exemptions that may apply to your company, as well as assist with the filing of tax returns and other compliance matters.

If you have any questions or need assistance with your Hong Kong corporate tax, please do not hesitate to contact us at enquiry@relinconsultants.com. We are here to help you navigate the tax system and ensure that your company can continue to grow and flourish in Hong Kong.

Overview of Taxes in Hong Kong

TERRITORIAL TAX SYSTEM IN HONG KONG

Hong Kong operates on a territorial basis for tax purposes, meaning that only income derived from Hong Kong is subject to corporate income tax. This principle is known as the “territorial principle” of taxation in Hong Kong. This means that businesses operating in Hong Kong will only be subject to corporate income tax on profits generated within the city, and not on profits generated from sources outside of Hong Kong.

For example, if a Hong Kong-based company conducts business with a foreign company and earns profits from that transaction, those profits would not be subject to Hong Kong corporate income tax as they were not derived from Hong Kong. Similarly, a Hong Kong-based business that earns profits from its operations in another country would not be subject to Hong Kong corporate income tax on those profits.

This territorial principle of taxation in Hong Kong makes the city an attractive location for businesses operating globally, as it allows them to minimize their overall tax burden. Additionally, the city does not have a capital gains tax or a withholding tax on dividends which makes it more appealing to businesses.

You can refer to setting up a Hong Kong Offshore Company for additional information. 

However, it is important to note that the tax laws and regulations in Hong Kong are complex and ever-changing. Businesses operating in Hong Kong are encouraged to seek the advice of a professional in Hong Kong familiar with company law to ensure they comply with all relevant regulations and to take advantage of any tax benefits that may apply to their business.

YEAR OF ASSESSMENT & CORPORATE TAX RETURN IN HK

The year of assessment for corporations in Hong Kong runs from April 1st to March 31st of the following year. And the deadline for filing the corporate tax return, which is known as the Profits Tax Return (PTR), is usually two months after the end of the year of assessment, which is usually 30 May of the following year. For example, for the YA ending on March 31, 2022, the PTR should be filed by 30 May 2023

In Hong Kong, the fiscal year runs from 1 April to 31 March. Profits made during an accounting year that ends within the tax year are considered profits for that tax year.

HONG KONG TAX AUTHORITIES

The primary tax regulation is the Inland Revenue Ordinance Hong Kong which lays out the taxation system and guidelines specifically in Hong Kong that is separate from the one in Mainland China. 

The taxing organization that handles all the taxation payments is the Hong Kong Inland Revenue Department (HK IRD).

Capital Gains Tax (CGT) in Hong Kong 

Hong Kong does not have a separate CGT system, and capital gains are not taxed as a separate category. However, capital gains from property transactions may be subject to tax under the Special Stamp Duty (SSD) and the Buyer’s Stamp Duty (BSD) regulations.

The SSD is a progressive tax applied to the selling price of a property at the following rates: 15% for the first HKD 2 million, 10% for the next HKD 2 million, and 5% for the remaining value. The BSD is a flat rate of 15% applied to the purchase price of a property. These taxes are usually paid by the seller of the property, but in certain cases, the buyer may also be liable.

Withholding Tax in Hong Kong

Hong Kong does not have a general withholding tax system on dividends, interest, or royalties. However, there are certain specific withholding tax requirements for certain types of payments such as rent, management fees, and service fees.

Dividend Tax in Hong Kong

Hong Kong does not have a separate dividend tax system. Dividends are not taxed as income in the hands of the shareholder. The company paying the dividends, however, is required to pay corporate income tax on the profits from which the dividends are paid.

Value Added Tax (VAT) in Hong Kong

Hong Kong does not have a Value Added Tax (VAT) system in place. Instead, it has a sales tax known as the “Sales Tax on Goods and Services” (STGS) which is a consumption tax that is imposed on the sale or importation of goods and services.

The standard rate of STGS is 0%, which does not apply to most goods and services, but a few types of goods and services are subject to a rate of 8.5%. These include items like tobacco, alcohol, and hydrocarbon oil.

Hong Kong’s government has been considering introducing a VAT system, but it has not been implemented yet.

Property Tax

Property tax is levied on land and building owners in Hong Kong and is calculated at a standard rate of 15% on the net assessable value of the property (i.e. rental income).

Stamp Duty

Stamp duty is levied on documents related to Hong Kong stock, shares, and immovable property. The documents covered by the stamp duty include, but are not limited to, the transfer of shares, bonds, debentures, and securities, as well as the transfer of immovable property, including the sale and purchase agreements, lease agreements, and mortgages. The stamp duty rate for stock and shares is 0.1% of the consideration, and it is 0.2% for immovable property.

Regarding immovable property, the tax rate is divided into two categories, residential and non-residential. The rate for residential property is a flat rate of 15% but with exemptions for first-time Hong Kong resident property buyers. And the rate for non-residential property varies depending on the value of the property, it ranges from HKD 100 to 4.25% of the property consideration.

It’s also worth mentioning that there are additional charges, such as Special Stamp Duty (SSD) and Buyer’s Stamp Duty (BSD), for property transactions as well.

Tax Incentives

Hong Kong offers a variety of tax incentives to encourage investment and business development in the region. Some of the main incentives include:

• Profits tax exemptions for certain types of funds, such as onshore and offshore funds operating in Hong Kong.
• Tax deductions for capital expenditure on plant and machinery specifically related to manufacturing, and computer hardware and software.
• A 5-year write-off period for capital expenditure on the renovation or refurbishment of business premises.
• Tax concessions for mutual funds and trusts.
• Tax exemptions for interest derived from deposits placed in Hong Kong with authorized institutions.
• 100% deductions for capital expenditure on environment protection machinery and environment-friendly vehicles.
• Tax concessions for captive insurers, in the form of a 50% reduction of profits tax on offshore risk insurance business.
• Tax incentives for aircraft lessors and managers, including reduced tax rates and tax base concessions.
• Tax exemptions for profits on transactions in specified assets for all funds operating in Hong Kong.
• Tax deductions for capital expenditure incurred by enterprises for the purchase of intellectual property rights.

All these incentives are subject to specific conditions, and it’s recommended to consult with a tax professional to understand if a business is eligible for these incentives and how to claim them.

Credits for foreign taxes

Foreign tax credits are available if a Hong Kong tax resident owes/pays foreign taxes on income received from a jurisdiction that has entered into a Comprehensive Double Taxation Agreements Agreement (CDTA) with Hong Kong. Such income is subject to tax in Hong Kong. Before claiming the tax credit in Hong Kong, taxpayers must make all reasonable efforts to reduce the amount of foreign tax owed.

Donation for Tax Deduction

Under Section 88 Inland Revenue Ordinance, charity is exempted from profit tax under specified conditions. In computing the assessable profits, charitable contributions/donations made to recognized charitable organizations, trusts of a public character, or the Government of the Hong Kong Special Administrative Region are allowed a tax deduction.

However, the donation must be claimed as not more than 35% of total assessable income or profits for the tax year. For instance, a company that has an assessable income of HK$500,000 can only claim up to HK$175,000 for tax deduction under the approved charitable donations and contributions. 

Cryptocurrency Tax

Profits or gains derived from cryptocurrency transactions are generally considered capital gains and are currently not subject to any specific taxes. The Inland Revenue Department (IRD) of Hong Kong has not yet released any formal guidelines on the tax treatment of cryptocurrency transactions.

The IRD stated in November 2020, in which it stated that transactions involving cryptocurrencies are treated as transactions in commodities and are subject to profits tax if they constitute a trade or business and subject to salaries tax or personal assessment if they are of a capital nature.

The profits or gains derived from cryptocurrency transactions will be considered capital gains and will be taxed as such if they are deemed as capital in nature, as long as it’s not considered trade or business.

HOW TO FILE A PROFIT TAX RETURN/CORPORATE TAX IN HONG KONG?

Here are the general steps to file a PTR in Hong Kong:

Gather the necessary information and documents: This includes the company’s financial statements, such as the balance sheet, income statement, and cash flow statement, as well as any other relevant documents, such as invoices and receipts.

• Calculate the company’s taxable profits: The company will need to calculate its taxable profits by deducting allowable expenses from its gross income.
• Complete the PTR form: The company will need to complete the PTR form, which can be obtained from the IRD’s website or an authorized tax representative.
• Submit the PTR form and supporting documents: The company will need to submit the completed PTR form and any supporting documents to the IRD. The form and documents can be submitted electronically or by mail.
• Pay any taxes owed: If the company owes any taxes, it will need to pay them to the IRD before the deadline.
• Keep records: It’s essential to keep records of all documents and information used to prepare the PTR for at least seven years in case the IRD requests to review them.

It’s recommended to consult with a tax professional or authorized tax representative to ensure that the PTR is filed correctly and on time, and also to understand the tax laws and regulations that apply to your business.