Hong Kong taxation provisions:
Hong Kong taxation is based on a territorial approach: a company is tax exempt if it operates outside of Hong Kong and its income is derived entirely from sources situated in other jurisdictions.
The system of taxation often applies a detailed investigation into the generation of a company’s profit. During the initial audit and submission of tax declarations, service and trading companies must submit a statement stating if its profit has been derived from sources outside of Hong Kong. According to the Law, the Tax Office scrutinises past and future events of a company and the geographical area where profit is generated.
To obtain tax exemption a company must prove that its income was earned outside of Hong Kong. The following documented evidence must be provided for verification:
- written evidence of pre-contractual work, negotiations and the execution of contracts outside of Hong Kong;
- the performance of any contracts and agreements (shipment, trading, services, commission, etc.) outside of the jurisdiction of Hong Kong;
- that no sales have been made to customers in Hong Kong and no purchases from Hong Kong suppliers have been made;
- the use of capital outside Hong Kong (the location of bank accounts is usually deemed as insignificant evidence);
- monetary income from the sale of goods and services outside of Hong Kong;
- the payment of business costs of a company outside of Hong Kong;
- transportation of goods with no entry to Hong Kong ports.
Utilising relevant regulations of tax laws, companies may apply for approval for a specific transaction to be applicable to the territorial taxation principle to avoid any potential tax disputes.
A company may request assessment by the Tax Office of its offshore status every 2-3 years.
Hong Kong does not apply:
- tax on interest or dividend income;
- capital gains tax;
- value added tax (VAT).
Corporate tax in Hong Kong:
Corporate tax is imposed on income derived from any activities within Hong Kong.
Corporate income tax (for corporations doing business within Hong Kong) is currently charged at the rate of 16.5%.
Tax on royalties:
Subject to specific circumstances, the applicable rate is 4.95% if royalties are paid to non-residents or 16.5% if royalties are paid to a related party.
If a loan is advanced in Hong Kong, the interest income on such loan is taxable.
Hong Kong companies (whether or not operating in Hong Kong) must pay the fixed annual business registration fee of $290 (applicable from 1st April 2014).
Late payment of the fee will result in a penalty.
Double Tax Treaties:
Double Tax Treaties have been signed with over 30 countries so companies can benefit from reduced rates at the source of payment of dividends, royalties and interest on loans and can undertake tax planning and optimisation within the regulation of taxation laws.