Setting up a Business in Hong Kong
SUMMARY OF CONTENTS
PART E - Taxation, Duties and Fees
1 Introduction
Hong Kong taxes are essentially territorial so that, in most cases, only income which in
substance arises in or is derived from Hong Kong is subject to Hong Kong tax.
Domicile, nationality and residence are therefore generally immaterial in determining
whether or not Hong Kong tax is payable in a particular situation. There are three
taxes on income in Hong Kong:
(1) property tax
(2) salaries tax
(3) profits tax
The Inland Revenue Department is responsible for the administration and collection of
these taxes and the taxation regime is set out in the Inland Revenue Ordinance.
In addition, ad valorem stamp duty is levied on transfers of shares in Hong Kong
companies and on agreements for sale of residential land and conveyances of nonresidential
land. Ad valorem capital fees are payable on the authorised capital of a
company and on increases in capital. Estate duty is charged on the aggregated value
of assets located in Hong Kong on death where the total value of such assets
exceeds HK$7,500,000. Sweeping anti-avoidance provisions apply where companies
are used to avoid Hong Kong estate duty.
There is no separate tax on interest in Hong Kong but in general, interest earned by
financial institutions from the carrying on of banking and similar financial activities in
Hong Kong and by other businesses where the interest has a Hong Kong source, is
liable to profits tax. However, interest derived from deposits placed in Hong Kong with
Hong Kong licenced banks, restricted licenced banks or deposit taking companies by
companies or other persons (who are not financial institutions) generally will not be
subject to profits tax unless the deposit secures a borrowing the interest expense of
which is tax deductible.
Dividends are not subject to tax and there is no withholding tax on dividends or
interest paid to non-residents. There is no capital gains tax in Hong Kong but profits
arising from trading in shares, commodities or land are liable to profits tax.
The Inland Revenue Ordinance provides for a system, known as personal assessment,
under which resident individuals can elect to have tax liability calculated by reference
to total taxable income from all sources.
Although when compared with many taxation systems, Hong Kong tax is relatively
simple in concept and application, we recommend that clients take specific tax advice
when establishing operations in Hong Kong to consider the most tax effective way of
structuring operations. Tax evasion is viewed as a serious matter in Hong Kong and
there are various specific anti-avoidance provisions and also two general antiavoidance
provisions in the legislation.
2 Property tax
Property tax is charged on the owner of land or buildings located in Hong Kong at the
rate of 16% of, generally, the actual rent or other consideration received, less the
amount of any rates paid by the owner and also less an allowance of 20% for repairs
and maintenance. Owner occupied buildings are exempt from property tax liability.
3 Salaries tax
General
Salaries tax is charged on income arising in or derived from Hong Kong from:
(1) any office of employment or profit
(2) any pension
Income
The income which is subject to salaries tax includes wages, salary, leave pay, fees,
commission, bonus, gratuity, perquisites and allowance. Examples of payments which
are not subject to salaries tax include severance payments and long service payments
and (up to a limit of HK$12,000) employees’ mandatory provident fund contributions.
Source
The rules which have been established for determining whether income derived from
employment arises in or is derived from Hong Kong can be summarised as follows:
(1) Employees with Hong Kong employment are subject to salaries tax on all their
income, irrespective of where they work, except in respect of any income earned for
services rendered in another territory which is taxed in that territory or unless the
employee visits Hong Kong for not more than 60 days in any tax year.
(2) Employees with non-Hong Kong employment are only subject to salaries tax on that
part of their income which is derived from services performed in Hong Kong.
Therefore, employees with non-Hong Kong employment who work partly in Hong
Kong and partly outside Hong Kong will be subject to Hong Kong salaries tax only in
respect of income attributable to the proportion of their income which relates to
services performed in Hong Kong. The apportionment can be done by reference to
days in/out of Hong Kong or the value of the services performed in Hong Kong. If an
employee is a visitor to Hong Kong who spends not more than 60 days on such visits
in any tax year, no salaries tax will be payable in respect of services rendered during
such visits.
For the purpose of these rules, a "non-Hong Kong employment" will normally only be
found to exist where the following three factors (or at least the first two) are present:
(1) the contract of employment was negotiated and entered into outside Hong Kong and
is enforceable outside Hong Kong
(2) the employer is resident outside Hong Kong
(3) the employee's remuneration is paid outside Hong Kong.
The Commissioner generally takes the view that a resident cannot be a "visitor" and
therefore a resident who is physically present in Hong Kong for not more than 60
days in a year of assessment is normally chargeable to salaries tax.
Directors’ fees
Directors’ fees paid to the directors of a company which is controlled and managed in
Hong Kong are chargeable to salaries tax irrespective of where the director resides.
For this purpose any person holding a position similar to that of a director will be
regarded as a director.
Deductions
Deductions from assessable income may be made for certain outgoings and
expenses which have been wholly, exclusively and necessarily incurred in the
production of the assessable income. It is, however, rare for an employee to succeed
in making a claim for such a deduction. Accordingly, in Hong Kong, emphasis is
placed on reducing assessable income by the use of non-taxable benefits rather than
expenses in the case of salaries tax. Deductions are permitted for contributions of
employees to mandatory provident fund schemes up to a limit of HK$12,000 per year.
Benefits
Non-salary benefits should be tax-deductible expenses for the employer and will,
generally speaking, not be subject to salaries tax if:
(1) the benefit is not in the form of "money or money's worth"
(2) in the case of a payment made by the employer for the benefit of an employee, the
employer (and not the employee) has the primary obligation to pay for the benefit and
no other person has guaranteed payment
(3) the benefit is not in connection with the education of a child of the employee.
Special tax rules apply to accommodation. The taxable amount is generally restricted
to a maximum of 10% of the employee's remuneration provided that certain conditions
are observed.
Rates of tax
Tax is charged on a progressive scale up to 20% after generous personal allowances
but this is subject to a maximum effective rate of 16% applied to gross income. The
amount of personal allowances to which a salaries tax payer is entitled depends on a
person's marital status and the number of children and other dependents.
Returns
Employers must file returns of remuneration paid to and benefits provided for
employees and must notify the Commissioner of Inland Revenue when employees are
employed or are about to leave employment. The procedure to be followed by an
employer where an employee is about to leave employment is important and should be
closely observed.
Provisional salaries tax
There is a system of provisional salaries tax in Hong Kong. A provisional assessment
for the current year is made based on the previous year's final assessment and tax is
charged accordingly. Once the actual income for the year of assessment is known, a
final assessment is issued based on the actual income crediting the provisional
salaries tax already paid.
4 Profits tax
General
Individuals, partnerships, corporations and other bodies carrying on business in Hong
Kong are liable to pay profits tax on those profits which arise in or are derived from
Hong Kong. The corporate profits tax rate is currently 17.5% of assessable profits and
the rate for sole proprietors and partnerships is 16%.
Source of income
It can sometimes be difficult to determine whether or not profits have a Hong Kong
source. However the broad guiding principle is "what did the taxpayer do to earn the
profits in question and where did the taxpayer do it?".
By way of example the following activities would normally amount to the carrying on of
business in Hong Kong which would give rise to profits with a Hong Kong source:
(1) manufacturing in Hong Kong
(2) performing services in Hong Kong
(3) selling goods in Hong Kong
(4) appointing an agent in Hong Kong with general authority to negotiate and conclude the contracts.
Certain profits, including receipts from the use of films, the use of intellectual property
rights or the hire of movable property in Hong Kong, are deemed to be profits of a
business carried on in Hong Kong and to be profits which arise in or are derived from
Hong Kong. Profits from arm's length licensing arrangements attract tax at 5.25%
thereof, provided that various conditions are satisfied. Special provisions apply to:
(1) insurance and ship and aircraft owning companies
(2) disposals of certain discounted financial instruments
(3) profits of financial institutions in respect of interest derived from financial business
carried on in Hong Kong
Chargeable profits and deductions
In general, only the difference between gross Hong Kong profits and Hong Kong
expenses incurred in producing profits is assessable to profits tax. Interest paid is only
deductible if it is of a revenue nature and only then if various specific conditions are
met. Provision is made for depreciation allowances for approved capital expenditure.
Subject to certain anti-avoidance provisions, business losses may be carried forward
and set-off against future profits. There are no provisions for transferring the benefit of
losses between group companies or for carrying back terminal losses.
Tax year
The tax year in Hong Kong runs from 1st April to 31st March and businesses
potentially liable to profits tax are usually issued with a tax return in April or May of
each year requesting that they complete the return and furnish it to the Inland
Revenue Department with the relevant accounts within one month of the date of issue
of the return. Profits for a particular tax year are usually based on the profits earned in
the accounting period ending in the year of assessment.
Provisional profits tax
The Inland Revenue Department issues a provisional profits tax assessment for each
year of assessment at the same time as it issues a final profits tax assessment for the
preceding year. Provisional tax is applied first against profits tax payable on the profits
of the current year of assessment. When the final assessment is calculated any underpayment
of tax is added to the provisional profits tax assessment for the following
year.
Who is responsible?
The secretary, managers and directors of a company are each responsible for
ensuring compliance with the company's obligations under the Inland Revenue
Ordinance. Where there is no one from the company resident in Hong Kong who can
be so responsible, the company is obliged to appoint a "tax representative" and advise
the Commissioner accordingly. The Registrar has the power to impose penalties in
relation to late filing and payment of taxes so care should be taken to comply with the
time limits imposed by the Registrar.
5 Stamp duty and capital fee
Share transfers
Stamp duty is levied on the transfer of shares in Hong Kong companies at an effective
aggregate rate of 0.2%. (There are exemptions available for intra-group transfers and
we will be pleased to provide advice about these exemptions on request). Duty is
charged on the consideration for the transaction or, if higher, the market value (as
assessed by the Stamp Office based on the company's most recent accounts or other
supporting documentation) (see Part B).
Sale and purchase agreements and conveyances of land
Stamp duty is payable on "agreements for sale" (which is widely defined) of residential
land at the maximum rate of 3.75% and on conveyances of non-residential land, at the
same rate. Lower rates apply where the sale price or gift value does not exceed
various thresholds which are regularly increased in line with inflation. Where ad
valorem duty has been paid on an agreement for sale of residential land, a fixed duty
of HK$100 is payable on the conveyance.
Capital fee
A capital fee of 0.1% is payable on the nominal value of, and on any increase in, the
authorised share capital of a company and on any premium on the allotment of shares.
It is capped at $30,000 per case.
Back to top
|
