Double Taxation and Tax Source for Hong Kong Business – All You Need to know
Tax planning is always an important feature for a company. This not only includes reducing a company’s taxes, but also in avoiding unnecessary taxes across country borders. This is why so much emphasis has been put on double taxation issues and tax treaties between different jurisdictions.
A tax treaty is a bilateral (two-party agreement) made by the two countries to resolve issues involving double taxation of passive and active income. Double Taxation Agreements / Arrangement (DTAs) are also known as the Tax treaties.
Many countries have entered into tax treaties with other countries to avoid or mitigate double taxation, and Hong Kong is one of them. In fact, this city has an extensive network of such treaties. Because of such double taxation treaties, Hong Kong is positioned as a leading economic hub in Southeast Asia. These also help to break down the tax barriers that obstruct the cross-border flow of trade, investment, technical know-how, and expertise between Hong Kong and the rest of the world.
This article will let you know about the Double Taxation in Hong Kong and Tax Source for Hong Kong Business and outline the important facts about Double Taxation Relief.
What is Double Taxation?
When taxpayers are taxed twice on the same income between two different jurisdictions, this falls under the double taxation process. The first jurisdiction where the income is raised due to the business operations i.e. the source jurisdiction. And the other authority where the income is received i.e. the province of residence.
Double taxation is also commonly known as the source-residence conflict. It is the most common circumstance which gives birth to the double taxation system. There are many jurisdictions which have made provisions for some form of relief from either unilateral basis or double taxation under their domestic tax laws. When two or more tax jurisdictions overlap, double taxation arises such that the same item of income or profit is subject to tax in each.
Hong Kong follows the territoriality basis of taxation. It means that only earned profit or sourced income in Hong Kong is liable to the taxes. The income derived from a source outside of Hong Kong by a local resident is not subject to taxation in Hong Kong.
As a result, the residents of Hong Kong don’t often face these problems from a double taxation system. However, many countries impose a tax on their resident’s tax on a worldwide basis.
If this income is derived in Hong Kong, then it would be subject to tax in Hong Kong. This city also allows a provision of reducing the foreign tax paid on the turnover of the company.
Permanent Establishment (PE)
Permanent establishment (PE) refers to a fixed business place when an enterprise chooses to operate their activities as one part or even the whole part of the business entity. It can be a place of management, a factory, an office, a branch, a workshop, an oil or gas well, or any other place where the main activities of the company is carried out.
When a non-resident including a foreign corporation, has PE in Hong Kong, then it should be deemed as carrying on a trade, profession, or business in Hong Kong. When they carry operations to other parts of the world, then their taxation liabilities will be dependent on how attributable they are in that region.
There are three basic features of a permanent establishment. The first feature is the benefit of getting a business plan for conducting business operations. Secondly, entrepreneurs will get a fixed business place with a permanent nature. Finally, the enterprise operates a part of or the whole of business at the business place.
Some services don’t fall under the permanent establishment category, even if it is implemented in a fixed place of business. The facilities which are solely used for displaying, storing, delivering goods or even merchandise of the enterprise would not be perceived as the permanent establishment.
Neither would be the maintenance for stocking goods, or merchandise of their own company for storage, display or delivery be counted as a permanent establishment. Moreover, for the maintenance work done by another company in order to stock goods, cannot be treated as a permanent establishment as well.
Hong Kong’s basis of taxation on profits from businesses
Hong Kong follows a territorial taxation system in order to charge taxpayer’s profits earned from a trade, profession, or business carried on in Hong Kong. In Hong Kong, entrepreneurs are required to pay taxes solely on the income, which is derived within the city. In short, if you set a business in Hong Kong, but derives profits from some other place, you would not be required to pay tax in Hong Kong on those profits.
Every area has its own rules and regulations, especially for levying taxes on a different basis. Some jurisdictions charge taxes on the worldwide profits of the business, including profits derived from an offshore source. However, while starting up the business, you should be aware of the tax laws that outline where the profits are made, whether in Hong Kong or from an offshore source.
Benefits of Double Taxation Agreements
The Hong Kong Special Administrative Region Government (HKSARG) acknowledges that double taxation agreements with trading patterns has many merits that everyone should know-
- It provides certainty to investors on the taxing rights of the contracting parties.
- It provides an added incentive for overseas companies to operate their business, and similarly, Hong Kong companies to do business overseas.
- It also helps investors or founders to assess better their potential tax liabilities on economic activities.
Hence, it has been the policy of the HKSARG to establish a DTA network. With the help of this network, they would minimize the susceptibility of residents of the DTA partner and the Hong Kong locals to double taxation. In order to negotiate the income covering in the DTAs, Hong kong has already actively engaged the trading partners.
Airline operators are more susceptible to the double taxation than any other taxpayers, because of the international nature of the operations of the aircraft. Since negotiations of the DTA may take longer time, Hong Kong has made a new policy. This includes double taxation relief arrangements for airline income in the bilateral between Hong Kong and the aviation partners.
Double Taxation Relief in Hong Kong
It’s important to know about the allocation of tax liabilities on the taxpayer’s profit derived from operating a business in Hong Kong or outside of its boundaries. Also, the income derived from immovable property, investment, and alienation of property between Hong Kong and China.
This same case applies to Hong Kong. When you choose to carry your business in China for a permanent establishment while operating the business in Hong Kong, you will be charged in Hong Kong. This all boils down to how attributable your business operation is in a region. If you want more information about double taxation or offshore profits tax exemption in Hong Kong, then you may refer to Startupr.
Q1. If a company conducts business outside of Hong Kong, and receives its funds into Hong Kong, would this be taxed twice?
A. The tax structure of Hong Kong follows a territorial source of income, meaning only the profits of the company arising from its profit making activities are taxed in Hong Kong. Thus, strictly receiving funds into Hong Kong, with its activities conducted elsewhere, would not make the company liable to profits tax in Hong Kong.
Q2. On the other hand, if the company is conducting services in Hong Kong, but has the money received to another jurisdiction, does it need to pay taxes in Hong Kong?
A. As these profit making activities were conducted in Hong Kong, despite the funds being received in another jurisdiction, the company would be liable to Hong Kong taxes.
Q3. If I operate my Hong Kong company internationally, and do not conduct any activities in Hong Kong during a given year, do I still need to file a tax return in Hong Kong?
A. Yes, all Hong Kong companies, regardless if they conduct their operations in Hong Kong or in another country, need to file a tax return every year. On their tax filing, they would then apply for a tax exemption as these activities were carried out in other jurisdictions.
Q4. If I own a Hong Kong company and pay taxes in Hong Kong, but conduct my activities internationally, am I still required to pay taxes in the country where my business operates? Wouldn’t I be paying tax twice?
A. Even though the business is a Hong Kong company, it may not be required to pay taxes in Hong Kong. It’s tax liabilities would normally be in the place of operations. Therefore, even though it pays taxes in Hong Kong, it may still be liable for taxes in other jurisdictions where the operations take place.
Q5. If my Hong Kong business conducts operations in another country during the year with a DTA with Hong Kong, but still charges withholding tax on my profits, is there anyway to get this back?
A. Normally the other jurisdictions will require the Hong Kong company to show evidence that it’s PE is in Hong Kong, and pays taxes on its operations here. Solely having a tax ID number and registered office is usually not enough. Companies are often required to go through the process of receiving a Certificate of Resident Status to establish their official tax residency in Hong Kong.
If you still have unanswered questions for taxes or double taxation in Hong Kong, contact startupr for more information.
How can Startupr help you?
After analyzing the facts about the double taxation relief in Hong Kong, Permanent Establishment, and how Hong Kong’s jurisdiction impose taxes on the business owners, you should have got a better idea on how this affects your company and its international operations.
Being one of the world’s leading financial centers with its advanced infrastructure, Hong Kong has attracted entrepreneurs across the globe. So, if you are also thinking to launch an enterprise, understanding the concept of double taxation is a must. If you want to get more information, head over Startupr.
We offer assistance and consultation for taxation matters and other information in regards to corporate taxation, personal taxation, and company formation. Feel free to get in touch for further details.