Is Hong Kong considered a tax haven for individuals and corporations?

The Hong Kong Special Administrative Region (SAR) of China, is one of the world’s leading capitals for financial services and business opportunities. The city is well known by foreign investors for its low tax rates, ease of business as well as a solid political-economic landscape.

Would that be enough to consider Hong Kong a tax haven? There’s no simple answer to this question. A country is considered a tax haven when doing business there is more convenient than doing it in anywhere else. Certainly, Hong Kong ticks off many of the features of a tax haven, including a tax-friendly jurisdiction with low corporate cost and no capital gain taxes. 

In this article we’ll take you through the whole concept of what a tax haven is and why it is so popular amongst foreign entrepreneurs to choose Hong Kong as home of their investments.

Hong Kong – a tax haven and global financial centre

Hong Kong is the global financial hub of Asia and has enormously grown its economic influence over the years. The city has built a great economy with a solid corporate law structure, offering one of the most favourable tax frame systems in the world to the point that it became a globally famous tax haven for foreign investors. Its politically and economically stable environment, financial and bureaucratic flexibility and extremely low tax rate give entrepreneurs just the motivation they need to come and explore Hong Kong tax haven market opportunities.

What exactly is a tax haven? 

When talking about the exact meaning, a tax haven is a term used for countries with low or no tax liabilities at all, for foreign investors and businesses. Tax havens, also called offshore financial centers, are usually very discreet in releasing businesses’ financial information to the public. This altogether, makes it the perfect place for investors to do their business. 

In 1998, the Organisation for Economic Cooperation and Development (OECD) pointed out several factors that help classify countries as tax havens. Below, we have listed a few of them for your ease:

• Either nominal or no tax on the relevant income.
• There have to be no substantial activities.
• Chances of less transparency.
• No effective exchange of information.

Perks of tax haven 

• The primary benefit of a tax haven country is for its banks and financial institutions. Foreign corporations will invest money in them, and this will help build a flourishing economy. 
• Tax haven residents will also benefit from it by only paying limited tax rates or none at all.
• No inheritance, dividend or capital gains tax.

The tax evolution in Hong Kong

The evolution of the tax system in Hong Kong involves a series of events that resulted in various tax reforms in the country between 1940 to the present.

Here are the most important milestones to remember about Hong Kong’s tax policy:

• 1947 – The Inland Revenue Ordinance (IRO) introduces for the first time income taxes in Hong Kong, following the British tax system in place for the UK colonies. Despite a few attempts and two committees from the government to review the original legislation, this tax system remained the same for an extended period of time.
• 1970 – Hong Kong becomes an emerging city-states and a leading global trading and financial centre. An update on tax policy is now extremely necessary and another committee is formed. However, the colonial government refuses any changes and the tax system remains unchanged for several more years. 
• 1997 – The government publishes an open document, encouraging proposal submissions on how to improve the country’s tax system competitiveness.  
• 1998 – The Hong Kong government implements several concessions following the 1997 document.
• 2002 – A new review committee issues the Goods and Services Tax (GST) which was then dropped in 2006 because of public disagreement. 

Hong Kong Income Tax

Hong Kong’s tax rate and income tax system are quite simple and can be divided into two parts:

• Direct Tax: such as salaries tax, property, and profits. 
• Indirect Tax: including stamp duty, customs and excise duty, betting duty and hotel accommodation tax.

Salary Tax

However low, people in Hong Kong are still required to pay taxes on their income. According to the local system, tax rates are progressive, which means the more an individual earns, the higher the tax rate. The five current tax rates for Hong Kong individuals are 2%, 6%, 10%, 14% and 17% for those earning more than HK$200,000.

Property Tax

A person or company that owns lands or buildings in Hong Kong is obliged to pay the property tax, which is fixed at a standard rate of 15% of the net value of the property in question. Property tax is levied on such properties which are immovable and earning profits. This tax does not apply to government and consular properties.

Profit Tax 

Hong Kong’s tax system is territorial based, independent of your residential status. To make it simple, taxes are levied on the profits a company gains within the Hong Kong jurisdiction only.

Automatically, all the profits gained by non-Hong Kong resident companies are not subjected to taxation. However, if the non-resident company makes profit from a Hong Kong based business, then it is also liable to pay taxes to the government. 

Business owners and entrepreneurs in Hong Kong can choose between two tax systems: 

• The single-tier corporate tax system – Corporations must pay 16.5 % in tax on the assessable income, whilst unincorporated companies only have to pay 15%. 
• The two-tier profits tax regime – This is supposed to ease tax payments on small/medium companies. Corporations will only be taxed at the special rate of 8.25% for the first HK$2 million profit. Any other profit after that will be regularly taxed at 16.5%. Unincorporated businesses, instead, will pay a 7.5% tax rate on the first HK$2 million and the standard 15% for anything after that. 

Why is Hong Kong considered a tax haven? 

Hong Kong has been recognised by different institutions as the country with the most friendly tax system with the freest economy in the world. Many investors from all parts of the world, in fact, trust Hong Kong as a place to store and invest their capital. Although low tax rates are a big part of this decision, there are many other factors that both individuals and corporations take into consideration. Let’s analyse a few of the most important ones.

• Attractive and low tax rates – One of the primary and exciting features of the Hong Kong tax system is its low and attractive tax rates. Certain features like the progressive tax system, corporation tax, and policies like the territorial taxation system have made Hong Kong a tax haven. 
• Privacy protection – After Hong Kong refused to share information regarding foreign banks and asset owners with the United States and European Union, it became the fourth most secretive state after Switzerland, Cayman Island, and the United States. This is greatly considered by investors who value their business privacy. 
• Economically stable environment – Hong Kong’s economy is considered one of the highest developed free market economies across the globe. It has a low tax rate, low or close to the free rate for port trade, and a well-structured international financial market. Its geographical location plays an important role in the economy of the country as it’s strategically close to mainland China, making free trade possible for business owners.
• Population – Hong Kong is one of the most densely populated cities worldwide, with 7 million people living here. Also, the progressive tax system in Hong Kong helps the population pay taxes according to their salary. This policy encourages people to stay in Hong Kong and helps them start small-scale businesses, which automatically benefits the city itself.
• Political structure – In 1997 Hong Kong officially became a Special Administrative Region (SAR) of the People’s Republic of China after decades of being a British Crown Colony. This means the Hong Kong government holds independent powers in all matters except foreign and defense affairs. Because of its high powers and authority, Hong Kong can regulate a structure that aims to attract foreign investors with facilities including low tax rates and much more. 

What are the advantages for Hong Kong as Tax Haven? 

Hong Kong tax haven seeks advantage by promoting and supporting businesses, offering them some of the best tax benefits framework such as: 

• Absence of dividend tax, value-added tax, goods and services tax, as well as lack of custom duties on most imported goods.
• Hong Kong collects revenues from the land sale and taxation of land with the Property tax. 
• All these benefits for both businesses and individuals are automatically benefitting Hong Kong as there is a continuous active economy, with a great turnover of both residents and non residents.
• People and investors are attracted to set up their businesses in the country and provide capital for their political finances. 
• Hong Kong is well regarded by other countries that are always interested in making market deals and treaties. In particular, Hong Kong has favourable deals with Mainland China. 

Offshore tax exemption in Hong Kong 

As we previously stated, Hong Kong tax frame is strictly territorial. This means that if only the profits and goods that have been generated within the Hong Kong jurisdiction are subject to the income tax rates, then all the foreign companies are said to be tax-free and therefore exempt from paying taxes to the government. Of course, there are some conditions to consider in order to qualify for tax exemption in Hong Kong, and can only be decided after the Inland Revenue Department (IRD) carries out a satisfactory assessment.

If you have any questions if your Hong Kong company qualified for offshore tax exemption, get in contact with our of our tax advisors.

What makes Hong Kong different from other tax havens? 

Hong Kong was ranked number three city in the world for the favourable advantages it offers to companies that want to do business here. The reasons behind this title are many, and each of them contribute to making Hong Kong different from any other tax haven country.

To name just a few, here’s a list of some factors that make Hong Kong a unique tax haven:

• Friendly tax rates and system, of course.
• Business and owners do not necessarily have to physically be in Hong Kong to start a company here.
• Mainland China free market deals – it’s also easier for foreign businesses wanting to trade with China (and other Asian markets)  if they have a company in Hong Kong. 
• Hong Kong law framework allows non Hong Kong residents to be the only shareholders of a company.
• Hong Kong is home to some of the highest ranked banks in the world and can offer multi-currency banking services. 
• Hong Kong offers great opportunities.

Need professional assistance with your HK company’s tax and accounting? 

We hope you enjoyed reading this article and if you have any type of query regarding company tax and accounting in Hong Kong, or need assistance, contact Startupr today! We can help you with your business registration in Hong Kong, mail forwarding, accounting, and bookkeeping services. Remember, we’re just a call away!