Why is Hong Kong’s tax system attractive to businesses?
Hong Kong is known to have one of the most business-friendly and straightforward tax systems in the world. And no, Hong Kong is not tax-free; it has a low-rate tax system and a lot of added benefits. Moreover, Hong Kong business taxes are based on a territorial taxation system. Regardless of whether the taxpayer lives in Hong Kong or not, only the profits generated in the city will be taxable.
In addition to this, there are many tax exemptions and benefits that the city offers. Due to these benefits, a lot of entrepreneurs choose to open offshore Hong Kong companies. Need more information before you make a decision for your business? This article details everything you need to know about why Hong Kong’s corporate tax system attracts many entrepreneurs.
Hong Kong Business Tax System
The words that best describe the tax system in Hong Kong are: simple and business-friendly. Hong Kong has no sales and capital gains taxes. And unlike other countries, it doesn’t have anything like collections. In fact, there are just three main and direct taxes that are charged for every business in Hong Kong – income tax, profits tax, and property tax. All these taxes are claimed and handled by the Inland Revenue Department, the jurisdiction’s main tax authority.
Corporations in Hong Kong only need to pay the profits tax and there are two systems that govern how the profits tax is collected in Hong Kong – the territorial tax system and the flat-rate tax system:
- Territorial Tax System – Hong Kong’s corporate tax system establishes that the taxes will be paid based on profits earned by businesses or trade conducted within Hong Kong. If the company is incorporated in Hong Kong, but is doing business outside Hong Kong, the profits tax is not levied on the company.
- Flat-Rate Tax System – A flat-rate tax system is where only one tax rate is applied to profits earned by any company, regardless of the company’s size, industry, and so on. There are two payment options under this for all the companies: single-tiered system and two-tiered system.
As per the single-tier system, the profits tax is capped at 16.5% for all corporate businesses, and 15% for all unincorporated companies. On the other hand, the double-tier tax system for both the unincorporated and incorporated companies offers a lower tax rate for their initial HK$2 million profit earned, which is a huge benefit for every small and medium-sized business.
In fact, during 2018, the incorporated companies had to pay a tax of just 8.25% on the first HK$2 million made. The rest of the generated amount above HK$2 million was taxed at the normal rate of 16.5%. For the companies that had not been incorporated, the tax for the first HK$2 million made was slashed to 7.5%, while the profits generated that were above HK$2 million were taxed at 15% as normal.
These two systems are the reason why Hong Kong is considered to be the best when it comes to taxes. In fact, there are no taxes for capital gains, payroll, or turnover. A company only has to pay the profits tax in Hong Kong. And in addition to the low profits tax rates, there are a lot of deductions and allowances that assist in the reduction of the total taxable amount.
The second type of tax that Hong Kong has is the income tax. If you are getting a salary from a company in Hong Kong, then this amount is subjected to Hong Kong income tax. The tax rate ranges in incremental bands that start at 2% and go to 17%. Moreover, the standard income tax rate is 15% which is applied to any income or pension in Hong Kong. In addition to this, there are many personal allowances and deductible benefits offered to reduce the overall taxable amount.
The Taxation Process
When you incorporate a company in Hong Kong, the Inland Revenue Department (IRD), Hong Kong’s tax authority, will issue an estimated tax return in April every year.
Since the tax is applicable for profits earned during that financial year, the tax amount issued by the IRD is based on an estimate derived from the previous year’s profits. The company can pay the total tax in two installments: 75% of the tax amount is paid as the first installment and the left 25% is paid after 3 months.
At the year end, the exact amount of profits earned becomes clear. If the tax amount was supposed to be more, the excess amount is added to the next year’s first installment. And if the amount paid was less, the remaining amount is added to the company’s next tax installment.
Offshore Tax Exemption in Hong Kong
Hong Kong offshore companies are those companies that are incorporated in Hong Kong, but operate and offer services outside of Hong Kong. Since the profits earned by the company are outside the jurisdiction, these profits are not taxable in Hong Kong.
A company can obtain the offshore tax exemption in Hong Kong once it proves that its business activities are not conducted in Hong Kong. This exemption is headed and offered by the IRD after all has been verified. Here are the things that make a company qualified for the offshore tax exemption in Hong Kong:
- The company does not offer any services in Hong Kong.
- The company is operated by its employees or owners outside of Hong Kong only.
- There are no suppliers or customers of the company in Hong Kong.
- The products of the company don’t enter Hong Kong.
- There are no employees of the company in Hong Kong.
- The owner of the company rarely visits Hong Kong.
- All the service agreements and business decisions are signed outside Hong Kong.
Kindly note that due to the territorial concept, only the profits that are derived in the city are liable to the profits tax in Hong Kong. For instance, if an HK company concludes the terms of a contract with the customers and suppliers outside of Hong Kong, where all the operations take place outside the jurisdiction, it is possible to claim the offshore tax exemption in Hong Kong.
Double Taxation Relief
Double taxation happens when the taxpayer is taxed two times, on the same income, and in two different countries – one is the country in which the amount was earned and the second is where the amount was received. This is a very common issue in many countries. Due to this, many jurisdictions work towards offering relief from the double taxation issue on a unilateral and bilateral basis under Double Taxation Agreements (DTAs).
A DTA is an agreement between two countries that want to eliminate double taxation on any income. Hong Kong has about 40 DTAs with 40 countries, including the UK, China, and many more. These agreements ensure that double taxation is not an issue at all for people who open businesses in Hong Kong and run their operations in these countries, or vice-versa.
No Withholding and Capital Gains Tax
Hong Kong does not have any capital gains tax, no estate tax, and no tax on dividends. To explain further, there is no withholding tax on the dividends and interest payments received by a Hong Kong company.
Although there is no capital gains tax or withholding tax, every business that is registered in the jurisdiction has to keep paying a business registration fee of HK$2,000 every year. In addition to this, there is a property tax that is levied at 15%. This tax is paid on the amount earned from renting out property that is located in Hong Kong.
Other Tax Incentives in Hong Kong
There are many other tax breaks that are applied to a Hong Kong company, especially for those that invest in R&D and innovation. In fact, there is a 300% tax deduction for the very first HK$2 million that is spent on R&D and a 200% deduction for the rest of the amount spent. The basic idea behind this offer is to bring more competitiveness and innovation to the jurisdiction.
Moreover, there is a 100% deduction for all the expenses used for various machinery related to computer hardware, software, and manufacturing. Amount spent on any machinery made or installed to help the environment can be completely deducted from the total tax amount. In addition to this, there is a 5-year write-off period for all the amount used to refurbish and renovate a business building or its grounds.
Get your Hong Kong Business Taxes Done Right with Our Experts
The favorable tax structure in Hong Kong is one of the main reasons why foreigners come and open businesses. If you want to open a company, or need assistance with filing for the profits tax in Hong Kong, Startupr can help you. We offer a broad range of bookkeeping, accounting, professional tax advisory and filing services. Contact us to know more or visit our services page to book a consultation with the best in the industry.