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Business Taxes in Hong Kong

Hong Kong relies on a territorial tax system, under which Hong Kong companies are only taxed on income arising in or deriving from Hong Kong. Meanwhile, foreign-source income is not subject to Hong Kong tax. For tax purposes, companies are treated as Hong Kong residents if their place of control and management is located in Hong Kong.
 
Hong Kong is introducing a two-tier profits tax rate system, by lowering the profit tax rate for the first 2 million HKD of profit from the current 16.5% to 8,25% (expected to be implemented in April 2018)

PROFIT TAX

Profit tax is levied at a rate of 16.5% on Hong Kong source income earned in or derived by companies carrying on business in Hong Kong. In assessing the source of profits, Hong Kong adopts the “operation test”, which consists of identifying the most important profit earning profits activities and the place where those activities are carried out.
 
Foreign-source income is, therefore, not subject to Hong Kong profit tax (the "Offshore Income Exemption"). No prior application is required to enjoy such exemption, and Hong Kong companies deriving offshore income simply declare that income as foreign-source income in the tax return. However, the Inland Revenue Department (“IRD”) may require the company to provide evidence to justifying the offshore nature of the income declared as offshore and can challenge the exemption from tax of such income.
 
There is no profit tax on capital gains, dividends and/or interest. Only certain gains on speculative transactions can be subject to profit tax as trading income.

DOUBLE TAX TREATIES

Thanks to  Hong Kong’s territorial tax approach, Hong Kong businesses rarely face double taxation issues, as their offshore income is exempt from tax in Hong Kong.
 
As of January 2018, Hong Kong has concluded 38 double taxation agreements (DTA) with other countries, including Canada, France, Italy, Luxembourg, and the UK. Most treaties are concluded on the OECD model and Hong Kong has also adopted OECD standards for information exchange.
 
WITHOLDING TAXES
 
Hong Kong does not levy any tax on dividends and interest.
 
As for royalties: payments made to non-residents for the use of intangible assets located in Hong Kong or  if the payments are tax deductible for the payer, then such royalty payments are subject to withholding tax in Hong Kong. The tax rate will vary depending on whether or not the non-resident company is associated to the payer. For non-associated companies, 30% of the gross amount of the royalties paid is subject to profit tax at 16.5%, resulting in an effective rate of 4.95%. For associates, 100% of the gross amount of the royalties paid is subject to profits tax, resulting in an effective rate of 16.5%. Additionally, the payer of the royalties has a withholding obligation under the Inland Revenue Ordinance to withhold the corresponding tax and to remit it to the IRD.
 
INDIRECT TAXES 

  • VAT:
There is no Value Added Tax in Hong Kong.
 
  • Stamp Duties:
Ad valorem stamp duties are charged on documents connected with a lease, sale or transfer of immovable property, and on the sale of shares. Rates generally vary from 0.25% (short term lease) to 8.5% (sale and conveyance of property).
 
  • Customs:
Hong Kong does not levy customs duties. The only excise taxes apply on alcoholic beverages, tobacco, methyl alcohol and hydrocarbon oil.


November 2015

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