KNOWLEDGE BASE

Doing Business in China & Hong Kong

TAXATION

CORPORATE TAXATION

Hong Kong has a territorial basis of taxation. Only local-source trading, property or employment income is taxed, and investment income is not taxed. The corporate profits tax rate is 16.5%; there is no capital gains tax, no withholding tax, no sales taxes, no VAT, no annual net worth taxes and no accumulated earnings taxes on companies which retain earnings rather than distribute them.

There are a number of full or partial exemptions from profits tax:

• Interest on a loan made available to the borrower in a foreign jurisdiction is not deemed Hong Kong source income and is therefore not taxable.
• An entity whose business is to grant rights to use a trademark, copyright, patent, know how or other types of intellectual property pays a flat profit tax of 30% of 16.5% (4.95%) of the payment received with all related expenses being non tax deductible. If the recipient of the payment is a related offshore licensing company the Hong Kong company must withhold and hand over 4.95% of the fee paid over.
• Income from the international operations of shipping companies is exempt from tax unless the ships are operating in Hong Kong waters or proximate to the same in which case only that proportion of income earned in Hong Kong is subject to local tax of 16.5%. Shipping profits meeting the conditions of the double taxation agreement with the USA are exempt from profits tax in Hong Kong.
• Dividend income received by a Hong Kong parent company from either a resident or foreign subsidiary is not deemed income in the holding company's hands and is thus not subject to an assessment to profits tax.
• Interest or capital gains made on qualifying medium debt instruments are taxed at a concessionary rate presently 50% of the normal profits tax rate.
• The re-insurance of offshore risks is taxed at 8.75% of assessable profits.
• Life insurance businesses are assessed at 5% of the value of the premiums arising in Hong Kong.
• For airline companies, irrespective of whether or not the company is managed and controlled from Hong Kong assessable profits are the proportion of income arising within Hong Kong (from the uplift of passengers and freight locally) to the proportion of worldwide income. Under a number of international aircraft double taxation agreements the government has agreed to include income arising abroad for taxation in Hong Kong where that income is exempted abroad under the agreement. Likewise profits meeting the conditions of the double taxation agreements are exempt from profits tax locally.
• The sale of goods on consignment from Hong Kong on behalf of a non resident is subject to a tax of 1% of the turnover without any deductions unless the non resident can produce accounts to show that he would have paid less profit tax than consignment tax in which case a normal rate of tax will apply. The selling of goods on consignment is deemed to be the equivalent of creating a permanent establishment.
• Profits remitted to a Hong Kong parent which represent the profitable disposal of its shareholding in a resident or non resident subsidiary are not assessed to tax in the territory both because the gains are capital gains and because (in the case of a non resident company) income arising outside the jurisdiction is exempt from tax under the principle of territoriality.
• The profitable disposal by a Hong Kong entity of foreign real estate is not assessed to tax in the territory both because the gains are capital gains and because of the principle of territoriality. This includes a disposal effected by means of the Hong Kong entity selling 100% of the shares in a company whose sole asset is the foreign real estate.
• The transfer by a Hong Kong entity of capital assets to a foreign or resident subsidiary or branch at market value and at a profit is considered a capital gain and thus does not attract tax in Hong Kong (unless the assets are classified as revenue assets).
• Rental income from foreign real estate is not assessable income in Hong Kong for profit tax purposes. (However depreciation & interest payments on loans made to finance the real estate tax are not deductible in the territory).
• Interest income received by a resident or non resident business entity on deposits lodged with a financial institution is exempt from profits tax (by way of exception if the deposit was made by a "financial institution" then any interest received by the financial institution is deemed trading income for profits tax purposes and taxed accordingly).
• The following sources of trading income are exempted from profits tax:
  • Interest received or capital gains made on the purchase, retention or sale of a Government bond issued under the Loans (Government Bonds) Ordinance.
  • Exchange fund debt instruments.
  • Hong Kong dollar denominated multi-agency debt instruments.
  • Specified investment schemes which comply with the requirements of a government supervisory authority are exempt from tax. Specified investment schemes include investments in unit trusts and mutual funds.
  • The repayment by a foreign subsidiary to its Hong Kong parent of the principal of loan capital or share capital is free of tax in the territory including where the repayment is by way of a capital reduction or a final dividend distribution in a liquidation.

PERSONAL TAXATION

Personal taxation is among the lowest in the world at around 15% on "assessabel income" after the deductions but before allowances or at progressive rates levied on "assessable income" after the deductions and allowances. From the tax year 2008/2009 these progressive tax rates are:

Nil to HKD40,000 - 2%

HKD40,000 to HKD 80,000 - 7%

HKD80,000 to HKD 120,000 - 12%

HKD120,000 upwards - 17%

Individuals pay no tax on investment income or capital gains, whether resident or not.

There are no special rules for foreign employees of Hong Kong businesses; the territorial principle governs salaries tax with the consequence that salaries tax is only levied on income "arising in or derived from a Hong Kong employment". The definition of income includes wages, salaries, bonuses, commissions, payments by the employer into a pension fund for the employee and gratuities. It does not include either a pension from a source outside Hong Kong or compensation for loss of employment.

The territorial principle of only taxing income arising in or derived from a trade within Hong Kong results in reduced or nil tax being levied in a variety of situations. Thus:

• Income paid in Hong Kong but which relates to services rendered outside the islands is exempt from salaries tax if the fiscal authorities are satisfied that tax has already been paid on that income in a foreign jurisdiction.
• An individual with Hong Kong source employment who works abroad but renders services in Hong Kong for less than 60 days in any tax year is exempt from salaries tax in the jurisdiction.
• A non-resident with foreign source employment who works abroad but renders services in Hong Kong for more than 60 days in any tax year is assessed to tax on that proportion of his income as is represented by the number of days he worked in Hong Kong as a proportion of 365.
• Tax is not payable on that proportion of income earned in relation to work done outside Hong Kong by the Hong Kong based employee of a non resident corporation on a contract governed by the laws of a foreign jurisdiction, where the employees are paid outside Hong Kong and are taxed in that jurisdiction and where the employee's activities are not limited to working within the territory.

DOUBLE TAXATION AGREEMENTS

Hong Kong has arrangement with a number of jurisdictions for double taxation relief of shipping or airline income. It has also comprehensive double tax agreements with a number of jurisdictions to relieve taxation on income, for instance dividends, interest and royalties. The Hong Kong Inland Revenue Department allows a deduction for foreign tax paid on a turnover basis in respect of income which is also subject to tax in Hong Kong. Therefore, businesses operating in Hong Kong do not generally have problems with double taxation of income.