Kong Scope of Profits Tax
tax is levied under the Inland Revenue Ordinance
on the "assessable profits" of corporate
entities, partnerships, trusts and sole proprietorships.
It is levied according to the "territorial
principle" meaning that it is the source of
the income rather than the residential or non-residential
status of the entity that determines whether or
not trading income is or is not subject to Hong
Kong profits tax.
territorial principle means that only income which
meets the following 3 preconditions is subject to
Hong Kong profits tax:
The entity must trade in Hong Kong
The income must arise from such a trade
The income must arise in or be derived from Hong
residential or non-residential status of the entity
is irrelevant as is the fact that the income is
or is not exempt from tax in a foreign jurisdiction.
Advance tax rulings are available in the SAR and
are particularly favored and recommended on the
question of whether or not for profits tax purposes
trading income is deemed onshore and taxable or
offshore and tax exempt.
of income" for profits tax purposes has been
defined as the geographical location of the operation
which substantially gave rise to the income, but
the Inland Revenue's Practice Note No 21 adds more
The establishment of an office in Hong Kong:
does not of itself render a company liable to profits
tax where that office is not generating profits
from within the territory.
Place where the contract was negotiated and executed:
A key criterion is the place where the contract
was negotiated and signed. Income relating to a
sale contract negotiated by the seller from the
territory by way of facsimile or telephone where
the negotiation did not require travel outside the
territory is deemed Hong Kong source income for
profit tax purposes. Likewise if the contract is
negotiated and signed outside the territory and
the goods sold are not sourced from within the territory
then any income arising is not deemed Hong Kong
source income for profits tax purposes. This is
often achieved by utilizing an offshore company
which re-registers in the territory as a foreign
company but whose directors both remain non resident
and negotiate and execute the contract from the
Center: Where the Hong Kong entity is merely
a booking center in the sense that it does not negotiate
or draft the sale agreement (which is carried out
abroad) but merely issues an invoice on instructions,
operates a bank account and maintains accounting
records covering the transaction then the income
from such a transaction is not deemed Hong Kong
source income for profits tax purposes.
& Securities : Gains from shares and securities
purchased and sold on the territory's stock exchange
are deemed Hong Kong source income for profit tax
purposes (assuming the entity is subject to profit
tax on such an activity).
Border Land Transportation:
Income from cross-border land transportation is
deemed Hong Kong source income if the passengers
or goods are normally uplifted in Hong Kong.
Loans : Loan interest on a loan made available
to the borrower within the jurisdiction of Hong
Kong is deemed to be Hong Kong source income for
profits tax purposes and taxable in the hands of
the Hong Kong lender whereas loan 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.
Kong Profits Tax Rates
A number of rates apply in 2011:
pay a standard rate of 16.5% on assessable
Businesses other than corporate entities pay
a rate of 15% on assessable profits.
rates have applied from the year of assessment
taxpayers are subject to the same corporation
or unincorporated business tax rate irrespective
of their residential status.
Special concessionary rates of profits tax which
are substantially less than the standard rates
apply to the following businesses or sources of
profits and interest income derived from
debt instruments issued in Hong Kong with
an original maturity of between three
and seven years will be chargeable to
tax at a concessionary rate, being 50%
of the normal profits tax rate,
while those with a maturity period of
seven years and above qualify for a 100%
re-insurance of offshore risks is taxed
at a concessionary rate, being 50% of
the normal profits tax rate.
insurance businesses are assessed at 5%
of the value of the premiums arising in
entity whose business is to grant rights
to use a trademark, copyright, patent
or know how pays a flat profit tax of
30% of 16.5% (4.95%, or 4.5% for an unincorporated
business) 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.
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
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 rate is 16.5% of assessable
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.
entity whose business is to rent out a
film, tape or sound recording for use
in any cinema or television program pays
a profit tax of 30% of 16.5% (4.95%, or
4.5% for an unincorporated business) of
the payment received with all related
expenses being non tax deductible.
Kong Special Administrative Region (HKSAR) Chief
Executive, Donald Tsang, announced during his
Policy Address to the Legislative Council in
October 2007, cuts in both salaries and profits
taxes in 2008-09.
the significance of profits tax on the Government's
revenue, I intend to adopt a prudent approach
by initially offering a one percentage point
cut to 16.5 percent in 2008-09."
rate of tax for unincorporated businesses was
also cut by 1% for 2008/9, to 15%.
the February 2008 budget, Financial Secretary
John Tsang announced that small and medium businesses
would be in line for a one-off tax reduction,
with a proposed 75% concession of profits tax
for 2007-08, up to a maximum of HKD25,000. Business
registration fees were also waived for 2008-09.
encourage the business sector to purchase more
electric vehicles, hybrid vehicles and other
environment-friendly commercial vehicles, the
Financial Secretary decided to accelerate the
tax deduction for capital expenditure on environment-friendly
vehicles in the 2010/11 budget.
to the Inland Revenue Ordinance (Cap. 112),
businesses are entitled to a total of 72% of
the capital expenditure as deduction of depreciation
allowance in the first year of its purchase
of the specified machinery (taking the category
of motor vehicle as example). Starting from
the second year onwards, businesses will be
granted annual allowances at the rate of 30%
(applicable for the category of motor vehicle)
of the reducing value for that specified machinery.
Under tax relief announced in the 2010/11 budget,
the tax deduction provided to a business in
the first year of purchase of an eligible Environment-friendly
Vehicle will be increased from 72% to 100% of
the capital expenditure. Thus, the deduction
of cost is accelerated.
Inland Revenue (Amendment) (No.3) Ordinance
was gazetted on 18 June 2010.
a concessionary profits tax rate at 50 per cent
of the normal rate is applied to the interest
income and profits derived from qualifying debt
instruments with a maturity period of less than
seven years but not less than three years. The
Financial Secretary proposed in the 2010/11
budget to extend this concession to cover qualifying
debt instruments with a maturity period of less
than three years.
to better meet market requirements, the Financial
Secretary also planned to amend the provisions
under the Inland Revenue Ordinance (“IRO”)
that require such qualifying debt instruments
to be issued to the public in Hong Kong. The
government announced in February 2010 that these
proposals would take effect upon the enactment
of the law amendments.
to effect the tax concession proposal for qualifying
debt instruments was introduced into the Legislative
Council on February 16, 2011 as the Inland Revenue
(Amendment) Bill 2011. This Bill would also
replace the "issued to the public"
criterion by a new requirement specifying that
for a debt instrument to be eligible for the
QDI scheme, it has to be issued in Hong Kong,
at issuance, to 10 or more persons; or if less
than 10 persons, none of them must be an associate
of the issuer of the debt instrument. The amendment
took effect on March 25, 2011.
promote wider application of intellectual property
by enterprises and the development of creative
industries, the Financial Secretary proposed
in the 2010/11 budget to expand the existing
regime of tax deductible capital expenditure
on the purchase of patent rights and industrial
know-how to cover registered trademarks, copyrights
and registered designs.
regard to intellectual property, under Hong
Kong’s existing tax arrangements, capital
expenditure by enterprises to purchase patent
rights and industrial know-how is deductible
under profits tax. A legislative bill introduced
into the LEgislative Council on March 9, 2011
seeks to amend the Inland Revenue Ordinance
to provide such a tax deduction (spreading over
five succeeding years on a straight-line basis
starting from the year of purchase) for capital
expenditure incurred on copyrights, registered
designs and registered trademarks. It would
also remove the "use in Hong Kong"
condition currently applicable to the tax deduction
for capital expenditure incurred on the purchase
of patent rights and industrial know-how. Those
enhancement measures will also be applicable
to the proposed tax deduction for copyrights,
registered designs and registered trademarks.
2010/2011 also brought about clarification by
the Inland Revenue Department of the meaning
of "central management and control"
in the Departmental Interpretation and Practice
Notes No. 43 to address the industry's concern
about the residency requirement for directors
of the management committee of offshore funds
in their applications for profits tax exemption.
for 1-year Business Registration Certificates
and 1-year Branch Registration Certificates
have been waived as a result of the 2010/2011
budget for the period from August 1, 2010 until
July 31, 2011. Businesses are still required
to pay the levy for the Protection of Wages
on Insolvency Fund.
Financial Secretary resisted the temptation
to lower Hong Kong's profit tax rate or tinker
with the profit tax regime in the 2011/12
budget, announced in February 2011, despite
a large revenue surplus. He is, however, under
pressure to effect further business tax concessions
to ensure the territory maintains is competitiveness
with other Asian financial centres, particularly
Kong Calculation of Taxable Base
A number of factors including the territorial principle
have created an extremely attractive fiscal regime
exempting categories of income which in most other
jurisdictions would normally be subject to a profits
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
is no separate schedule of capital gains tax in
Hong Kong. Nor does the territory follow the practice
of other jurisdictions and tax capital gains as
trading income which is subject to profits tax.
However by way of exception a business whose activities
is to trade in capital assets is assessed to profits
tax on any profits made on the sales of those
capital assets as if these gains were trading
income. Likewise if the asset is deemed a revenue
asset as opposed to a capital asset then any profits
made on its disposal are deemed trading income
and assessed to profits tax. The absence of capital
gains tax (often together with other factors)
has had a number of fiscal consequences:
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 jurisdiction is exempt
from tax under the principle of territoriality.
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.
currency gains and losses are considered to
have a capital nature they are neither taxable
profits nor deductible losses.
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).
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 non
deductible in the territory).
The profits and losses of the foreign branch or
subsidiary of a Hong Kong company are neither
taxable profits nor deductible losses in Hong
Kong owing to the territoriality principle.
Interest income received by a resident or non
resident business entity on deposits lodged with
a financial institution are 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 tax treatment of loan interest payments and
receipts requires a special mention. 3 situations
interest repayments made by a Hong
Kong borrower to a foreign lender are only
tax deductible in Hong Kong if the foreign
lender is a "financial institution".
If the foreign lender is not a financial institution
but is the parent or subsidiary of the Hong
Kong borrower the interest payments are not
tax deductible in the territory unless the
parent or subsidiary is a connected company
and is subject to Hong Kong profits tax on
the loan interest receipts.
interest repayments received by a Hong
Kong company on a loan made to a 3rd party
are not taxable income in the hands of the
Hong Kong lender if the loan was advanced
to the borrower from a foreign jurisdiction
such as Gibraltar. If the loan was advanced
to the borrower from Hong Kong then the loan
interest repayments are taxable in the territory.
Hong Kong parent company which borrows money
to set up a subsidiary or a branch in a foreign
country cannot deduct the cost of the loan
for profit tax purposes since the income earned
by the borrower has a foreign source. Therefore
the loan should always be sourced by the foreign
subsidiary or the foreign branch in the foreign
jurisdiction in which it will be tax deductible.
to the principle of territoriality there is no
controlled foreign company legislation under which
the profits and capital gains of non resident
subsidiaries can be taxed as if they were the
profits of a resident parent company.(The converse
applies in both the United States and the United
group accounting under which the profits of one
company in the group can be set off against the
losses of another company in the group so as to
reduce the over all profit subject to profits
tax does not exist in Hong Kong.
Losses can be carried forward indefinitely. This
compares favorably with other jurisdictions which
only allow losses to be carried forward for a
fixed period of time (usually 5 years).
Since there are no debt/equity thin capitalization
rules in Hong Kong a foreign parent can set up
a resident subsidiary with a minimum of share
capital and a maximum of loan capital and thereby
reduce taxable profits arising in Hong Kong through
excessive interest payments.
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
The following sources of trading income are exempted
from profits tax:
received or capital gains made on the purchase,
retention or sale of a Government bond issued
under the Loans (Government Bonds) Ordinance;
fund debt instruments;
Kong dollar denominated multi agency
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
Tax Deductible Allowances
following allowances are deductible from assessable
profits for profits tax purposes.
deduction is allowed for a contribution (or provision
for a contribution) by an employer amounting to
not more than 15% of the employee's annual salary
into a recognized retirement scheme registered
under the Occupational Retirement Schemes Ordinance.
(It is in any event an offence for an employer
to operate a pension scheme that is not registered
under this Ordinance). Since the Mandatory Provident
Fund Scheme came into effect on 1st December 2000
allowable deductions are either 5% of an employee's
gross salary or a maximum of USD2,560 per month.
donations made to approved charitable institutions
or trusts of a public character or to the government
of the Hong Kong Special Administrative Region,
amounting in aggregate not less than HKD100 but
not exceeding 35% (10% for years of assessment
up to and including 2002/03; and 25% for years
of assessment 2003/04 to 2007/08) of the adjusted
assessable profits before deduction of donations,
are allowable for deduction in computing the assessable
Hong Kong tax paid on foreign income which by
law is chargeable to profits tax in Hong Kong
is an allowable deduction for profits tax purposes.
(N.B. foreign source income is not normally subject
to tax in the territory).
Any property tax already
paid is deductible from income for profits tax
Depreciation allowances for capital equipment
are as follows:
60% of the cost of all other plant and machinery
can be written off in the first year with
a rate of 10-30% written off thereafter.
20% of the cost of construction of an industrial
building can be written off in the 1st year
with 4% per annum thereafter.
incurred refurbishing or renovating business
premises can be written off in 5 equal installments.
May, 2004, LEGCO
expanded the scope of deduction for research
and development expenses under profits tax
to cover design-related expenses.
Kong Sales Taxes
Kong does not currently have a sales tax, but there
has been much discussion of the need for one. In
March, 2004, then
Financial Secretary Henry Tang announced that the
introduction of a sales tax was likely to be at
least three years away. But the Hong Kong government
said in December 2006, that it will abandon plans
for a goods and services tax.
used his maiden budget speech to make the case for
the introduction of a GST-style indirect tax. “Hong
Kong's tax base is narrow. In the long run, we need
to broaden it to secure a steady source of revenue,”
he observed, adding that:
Hong Kong, non-tax revenue accounts for about 40
per cent of total revenue, whereas the figure for
OECD economies is around 14 per cent. This shows
that Hong Kong has a far heavier reliance than those
economies on non-tax revenue, such as land revenue
and investment income.”
He continued: “Hong Kong is the only developed economy
that does not have one. GST is broad-based and equitable,
and is capable of yielding a sizeable and steady
revenue. Depending on any exemptions, a GST of 5
per cent would generate around $20-30 billion revenue
for the government in a full year."
being less sensitive than direct taxes to the cyclical
movement of the economy, GST can enhance the government's
ability to withstand the pressure on public finances
brought about by an economic downturn.”
Tang announced at the time that the government had
established an internal committee to conduct a detailed
survey into the implementation of a sales tax in
the territory, drawing upon the experiences of other
nations. The committee was expected to report to
the Financial Secretary by the end of 2004. “After
that, I will announce what will be done next. We
are likely to need at least three years to implement
his 2006 budget speech, Mr Tang said that while
Hong Kong's financial position had been improving
gradually, the jurisdiction still faced the problem
of a narrow tax base: At the time, about one in
three employed people paid tax and most of the revenue
from salaries tax comes from the minority of taxpayers.
broaden the tax base, Mr Tang reiterated that he
will consider introducing a goods and services tax
- after publishing a consultation paper on the subject
later in the year to seek the public's views.
a surprising about turn, the Hong Kong government
said in December 2006, that it will abandon plans
for a goods and services tax in the face of widespread
public hostility to the idea.
consultation has showed that people have concerns
that a GST would be inflationary, would be regressive
and would discourage tourists.
have heard clearly a strong opposition to the GST
from the public,” said Financial Secretary
Henry Tang Ying-yen. He said that the government
would still put forward ideas for widening the tax
base, something that has been strongly urged on
Hong Kong by the IMF and other bodies, but that
they would not include the GST as an option.
on the motion at the time, Henry Tang said that:
"We are disappointed at the outcome. Actually
the biggest difference between the government and
the Hon Yeung Sum's motion, that this Council opposes
the introduction of a Goods and Services Tax, is
that the actual effect of the motion will suffocate
further discussion on broadening the tax base and
a Goods and Services Tax. I hope in this incident,
that LegCo members have not misjudged public sentiment
nor have they lost a valuable chance to discuss
a very important subject in the community."
continued: "Actually, there was a lot of discussion
today regarding various different types of taxes.
New taxes, for example capital gain tax, progressive
tax or dividend tax and indeed they have raised
a number of questions as well as concern about the
GST. This is exactly why we should continue this
discussion and we should continue to consult."