Profits 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.
The territorial principle means that only income which meets the following 3 preconditions is subject to Hong Kong profits tax:
The 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.
"Source 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 precise criteria:
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 offshore jurisdiction.
Booking 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.
Shares & 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).
Cross 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.
A number of rates apply in 2011:
These rates have applied from the year of assessment 2008/9.
All 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 income:
- Trading 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% concession.
- The re-insurance of offshore risks is taxed at a concessionary rate, being 50% of the normal profits tax rate.
- Life insurance businesses are assessed at 5% of the value of the premiums arising in Hong Kong.
- An 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.
- 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.
- 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 rate is 16.5% of assessable profits.
- 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.
- An 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.
Hong 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.
"Given 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."
The rate of tax for unincorporated businesses was also cut by 1% for 2008/9, to 15%.
In 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.
To 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.
According 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.
The Inland Revenue (Amendment) (No.3) Ordinance was gazetted on 18 June 2010.
Currently, 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.
Further, 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.
Legislation 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.
To 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.
With 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.
Budget 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.
Fees 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
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 tax:
Profits Tax Deductible Allowances
The following allowances are deductible from assessable profits for profits tax purposes.
Hong 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.
Tang 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:
“In 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."
“Besides, 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 GST.”
In 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.
To 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.
In 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.
Public consultation has showed that people have concerns that a GST would be inflationary, would be regressive and would discourage tourists.
“We 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.
Commenting 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."
He 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."
Property tax is levied annually on the owner or occupier of real estate located in Hong Kong. Since ownership may be split (eg an entity with a 100 year lease may grant a 50 year sublease to a 3rd party) separate assessments may be made on the same parcel of land. Property tax which is governed by the provisions of the Inland Revenue Ordinance has the following characteristics:
In November 2010, Financial Secretary Mr John C Tsang proposed to introduce a Special Stamp Duty (SSD) on residential properties as part of the the government's attempts to curb speculation and cool the property market (see below).
The laws on stamp duty are set out in the Stamp Duty Ordinance. Stamp duty is either a fixed fee or is calculated ad valorem depending on the nature of the transaction. It is payable on:
Immovable Property Stamp Duty Rates
2 separate rates of stamp duty are payable on immovable property:
Immovable Property Transactions Exempted from Stamp Duty:
The following immovable property transactions are exempt from stamp duty:
Immoveable Property Stamp Duty Anti-Avoidance Provisions
There are elaborate anti avoidance provisions in place aimed at deterring speculation. Thus where the beneficial owner of real estate executes an instrument in favor of a third party under which he undertakes to hold the real estate on trust for the third party duty is payable on this instrument as if a conveyance had taken place. Likewise stamp duty is payable where under an uncompleted contract of sale the vendor is deemed by law to hold on trust for the purchaser.
Stamp Duty Payable on Shares & Marketable Securities
Stamp duty of 0.2% is payable on the transfer of shares or marketable securities whereas 0.1% stamp duty is payable on the issued share capital of a company.
Securities Transactions Exempted from Stamp Duty
The following transactions are exempt from stamp duty:
Stamp Duty Payable on Bearer Instruments
The amount of stamp duty payable is 3% of the value of the instrument transferred.
Stamp Duty Concession in Respect of ETFs
The Financial Secretary proposed in the 2010/2011 budget to extend the stamp duty concession in respect of the trading of exchange traded funds (ETFs) to cover ETFs with the value of Hong Kong stock not exceeding 40% of the aggregate value of the underlying portfolio. The measure was to be implemented with immediate effect. ETFs satisfying the requirement can apply to the Inland Revenue Department for the concession under section 52 of the Stamp Duty Ordinance.
Following a significant inflow of hot money, leading to substantial increases in asset prices in Hong Kong, the Financial Secretary, John C Tsang, announced new anti-property speculation measures in November 2010. Among them was the SSD on residential properties, charged on top of the current ad valorem property transaction stamp duty.
Any residential property acquired on or after November 20, 2010, either by an individual or a company, listed or unlisted, and regardless of where it is incorporated, and resold within 24 months will be subject to the proposed SSD.
The SSD will be payable jointly and severally by both the buyer and the seller in the resale transaction, and will be calculated based on the consideration for the resale transaction at regressive rates for different holding periods.
It will be charged at 15% if the property is held for six months or less; 10% if the property is held for more than six months but for 12 months or less; and 5% if the property is held for more than 12 months but for 24 months or less.
It is also proposed to disallow deferred payment of stamp duty, including SSD, for residential property transactions of all values, while, to deter non-compliance, the existing statutory sanctions will be extended to cover the SSD. Any person who fails to pay the SSD by the deadline for payment shall be liable to penalties up to 10 times the amount of the SSD payable.
Not long after Tsang's announcement, Secretary for Transport and Housing, Eva Cheng, told the Legislative Council that it will introduce additional measures to cool the property market if the stamp duty and other curbs on speculative buying are not successful.
The tax year starts on April 1. The assessment to profits tax is provisional and is based on the previous year's assessable profits with 75% of the assessment being due by the 3rd quarter and the final 25% being due at the year-end. Tax payments delayed less than 6 months are subject to a 5% non-deductible surcharge whereas payments overdue by more than 6 months are subject to a 10% non-deductible surcharge. A tax credit is granted where the previous year's assessment exceeds the currents year's assessable profits.
Corporations and partnerships may be able to file their profits tax returns for 2009/10 and 2010/11 electronically using the eTAX system. However, businesses must satisfy a number of conditions in order to use this internet filing service. These conditions include: a corporation’s gross income should not exceed HKD2m (USD257,000); it should not be claiming a foreign tax credit; it should not have obtained an advance ruling on any of its tax matter in relation to that year of assessment; and it should not have paid or accrued to a non-resident person any sum for the use of intellectual property.
A partnership must satisfy all of the conditions applicable to a corporation. In addition, it cannot have more than six partners during the basis period for that year of assessment (including those partners who have retired); and all of its partners should be individuals.
There are no withholding taxes in Hong Kong as such, but there are certain circumstances in which a company making a payment to a foreign associate (subsidiary or holding company) which is deemed to be Hong Kong source income needs to withhold the tax.
For instance, when a Hong Kong entity pays royalties for the use of intellectual property to its own offshore licensing affiliate, then tax is due of 30% of 16.5% = 4.95% (4.5% for an unincorporated business) and this must be withheld by the Hong Kong paying company.