Hong Kong

Tax residency – A legal entity is deemed to be tax resident in Hong Kong if it is incorporated and/or managed and controlled in Hong Kong. However, for domestic tax purposes, both HK resident entities and nonresident entities are only taxable on profits that arise in or are derived from a trade, profession or business carried on in Hong Kong.

Basis - Corporate income tax is levied on profits that arise in or are derived from a trade, profession or business carried on in Hong-Kong. Foreign-sourced profits may be exempt from taxation, regardless of whether they are received in, or remitted to, Hong Kong.

Tax rate - Companies incorporated in Hong Kong are subject to profits tax at 8.25% for the first HKD 2,000,000 and 16.5% on profits over HKD 2,000,000.

Capital gains - Capital gains arising from the disposal of shares of resident companies are usually not subject to taxation.

Dividends - Dividends from resident companies are not subject to taxation. Foreign-source passive income (dividends, capital gains and interest) may be exempt from tax in Hong Kong if either -

Interests - Interest income derived from Hong Kong is subject to profits tax, except interest derived from any deposit in a financial institution. Foreign-source interest is subject to profits tax unless the company maintains adequate economic substance in Hong Kong.

Royalties - Royalty income derived from Hong Kong is subject to profits tax. Foreign-source royalty income, in order to obtain a tax exemption, R&D activities related to the underlying intellectual property must be conducted in Hong Kong. Otherwise, 30% of the foreign royalties received may be deemed to constitute HK-sourced profits subject to tax. If royalties are received by or accrued to a related party, 100% of such royalties may be deemed to constitute HK-sourced profits.

Foreign-source income - Other than for foreign dividends, interest and royalties explained above, foreign-source profits are usually exempt from taxation as long as evidence on such foreign-source satisfies the IRD. The profits source is usually determined by the place where the purchases and sales contracts are affected or the place where the key activities to generate the profits are carried out.

Withholding taxes - Payments to non-residents on dividends and interests are exempt from taxation. Royalties are subject to a withholding effective tax rate of 4.95% if are paid to a resident of a jurisdiction where the royalty payments are deductible for profits tax purposes. If royalties are paid to foreign-related parties, withholding tax at the standard corporate taxe rate may apply.

Losses – Losses arising from taxable income may be carried forward indefinitely. Losses may not be carried back.

Inventory - Inventory may be declared at its cost or market value, whichever is lower and must be valued through the First in first out (FIFO) method.

Anti-avoidance rules – On July 4, 2018, Hong Kong passed The Inland Revenue (Amendment) (No. 6) Ordinance 2018 (IRO), which codifies transfer pricing rules (Fundamental Rule) and requires transactions between affiliates to be carried out at an arm’s length basis for tax purposes.

The Fundamental Rule entitles Hong Kong’s taxman, the Inland Revenue Department (IRD), to adjust profits or losses of a company if compensations arisen from transactions with associated persons differ from compensations which would have been made between independent actors, and have led to a tax advantage.

The Fundamental Rule applies to transactions involving sale/transfer/use of assets and provision of services, and financial and business arrangements within a group structure.

The IRO Amendment also codifies transfer pricing documentation requirements. Hong Kong companies transacting with affiliates are required to prepare a master file and local file transfer pricing documentation, and HK ultimate parent entities (UPE) need to prepare country-by-country (CbC) reports (CbCR).

The local file typically includes documentation on the local entity intercompany transactions, whereas the master file includes high-level information about the group’s global business operations and transfer pricing policies.

A CbCR is an annual return that includes the key elements of the financial statements of a given multinational group by jurisdictions. It provides information to tax authorities about revenue, tax paid and accrued, employment, capital, retained earnings, tangible assets, and business activities, among others.

These transfer pricing reporting requirements are becoming a worldwide standard international tax practice in line with OECD’s BEPS anti-avoidance requirements.

Companies that meet certain conditions, such as total revenue of not more than HKD 400 mil or total assets of not more than HKD 300 mil, among others, might be exempted from preparing the local file and master file documentation. For its part, an HK UPE with consolidated group revenue of less than HKD 6.8 Bil may not be required to file a CbCR.

Companies subject to prepare the master file and local file documentation, and fail to do so may face a fine of HKD 50,000, and may be ordered by the court to prepare such documentation within a specified time. Failure to comply with that order may entail an HKD 100,000 fine on conviction.

The IRO amendment also provides for enhanced economic substance requirements to benefit from HK tax treaties; and modifications to certain preferential regimes.

Labor taxes – Employers are required to make contributions to the Mandatory Provident Fund (MPF) at 5% of employees’ monthly income, capped at HKD 1,500. Employees whose salary is over HKD 7,500 contribute other 5 %, also capped at HKD 1,5000.

Tax credits and incentives – A tax credit may be available for foreign tax paid on income taxable, provided that is derived from a jurisdiction where Hong Kong has concluded a tax treaty with. A tax credit is usually limited to the amount of tax payable in Hong Kong on the same income.

Investments funds may be exempt from taxation. Concessionary tax rates (up to 50% of the standard tax rate) may be available for certain treasury corporate centers, reinsurance and authorized captive insurances.

Compliance – The tax year in Hong Kong starts on 1^st April and ends on 31^st March. On average, a Limited Company may require 3 payments and 74 hours per year to prepare, file and pay taxes.

Personal income tax – Individuals who ordinarily reside in Hong Kong or stay in the country for more than 180 days per year or more than 300 days in two consecutive years may be considered Hong Kong tax residents. Although, tax residency rules may vary according to a tax treaty.

In Hong Kong income tax is levied on a territorial basis. This means that both residents and non-residents are subject to income tax on their income accrued in Hong Kong, being foreign-source income exempt from taxation.

Personal income tax on salaries is levied at a progressive rate from 2% to 17% on income exceeding HKD 120,000. Income from business is taxed under profits tax (16.5%). Dividend and interest income are exempt from taxation. Capital gains are usually tax-exempt, although those derived from certain trading assets may be subject to profits tax.

Rental income is taxed under property tax, at a 15% on the net assessable value of land or buildings. Property tax does not apply on residential properties occupied by the owner for self-use. Note that while it is possible to buy condominium units, the land is owned by the government and its tenure is on a renewable leasehold basis.

Other taxes – There are no sales taxes, nor customs duties on general imports, some commodities such as tobacco, alcohol, and hydrocarbons may be subject to excise taxes.

Hong Kong levies property tax on land and buildings owners at a 15% rate.

There is a stamp duty on contracts of sale and purchase of Hong Kong-registered stocks (0.2%) and the transfer of immovable property, up to 8.5%. There is a special stamp duty on the resale of properties held less than 36 months from 10% to 20%.

There are no capital duties, net wealth, inheritance and taxes.