Businesses in Hong Kong flourish for a number of reasons. The main reason is the taxation structure. Read more to know more
While the chances of starting a business in a foreign nation may seem too grim, it’s not completely true. At least it’s not the case with all foreign countries. At least it’s not the case with Hong Kong! Among several Asian countries that lure foreign entrepreneurs to try their new business ventures, Hong Kong has been the most popular. Having the fastest growing and freest economy, Hong Kong has been the hot favourite destination for new talents to establish their businesses. The fact that the country was open for business even during the COVID-19 lockdown is just an example of how driven the economy is in Hong Kong.
Business Entities in Hong Kong
The most common types of business entities in Hong Kong are limited liability companies, sole proprietorships, and partnership companies. Limited liability companies, whether private or public, whether limited by shares or guarantees, offer the members the advantage of not being personally liable for the debts incurred by the company. The members are liable only to the extent of the capital they have invested in the business.
In the case of sole proprietorship companies, the proprietor and the business are one and the same, wherein the proprietor is wholly responsible for the debts and liabilities of the business. The major attraction this entity offers to entrepreneurs is that the income from the business is taxed at 15% despite the corporate taxes being levied at 16.5%, as a sole proprietorship is treated as an unincorporated form of business.
In the case of partnership firms, there are two types. General partnership firms where the partners are personally liable for the debts and obligations; limited liability partnerships wherein there is at least one partner who is liable to the extent of shares owned and at least one other who is fully liable for the debts and obligations of the firm. Here again, these entities are considered unincorporated businesses, and the income made out of them is taxed at 15%, as against the general corporate tax charge of 16.5%.
In the case of partnership firms, the firms are required to enclose the partnership’s tax returns for profits tax. A statement pertaining to the financial position of the company or the balance sheet along with the statement showing the profits and loss accounts with the tax computation must be furnished. On the other hand, the partners of the firm are subjected to taxes on the profits earned by them, proportional to the ratio of their shares in the firm.
A branch office is not considered a separate legal entity, as it is merely a continuation of the parent company. The parent company is held liable for all the debts and obligations of the branch company. Branch offices or registered foreign companies and subsidiaries of foreign companies incorporated in Hong Kong are taxed at similar rates.
Taxation Procedures for Businesses Incorporated in Hong Kong
The taxation procedure in Hong Kong is quite straightforward. It is territorial in nature, meaning that only the income or profit earned in Hong Kong is taxed unless there is a specific exemption mentioned in the Inland Revenue Ordinance (IRO). Here, the taxes charged are dependent on the source of income rather than the place where the business owner resides. The question of whether a business or the income of a business is completely sourced out of Hong Kong can be satisfactorily answered only after the application of the stipulated principles proposed by law. This would essentially vary on a case-to-case basis.
The taxation system in Hong Kong is entirely different from the one existing in mainland China. The Inland Revenue Ordinance (IRO) governs the taxation procedures, and the Inland Revenue Department (IRD) is the sanctioned authority for collecting taxes in Hong Kong.
Tax on Profits
Hong Kong follows a two-tiered profits tax system wherein, for the first HKD 2 million, a tax rate of 8.25% is applied, and for amounts exceeding that, a rate of 16.5% is employed. In the case of unincorporated businesses like partnerships and sole proprietorships, the two-tiered rates applicable will be 7.5% and 15%, respectively. It has to be kept in mind that as Hong Kong charges taxes on a territorial basis, even a non-resident could be charged if the business carried out has its source in Hong Kong.
Hong Kong’s tax regime is something the world’s countries have to look at and learn from. Hong Kong not only has an effective taxation framework but also follows several good practices, such as discouraging double taxation. It is highly commendable that Hong Kong has entered into Double Taxation Agreements (DTA) and Tax Information Exchange Agreements (TIEA) with several other countries. Also, Hong Kong offers several tax incentives to motivate entrepreneurs. Tax concessions are offered to companies that deal with mutual funds and trusts. A 100% deduction on capital expenditure is awarded for machinery pertaining to the protection of the environment. Businesses that intend to renovate the premises are assisted with a 5-year write-off period on their capital expenditure. Also, profit tax deductions are conferred for expenses encountered in acquiring intellectual properties like patents, copyrights, registered trademarks, etc.
Stamp Duty
The transfer of stocks or immovable property attracts stamp duty in Hong Kong. In the case of Hong Kong stocks, it is 0.26% of the exchange price. These refer to the stocks that are registered in Hong Kong and include bonds, shares, debentures, and securities. The tax rates vary when the transfer of immovable property comes into the picture. While residential property is taxed at a flat 15%, non-residential property, on the other hand, is charged anywhere from HKD 100 (Hong Kong Dollars) to 4.25% of the value of the property.
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