Businesses in Hong Kong flourish for a number of reasons. The main reason is 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 sport their new Business in HK has been the most popular one. Having the fastest growing and freest economy, Hong Kong has been the hot favorite destination for new talents to establish their businesses. The fact that the country was open to business even during the Covid-19 lockdown is just an example of how driven the economy is in Hong Kong.
Taxation Procedures for Incorporated Business 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 the business is completely sourced out of Business in HK 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 the taxes in Hong Kong.
Hong Kong’s Profit Tax System
When it comes to taxes, understanding the basics can save you a lot of confusion and ensure you make the right financial decisions. Let’s break down Hong Kong’s profits tax system in simple terms:
- Flat Rate and Territorial Principle: Hong Kong’s corporate tax system, known as profits tax, follows a flat-rate and territorial principle. This means that taxes are based on profits earned within Hong Kong’s boundaries.
- Profit Tax Rate: The standard Profits Tax Rate in Hong Kong is 16.5% for Corporate Income Tax. However, there’s more to it.
- Two-Tier Tax System: Since 2018, Hong Kong introduced a two-tier tax system. This means companies can enjoy a preferential tax rate for a specific amount of profit, providing an incentive for businesses.
- Interest Income: Any interest income earned from operations in Hong Kong is subject to profit tax.
- No VAT or Sales Tax: Hong Kong doesn’t have Value-Added Tax (VAT) or Sales Tax for most services and items.
- No Capital Gain Tax: There’s no tax on capital gains in Hong Kong.
- Dividend Tax: Dividends, whether from Hong Kong or overseas, aren’t subject to withholding taxes.
- Personal Income Tax: Personal income tax, also known as Salaries Tax, is based on individual income.
- Property Tax: Individuals who make money from owning land or buildings in Hong Kong are subject to Property Tax at 15% of the property’s assessable value.
Tax Incentives in Hong Kong
Hong Kong offers tax incentives to make incorporating there more appealing:
- Eligible onshore and offshore funds can enjoy profits tax exemption.
- High-value manufacturing businesses get a 100% write-off for specific expenses related to manufacturing.
- Renovation or refurbishment of business premises can enjoy a 5-year write-off period.
- Various tax concessions for mutual funds, trusts, and more.
How to File Profits Tax Return/Corporate Tax Return?
Following the principle of a simple tax regime, the Hong Kong Inland Revenue Department issues Profit Tax Returns for companies without delay every year in April.
However, depending on the company’s chosen fiscal year-end, the deadline to submit the declaration can range from April to November of the following year.
Although tax authorities can grant extensions, it is critical to plan ahead of time and submit all supporting documents and forms on time.
Failure to timely submit the forms may result in penalties, fees, and additional assessments from the Inland Revenue Department.
Newly registered businesses receive the profits tax return 18 months after starting or incorporating. The return includes specific forms, supplementary forms, financial data, balance sheets, and more.
Hong Kong Corporate Tax
- Territorial System: Hong Kong’s taxation is based on profits derived from business within its boundaries.
- Special Status: If profits are earned outside Hong Kong by a company established within it, special status can grant a 0% profit tax rate.
- Provisional Profits Tax: Estimated tax based on the last year’s profits paid in two instalments.
- Flat-Rate Tax System: Hong Kong’s tax rate is flat and not progressive, offering single-tier and two-tier rates.
- Single-Tier: 16.5% for incorporated companies, 15% for unincorporated ones.
- Double-Tier: 8.25% for profits under $2 million, 16.5% for profits above $2 million for incorporated companies.
- For unincorporated businesses: 7.5% for profits under $2 million, 15% for profits above $2 million.
Understanding these basics can help you navigate Hong Kong’s profit tax system and make informed financial decisions. If you need assistance, Vakilsearch experts can ensure you’re on the right track.
Entities of Business in Hong Kong
The most common types of entities Business in HK are limited liability companies, sole proprietorships, and partnership companies. Limited liability companies, whether private or public, whether limited by shares or guarantee, 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 had 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 the 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 and 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 these are taxed at 15%, as against the general corporate tax charges at 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 new company registration in Hong Kong are taxed at similar rates.
Stamp Duty
The transfer of stocks or immovable property attracts stamp duty Business in HK. In the case of Hong Kong stocks, it is 0.26% of the exchange price. This refers 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 the residential property is taxed at a flat 15%, non-residential property is charged from HKD 100 (Hong Kong Dollars) to 4.25% on the value of the property.
Profits Tax
Business in 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 Business in HK, 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 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 countries have to look at and learn. Business in 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, Business in HK offers several tax incentives to motivate entrepreneurs. Tax concessions are offered for companies that deal with mutual funds and trusts. For machinery pertaining to the protection of the environment, a 100% deduction on capital expenditure is awarded. 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.
Set up a Business in Hong Kong
Setting up a business in HK is a straightforward process. Here are the general steps involved:
- Decide on the type of company: Determine whether you want to set up a private limited company, sole proprietorship, partnership, or branch office.
- Choose a company name: Select a unique name that is not already registered in Hong Kong and complies with the naming guidelines.
- Appoint directors and shareholders: You need at least one director (who can be of any nationality) and one shareholder (can be the same person).
- Engage a company secretary: It is mandatory to appoint a company secretary who can be an individual resident in Business in HK or a corporate secretary.
- Prepare the necessary documents: Prepare the Articles of Association, Form NNC1 (incorporation form), and other required documents.
- Register your company: Submit the necessary documents to the Companies Registry and pay the registration fees.
- Obtain business registration: After incorporating the company, you must apply for a business registration certificate from the Inland Revenue Department within one month.
- Open a bank account: Choose a bank and open a corporate bank account in the name of your company.
- Fulfill other legal obligations: Comply with other legal requirements such as obtaining licenses, permits, and registrations specific to your business activities.
It is advisable to consult with a professional service provider or a company incorporation specialist from Zolvit to ensure compliance with all legal procedures and requirements while setting up a business in HK.
Listing in Hong Kong
If you want to list your company on the Hong Kong Stock Exchange (HKEX), you need to follow these steps:
- Meet the listing requirements: Ensure your company meets the eligibility criteria set by the HKEX, including financial track record, market capitalization, and corporate governance standards.
- Engage professional advisors: Appoint professional advisors such as lawyers, accountants, and financial consultants who are experienced in the listing process.
- Prepare the necessary documents: Prepare a prospectus containing detailed information about your company, including financial statements, business model, management team, and risk factors.
- Submit the listing application: Submit the listing application and all required documents to the HKEX. The application will undergo a review process, including vetting by the Listing Division and approval from the Listing Committee.
- Undertake due diligence: Cooperate with the regulators to complete the due diligence process, including verification of the information provided in the prospectus.
- Marketing and roadshows: Engage in investor roadshows and marketing activities to generate interest in your company’s listing.
- Pricing and allocation: Determine the offer price and allocation of shares to institutional and retail investors.
- Obtain regulatory approval: Obtain final regulatory approvals from the Securities and Futures Commission and the HKEX.
- Trading and ongoing compliance: Once listed, comply with ongoing reporting and disclosure obligations, and adhere to the rules and regulations of the HKEX.
Listing on the HKEX can be a complex process, and it is advisable to seek guidance from professional advisors such as Zolvit biz and legal experts who specialize in IPOs and the Business in HK market.
Business in Hong Kong Tax System
Hong Kong operates on a territorial basis of taxation, which means only income “derived from or arising in” Hong Kong is subject to taxation. Businesses in Hong Kong are subject to Profits Tax on their profits derived from Hong Kong. The current standard rate is 16.5% for corporations, and there is a two-tiered system with lower tax rates available for qualifying small businesses.
Import and Export Requirements
Importing and exporting goods Business in HK involves compliance with customs and trade regulations. Here are the key requirements:
- Import and Export License: Most goods do not require an import or export license in Hong Kong. However, specific goods, such as tobacco, alcohol, pharmaceuticals, and certain chemicals, may require permits or licenses.
- Customs Declaration: File a customs declaration for the import or export of goods. Provide accurate and complete information about the goods, their value, quantity, and other required details.
- Trade Documentation: Prepare and present the necessary trade documents, including commercial invoices, packing lists, bills of lading or airway bills, and certificates of origin.
- Tariffs and Duties: Check the customs tariff rates and any applicable duties for the goods you are importing or exporting. Hong Kong generally maintains a free trade policy with low or no tariffs on most goods.
- Restricted and Prohibited Goods: Be aware of any restrictions or prohibitions on importing or exporting certain goods, such as endangered species, firearms, or counterfeit items.
- Customs Clearance: Ensure your goods undergo customs clearance procedures, which may involve inspections, assessments, and payment of any applicable duties or taxes.
- Compliance with Trade Regulations: Comply with relevant trade regulations, including export controls, sanctions, and intellectual property rights.
It is recommended to work with a freight forwarder, customs broker, or trade consultant who can assist you with the import and export process and ensure compliance with all requirements.
Preventing Corruption
Non-residents can own and manage companies in Hong Kong, and there are no restrictions on foreign ownership in most industries.
However, it is important to comply with the legal and regulatory requirements for doing business in HK in order to prevent engaging in corrupt activities while conducting business in HK and foster a culture of integrity and ethical conduct within your organization.
This is because corruption is taken very seriously in Hong Kong, and engaging in corrupt practices can result in severe legal consequences, including fines and imprisonment.
FAQ’s on Business in HK
Is Hong Kong good for business?
Yes, Hong Kong is considered a favorable destination for business. It has a strong and open economy, low tax rates, efficient infrastructure, well-established legal framework, and a business-friendly environment.
What is the most popular business in Hong Kong?
Hong Kong has a diverse business landscape, but some of the most popular industries include finance and banking, professional services (such as accounting and consulting), trading and logistics, tourism and hospitality, retail, and technology-related sectors.
Can Indian do business in Hong Kong?
Yes, Indians can do business in HK. Hong Kong welcomes foreign entrepreneurs and investors from around the world, including India. However, it is important to comply with the relevant immigration, company registration, and business regulations in Hong Kong.
Can foreigners do business in Hong Kong?
Yes, foreigners can do business in HK. The city has a well-established legal framework that allows foreigners to set up and operate businesses.
What is the global minimum corporate tax in Hong Kong?
Hong Kong plans to levy a 15% minimum corporate tax rate in 2025 in order to overhaul global tax rules.
Is there corporate tax in Hong Kong?
Yes, there is a levy of corporate tax in Hong Kong, also known as profits tax.
What is the tax rate for businesses in Hong Kong?
The tax rate for businesses in Hong Kong is 16.5% on assessable profits beyond HKD 2 million and 8.25% for assessable profits up to HKD 2 million.
Does Hong Kong tax worldwide income?
Hong Kong adopts a territorial basis of taxation, meaning that profits tax is payable by every person carrying on a trade, profession, or business in HK SAR on profits arising in or derived from Hong Kong SAR from that trade, profession, or business.
