Corporate tax in Hong Kong

Summary

Corporate Income Tax Rate (%) 16.5
Capital Gains Tax Rate (%) 0
Branch Tax Rate (%) 16.5
Withholding Tax (%)
Dividends 0
Interest 0
Royalties from Patents, Know-how, etc.
Paid to Corporations 4.95/16.5*
Paid to Individuals 4.5/15*
Branch Remittance Tax 0
Net Operating Losses (Years)
Carryback 0
Carryforward Unlimited

* This is a final tax applicable to persons not carrying on business in Hong Kong. The general withholding tax rate is 4.95% for payments to corporations. For pay-ments to individuals (including unincorporated businesses), the general with­holding tax rate is 4.5%. However, if a recipient of payments is an associate of the payer and if the intellectual property rights were previously owned by a Hong Kong taxpayer, a withholding tax rate of 16.5% applies to payments to corpora­tions and, for payments to individuals (including unincorporated businesses), a 15% rate applies.

Taxes on corporate income and gains

Profits tax. Companies carrying on a trade, profession or busi­ness in Hong Kong are subject to profits tax on profits arising in or derived from Hong Kong. However, certain royalties received from a Hong Kong payer by a foreign entity that does not other­wise carry on a trade, profession or business in Hong Kong are liable to a withholding tax in Hong Kong (see Section A).

The basis of taxation in Hong Kong is territorial. The determina­tion of the source of profits or income can be extremely compli­cated and often involves uncertainty. It requires case-by-case consideration. To obtain certainty concerning this and other tax issues, tax payers may apply to the Inland Revenue for advance rulings on the tax implications of a transaction, subject to pay­ment of certain fees and compliance with other procedures.

Rates of profits tax. The corporate rate of profits tax is 16.5%.

Interest income and trading profits derived by corporations from qualifying debt instruments with a maturity period of less than seven years are taxed at a rate of 8.25%, while those derived from instruments with a longer maturity period are exempt from tax. Professional reinsurance companies authorized in Hong Kong may irrevocably elect to be taxed at 50% of the normal profits tax rate (that is, at a rate of 8.25%) on income derived from the busi­ness of reinsurance of offshore risks. In addition, authorized cap­tive insurers in Hong Kong may irrevocably elect to be taxed at a rate of 8.25% on their business of insurance of offshore risks. Authorized and certain bona fide widely held mutual funds, collective-investment schemes and unit trusts are exempt from tax.

Proposed tax incentives for corporate treasury centers. To encour­age multinational corporations to set up their corporate treasury centers (CTCs) in Hong Kong, the government has proposed that certain profits of a qualifying CTC would be taxed at a conces­sionary tax rate of 8.25%.

Tax exemption for nonresident funds. Nonresident persons, includ­ing corporations, partnerships and trustees of trust estates, are exempt from tax in Hong Kong if their activities in Hong Kong are restricted to certain specified transactions and to transactions incidental to such transactions. An entity is regarded as a non­resident if its place of central management and control is located outside Hong Kong. Specified transactions are broadly defined to cover most types of transactions typically carried out by invest­ment funds, such as transactions involving securities (for unlisted securities, the exemption is subject to certain specified condi­tions), future and currency contracts, commodities and the mak­ing of deposits other than by money-lending businesses.

Anti-avoidance measures provide that under certain circumstances, a resident investor in an exempt nonresident fund is deemed to derive a portion of the exempt income of the fund and is subject to tax in Hong Kong on such income, regardless of whether the fund makes an actual distribution.

Capital gains. Capital gains are not taxed, and capital losses are not deductible for profits tax purposes.

Administration. A fiscal year runs from 1 April to 31 March. If an accounting period does not coincide with a fiscal year, the profit for the accounting period is deemed to be the profit for the fiscal year in which the period ends. Special rules govern commence­ments and cessations of businesses and deal with accounting periods of shorter or longer duration than 12 months.

Companies generally make two payments of profits tax during a fiscal year. The first payment consists of 75% of the provisional tax for the current year plus 100% of the final payment for the preceding year. The second payment equals 25% of the provi­sional tax for the current year. The timing of payments is deter­mined by assessment notices rather than by set dates, generally during November to April of the fiscal year.

Dividends. Hong Kong does not impose withholding tax on divi­dends paid to domestic or foreign shareholders. In addition, divi­dends received from foreign companies are not taxable in Hong Kong.

Foreign tax relief. In certain circumstances, a deduction is allowed for foreign taxes paid. A foreign tax credit is available under the full comprehensive double tax treaties entered into between Hong Kong and other jurisdictions. However, the amount of the credit may not exceed the amount of tax payable under the Hong Kong tax laws with respect to the relevant item of income. For details concerning Hong Kong’s double tax treaties, see Section E.

Determination of assessable profits

General. The assessment is based on accounts prepared on gener­ally accepted accounting principles, subject to certain statutory tax adjustments.

In general, interest income earned on deposits with financial institutions is exempt from profits tax. However, this exemption does not apply if the recipient of the interest is a financial institu­tion or if the deposits are used as security for borrowings and the interest expense with respect to the borrowings is claimed as a tax deduction.

Expenses must be incurred in the production of chargeable profits. Certain specified expenses are not allowed, including domestic and private expenses, capital expenditures, the cost of improvements, sums recoverable under insurance and tax payments. The deduct­ibility of interest is subject to restrictions (see Section D).

Inventories. Stock is normally valued at the lower of cost and net realizable value. Cost must be determined using the first-in, first-out (FIFO) method or an average cost, standard cost or adjusted selling price basis. The last-in, first-out (LIFO) method is not ac­ceptable. However, this may not apply to shares and securities held for trading purposes.

Capital allowances

Industrial buildings. An initial allowance of 20% is granted on new industrial buildings in the year in which the expenditure is incurred, and annual depreciation allowances are 4% of qualify­ing capital expenditure beginning in the year the building is first put into use. No initial allowance is granted on the purchase of used buildings, but annual depreciation allowances may be avail­able. Subject to certain exceptions, buildings used for the pur­poses of a qualifying trade are industrial buildings.

Commercial buildings. An annual allowance (4% of qualifying capital expenditure each year) is available on commercial build­ings. Buildings that do not qualify as industrial buildings are commercial buildings. Refurbishment costs for premises, other than those used as domestic dwellings, may be deducted in equal amounts over a five-year period.

Prescribed plant and machinery. Subject to satisfying certain con ditions, companies may immediately write off 100% of expen­diture on manufacturing plant and machinery and on computer software and hardware.

Environmental protection facilities. Subject to satisfying certain conditions, capital expenditure incurred on eligible environmental protection machinery and environmentally friendly vehicles quali­fies for a 100% write-off in the year in which the expenditure is incurred. Expenditure incurred on the construction of an eligible environmental protection installation forming part of a building or structure is deductible in equal amounts over a period of five years.

Other plant and machinery, and office equipment. An initial allow­ance of 60% is granted for non-manufacturing plant and machin­ery, and office equipment in the year of purchase. An annual allowance of 10%, 20% or 30% under the declining-balance meth­od is available on the balance of the expenditure beginning in the year the asset is first used in the business. Con sequently, the total allowances (initial and annual) in the first year can be 64%, 68% or 72%.

Motor vehicles. An initial allowance of 60% is granted for motor vehicles in the year of purchase. An annual allowance of 30% under the pooling system (declining-balance method) is allowed on the balance of the expenditure beginning in the year the asset is first used in the business.

Intellectual property rights. Subject to certain anti-avoidance pro­visions, capital expenditure incurred on the purchase of patents, industrial know-how, registered trademarks, copyrights and reg­istered designs qualifies for tax amortization over a time period ranging from one to five years.

Recapture. Depreciation allowances are generally subject to recap­ture if the proceeds from the sale of a depreciable asset exceed its tax-depreciated value. The recapture rule also applies to prescrib­ed plant and machinery (manufacturing plant and machinery and computer hardware and software) and environmental protection machinery and installations that were previously written off in full. Conse quently, in the year of disposal, the sales proceeds from prescribed assets generally are included in chargeable profits, up to the original costs of the assets. Allow ances for commercial and industrial buildings may be recaptured, up to their original costs. Assets depreciable under the pooling system (declining-balance method) are allocated to one of three pools according to their depreciation rates, which are 10%, 20% or 30%. Pro ceeds from the sale of an asset in a pool (up to the cost of the asset) are deducted from the pool balance. If a negative balance results within the pool, a balancing charge is added to taxable profits.

Relief for business losses. Losses incurred in a year can be carried forward indefinitely and set off against the profits of the com­pany in subsequent years. No carryback is possible. Certain rules prevent trafficking in loss companies. In addition, specific rules govern the offset of normal business losses against concessionary trading receipts (that is, those taxed at concessionary rates instead of the full normal rates) and vice versa.

Groups of companies. Consolidated filing is not permitted. Hong Kong does not provide group relief for tax losses.

Miscellaneous matters

Mergers and reorganizations. When considering an acquisition in Hong Kong, a company must first decide whether to acquire the shares or the assets of the target company. Unlike some other jurisdictions, Hong Kong tax law does not allow a step-up in tax basis of the underlying assets if shares are acquired. The target company retains the same tax basis for its assets, regardless of the price paid for the shares.

Effective from 3 March 2014, the new Companies Ordinance (Cap 622) introduces measures to facilitate an amalgamation of two or more wholly owned companies within a group without the need to seek approval from the court. The current Inland Revenue Ordinance does not contain specific measures providing for a court-free amalgamation, and assessing practice in this regard is expected to be issued in due course.

Anti-avoidance legislation. Transactions that are artificial, ficti­tious or predominantly tax-driven may be disregarded under gen­eral anti-avoidance tax measures. In addition, specific measures deny the carryforward of tax losses if the dominant reason for a change in shareholding of a corporation is the intention to use the tax losses. Other specific anti-avoidance measures include those de signed to counteract certain leverage and cross-border leasing, non-arm’s-length transactions between a Hong Kong resident com­pany and its foreign affiliates and the use of personal service companies to disguise employer-employee relationships.

Foreign-exchange controls. Hong Kong does not impose foreign-exchange controls.

Islamic bonds. A special legislative framework provides compa­rable tax treatment in terms of stamp duty, profits tax and prop­erty tax for some common types of Islamic bonds (sukuk), vis-à-vis conventional bonds. However, no special tax incentives are conferred on Islamic bonds.

Interest expense. In an attempt to combat avoidance, restrictions are placed on the deductibility of interest expense. In general, subject to certain specific anti-avoidance rules, interest on mon­ies borrowed is deductible for tax purposes if it is incurred in the production of chargeable profits in Hong Kong and if one of the following additional conditions is satisfied:

  • The recipient is taxable in Hong Kong on the interest.
  • The interest is paid to a recognized financial institution in Hong Kong or overseas.
  • The interest is paid with respect to debt instruments that are list ed or marketed in Hong Kong or in a recognized overseas market.
  • The interest is paid with respect to money that is borrowed from an unrelated person and that is wholly used to finance capital expenditures on plant and machinery qualifying for capital allowances or the purchase of trading stock.

The government has proposed that subject to certain other anti-avoidance provisions, interest paid on money borrowed from an overseas associated corporation would be tax deductible if the borrower is a corporation carrying on a business of borrowing money from, and lending money to, associated corporations and if overseas tax is paid by the lender at a rate of not less than 8.25% or 16.5%, as applicable.

Reversion of sovereignty to China. Since 1 July 1997, Hong Kong has been a Special Administrative Region (SAR) of China under Article 31 of the constitution of China. However, as an SAR, Hong Kong has a tax system that is based on common law and distinct from the system used in Main land China.

In addition, on its own, Hong Kong, using the name “Hong Kong, China,” may maintain and develop relations, and may conclude and implement agreements, with foreign states and regions and relevant international organizations in such fields as economics, trade, finance, shipping, communications, tourism, culture and sports.

Tax treaties

Both the Hong Kong and Mainland China tax authorities take the view that Mainland China’s tax treaties with other countries do not cover Hong Kong.

For the avoidance of double taxation on shipping income, Hong Kong has entered into agreements with Denmark, Germany, Norway, Singapore, Sri Lanka and the United States. These agree­ments generally provide for tax exemption in one territory for profits and capital gains deriv ed by an enterprise of the other territory in the first-mentioned territory with respect to the opera­tion of ships in international traffic. However, under the agree­ment between Hong Kong and Sri Lanka, 50% of the profits derived from the operation of ships in international traffic may be taxed in the source jurisdiction. Apart from these agreements, reciprocal exemption provisions with the tax authorities of Chile, Korea (South) and New Zealand have also been confirmed.

Hong Kong has signed double tax agreements relating to airline profits with several jurisdictions, including Bangladesh, Croatia, Denmark, Estonia, Ethiopia, Fiji, Finland, Germany, Iceland, Israel, Jordan, Kenya, Korea (South), Laos, the Macau SAR, Maldives, Mauritius, Norway, the Russian Federation, Seychelles, Singapore, Sri Lanka and Sweden. Under these agreements, inter­national trans port income of Hong Kong airlines is exempt from tax in these signatory countries. However, international transport income of Hong Kong airlines that is exempt from tax overseas under these agreements or under relevant full comprehensive double tax treaties is taxed in Hong Kong.

Hong Kong has also entered into full comprehensive double tax treaties modeled on the conventional tax treaty adopted by the Organisation for Economic Co-operation and Development (OECD), with the jurisdictions listed in the table below. The table shows the withholding tax rates for dividends, interest and royal­ties paid from Hong Kong to residents of the treaty jurisdictions. The rates shown in the table are the lower of the treaty rates and the applicable rates under Hong Kong domestic law.

  Dividends

%

Interest

%

Royalties

%

Austria 0 0 3
Belgium 0 0 4.5/4.95 *
Brunei Darussalam 0 0 4.5/4.95 *
Canada 0 0 4.5/4.95 *
China (Mainland) 0 0 4.5/4.95 *
Czech Republic 0 0 4.5/4.95 *
France 0 0 4.5/4.95 *
Guernsey 0 0 4
Hungary 0 0 4.5/4.95 *
Indonesia 0 0 4.5/4.95 *
Ireland 0 0 3
Italy 0 0 4.5/4.95 *
Japan 0 0 4.5/4.95 *
Jersey 0 0 4
Korea (South) 0 0 4.5/4.95 *
Kuwait 0 0 4.5/4.95 *
Liechtenstein 0 0 3
Luxembourg 0 0 3
Malaysia 0 0 4.5/4.95 *
Malta 0 0 3
Mexico 0 0 4.5/4.95 *
Netherlands 0 0 3
New Zealand 0 0 4.5/4.95 *
Portugal 0 0 4.5/4.95 *
Qatar 0 0 4.5/4.95 *
South Africa 0 0 4.5/4.95 *
Spain 0 0 4.5/4.95 *
Switzerland 0 0 3
Thailand 0 0 4.5/4.95 *
United Arab Emirates 0 0 4.5/4.95 *
United Kingdom 0 0 3
Vietnam 0 0 4.5/4.95 *
Non-treaty countries 0 0 4.5/4.95 *

* The withholding rates in Hong Kong applicable to individuals (including un incorporated businesses) and corporations are 4.5% and 4.95%, respectively. These rates are lower than those specified in the relevant tax treaties and conse­quently, the Hong Kong domestic rates apply.