An Overview

Hong Kong is a significant trading economy and a major domicile for both multinational and local companies operating in Asia. Although not commonly regarded as a tax haven, Hong Kong offers significant tax advantages including low rates of taxation and the ability to legally earn profits tax-free under certain conditions - see 'Profits Tax' below.

Hong Kong is ideally located for companies carrying out business in the Peoples Republic of China and throughout Asia. Hong Kong incorporated companies are increasingly becoming the chosen entities for conducting trading activities in Asia as they benefit from a tax friendly environment but do not share the same negative image as a company incorporated in some offshore jurisdictions.

The following is a brief guide to the Hong Kong taxation system and the ongoing compliance requirements for a company incorporated in Hong Kong.

Taxation in Hong Kong

Taxation in Hong Kong is based on a territorial source principle rather than based on residency. This results in individuals and companies incorporated in Hong Kong paying tax only on income or profits earned from activities actually taking place in Hong Kong. If there are no activities in Hong Kong then there is no liability to tax in Hong Kong.

The taxation system is relatively straightforward with the following major categories

Profits Tax - based on a companies trading profit
Salaries Tax - based on an individuals income

There are no taxes on capital gains, no withholding taxes on dividends or interest and no sales taxes.

Profits Tax

Profits tax is levied at the rate of 16.5% on taxable profits arising from activities taking place in Hong Kong. Deductions are given for business expenses that are incurred in earning the assessable profits.

The location of where a company's activities take place is the key to whether a company's profits are taxable in Hong Kong. If profits are earned from activities that take place entirely outside of Hong Kong then these profits would not be taxable even if the company's transactions are carried out thru the company's Hong Kong bank account.

As an example a Hong Kong trading company with a bank account in Hong Kong would not be subject to Hong Kong taxes if

(a) The company has no physical office in Hong Kong and only uses our address for receipt of mail

(b) The company has no staff in Hong Kong and its staff rarely visit Hong Kong (eg total visits are less than 60 days a year)

(c) The company has an overseas office in which the company's staff are working

(d) The company negotiates and signs contracts with its customers and suppliers outside of Hong Kong

(e) The company has no customers based in Hong Kong and does not receive payments from customers Hong Kong bank accounts

(f) The company has no suppliers based in Hong Kong and does not make payment to suppliers Hong Kong bank accounts

(g) The company's products do not enter Hong Kong

It should be noted the question of whether a company has an activity taking place in Hong Kong is a question of fact (and not a question of law). It should also be noted that the Hong Kong tax authorities may check a company's claim that it has no activities taking place in Hong Kong by reviewing a randomly selected transaction and checking where the various activities involved in this transaction took place. It is therefore advisable to keep complete records to illustrate the fact that all activities take place outside of Hong Kong including emails, faxes, itemised telephone bills (showing to which numbers calls are made), memos of meetings with customers and suppliers, travel receipts, passport copies, purchase orders, sales orders, shipping documents etc.

ACS has assisted numerous overseas clients to benefit from Hong Kong's favourable tax environment including initial planning of the corporate structure and on-going monitoring of the structure and business activities to ensure the continuing ability to operate in a tax-free environment

Salaries Tax

Salaries tax is levied on the income of individuals arising from employment within Hong Kong. There is a sliding tax scale with a ceiling of 15% of taxable income. Various allowances and reliefs are available. Apportionments may be used for individuals based in Hong Kong if part of their duties are performed outside Hong Kong.

Ongoing Compliance Requirements

The following is a summary of the major ongoing compliance requirements for a Hong Kong company.

Annual Return

Every Hong Kong company is required by law to file an Annual Return at the Companies Registry on the anniversary of its incorporation. The Annual Return details the corporate structure of the Company including details of the shareholders, directors and company secretary.

We prepare the Annual Return on behalf of our clients and the cost of the preparation is included within all of our annual package fees.

Renew Hong Kong business registration

Every Hong Kong company is required to renew its business registration on an annual basis by paying a registration fee to the Hong Kong Government. The fee is currently HKD2,450. We will advise you of the due date for the renewal as part of the service provided within our annual company secretarial packages.

Accounting, auditing and tax filing

It is a requirement of Hong Kong law that every Hong Kong company maintains accounting records, prepares annual accounts in accordance with Hong Kong accounting standards and arranges for its accounts to be audited by Hong Kong registered certified public accountants.

Each company can choose its accounting year end date but the first accounting period can cover a period no longer than 18 months from the date of incorporation. Once the accounting year end date is chosen then the company must produce its accounts every 12 months using the same accounting year end date.

Every Hong Kong company is required to file a tax return on an annual basis even in cases where there is no business activity in Hong Kong and / or no tax payable. The tax year end in Hong Kong is 31 March and we therefore suggest to clients that they select 31 March for their accounting year end date to match the date when tax returns will be issued by the Hong Kong tax authorities.

Reporting of remuneration paid to employees

Before the end of each April, every Hong Kong company is required to submit a return to the Hong Kong tax authorities detailing the remuneration paid to its employees during the year to 31 March. Even if a company has no employees it is required to advise the Hong Kong tax authority that no remuneration has been paid. We can assist clients to prepare the return as required.

Please note adherence to the above compliance requirements is strictly enforced in Hong Kong and failure to comply with deadlines will result in penalties and possible court summons.