Hong Kong is a former British colony that became a Special Administrative Region of the People’s Republic of China on July 1, 1997. Hong Kong, in accordance with the policy of the PRC «One state — two systems» continues to maintain a high level of autonomy in resolving its internal affairs for 50 years (that is, until 2047).
Hong Kong law is based on English common law. More than a million companies are registered in Hong Kong. A large number of banks, stock exchanges and financial institutions, as well as all major international law and accounting firms, are represented in Hong Kong. Hong Kong has a well-developed service sector for local secretarial companies, corporate management, and trust companies. An efficient modern banking system has been developed.
Under Hong Kong legislation, there are no distinctions in the approach to the establishment and taxation of resident and non-resident companies operating within its territory. Furthermore, Hong Kong legislation does not contain provisions specifically regulating the activities of offshore companies, i.e., those operating outside the territory of Hong Kong. By definition, companies are considered residents if they are either incorporated in Hong Kong or have their center of management and control within its territory.
General characteristics of the taxation system in Hong Kong:
As there is no distinction in Hong Kong’s legislation between resident and non-resident companies, taxation of all companies is based on the territorial principle. Taxation only occurs when a company conducts business in Hong Kong and the income from such trading or activity is derived from or sourced in Hong Kong. In all other cases, the income is not subject to taxation.
Taxation levied outside Hong Kong is not taken into account in Hong Kong. Companies can take advantage of double taxation avoidance agreements signed by Hong Kong with other countries.
All Hong Kong companies are required to submit an annual financial report audited by a Hong Kong auditor.
When planning transactions with shares of a Hong Kong company, it must be taken into account that there may be an obligation to pay a Stamp Duty. This is a tax levied on real estate transactions, as well as on the purchase of shares and other securities.
This tax is calculated as 0.2% of the current value of shares at the date of the transaction. The current value of shares is determined on the basis of financial statements (balance sheet + profit and loss account). Reporting must be prepared no later than three months before the transaction.
Thus, for the purposes of paying Stamp Duty, there are several options for transferring shares in a company:
When increasing / decreasing the share of an existing shareholder, it is also necessary to prepare reports and pay stamp duty.
It is worth pointing out that that Hong Kong has a number of tax treaties in relation to sea and air transportation with the following countries: Australia, Austria, Bahrain, Burma, Brazil, Brunei, UK, Vietnam, Germany, Israel, India, Indonesia, Italy, Canada, Qatar, China, Luxembourg Mauritius, Malaysia, Nepal, Netherlands, New Zealand, Norway, United Arab Emirates, Oman, Pakistan, Russia, Singapore, USA, Thailand, Turkey, Philippines, France, Switzerland, Sri Lanka, Estonia, South Korea, Japan.
Hong Kong has signed full Double Tax Treaties with such countries as Belgium, China, Thailand, Luxembourg, Liechtenstein, Vietnam, Malaysia, New Zealand, Portugal, Spain, Great Britain.
In order to avoid double taxation, it is possible to obtain a Certificate of Resident Status in Hong Kong.
To do this, you must submit a specially completed application to the Hong Kong Inland Revenue Department. The applicant may be:
The typical review period for a tax application is 21 days. If the tax authority deems that the information provided is insufficient to make a decision, they may request additional information (which may extend the review period).
Since all companies are taxed on a territorial basis, companies pay taxes only when they derive income from sources in Hong Kong. Thus, the methods of determining the place of extraction of income are one of the most important aspects that must be taken into account when working with companies in this region. Determining the place of origin of income for tax purposes is carried out on the basis of a number of tests. These tests are of a general nature, in practice they are used in combination and depending on the specifics of the business.
The Internal Revenue Service analyzes what exactly the taxpayer has done to obtain the profit in question and where. Moreover, in certain cases, when profits come from different places, taxes can be paid only on part of the profits originating in Hong Kong. However, this does not apply to trading profits (profits from sales), which are either fully taxed or completely exempt from it. When determining the local or offshore origin of profit, gross income is considered, that is, only those operations (actions) that influenced the formation of gross income are analyzed. So, let’s say, this does not include actions related to general management or, for example, the purchase of stationery for the office.
The place where current business decisions are made is only one of the factors that is taken into account when determining the source of income. And often this is not a decisive factor.
The company can support its foreign structures that make a profit outside of Hong Kong. However, their absence does not mean that profits necessarily come from Hong Kong. However, in most cases where the main place of business is located in Hong Kong and there is no business presence abroad, it is likely that the profits of such a business will be taxed in Hong Kong.
An important factor determining the origin of the profits of trading companies is the place where the purchase and sale contracts were executed. The concept of «were carried out» includes the negotiation process, the conclusion and execution of transactions.
Our advice: if you are doing business in Hong Kong, keep phone bills confirming conversations with foreign partners, air or railway tickets, hotel receipts and other confirmations that may indicate your business contacts carried out abroad.
A trading company doing business outside of Hong Kong may establish a branch office in Hong Kong to act as a «purchasing office» limited to purchasing goods in Hong Kong and not selling them in Hong Kong or elsewhere. In this case, there will be no obligation to pay taxes. A «purchasing office» may also be a subsidiary or official representative. However, they are discouraged from participating in the sale of goods. Any remuneration received by a subsidiary or official representative for the performance of services in Hong Kong will be fully taxable.
A separate issue arises when purchase and sale contracts are executed outside of Hong Kong by Hong Kong employees traveling on business or by authorized foreign agents. Yes, profits derived from contracts so executed are subject to tax exemption in Hong Kong, however, the Inland Revenue Authority must:
The source of origin of profits derived from the provision of services by a company incorporated in Hong Kong will be the place where the services are provided.
Private Company Limited by Shares:
Public Company Limited by Shares:
Price for company with a standard share capital of HK$10,000. There is no additional fee for issuing a standard MC. The company must have at least one director — an individual. A Hong Kong citizen is not appointed as a director due to the risks of tax residency in Hong Kong. It is also possible to appoint a director who is not a citizen of Hong Kong, but has an I.D. Card in Hong Kong.
