(1) No profit Tax for business activities carried out outside Hong Kong
Taxation in Hong Kong is based on a territorial source principle rather than based on residency. It 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 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 (e.g. 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, itemized 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.
We have assisted numerous overseas clients to benefit from Hong Kong’s favorable tax environments 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.
(2) Low Profit Tax rate for business activities carried out in Hong Kong
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.
(3) Simple Taxation System
The taxation system is relatively straightforward with the following major categories
Profits Tax – based on company trading profit
Salaries Tax – based on individual income
There is no capital gain tax, withholding tax on dividends, interest tax and sales tax (VAT).
(4) High Reputation
Hong Kong is one of the world’s leading reputable international financial centers with well-known and excellent legal and banking systems. It gives confidence to our clients’ business partners and investors for engaging business with them.
(5) No Foreign Exchange Control
Funds are freely allowed in and out of the territory very efficiently.
(6) No Instant Capital Injection Requirement
In many other countries, after the company has been set up, capital injection is required to be made within a specified period. There is no such requirement in Hong Kong, investors can arrange capital injection according to their own business time schedule and plan. It provides high degree of flexibility for investors to arrange their cash flows.
In Hong Kong, business activities can be carried out in the following forms.
(1) Sole proprietorship;
(2) Partnership; and
(3) Limited Liability Company
For Sole Proprietorship and Partnership, investors bear unlimited liabilities. Business owners are personally liable for all debts and liabilities arising from their business activities. Moreover, under Hong Kong Laws, only Hong Kong Identity card holders can apply Proprietorship and Partnership business licenses. Therefore, these two business forms are generally not used by foreign investors. Foreign investors prefer using the third business form (i.e. Limited Liability Companies) where they can enjoy the benefits of limited business liabilities (limited to the amount of registered capital), a complete legal entity (person) to enter into any business contracts and agreements, wide range of business scopes and freely transferrable company shares.