Business taxes in Hong Kong

Hong Kong is renowned for its attractive tax system that fosters a business-friendly environment in the region. The main feature is the territorial principle of taxation, where only income derived from sources within Hong Kong is taxed. Let’s explore the key aspects of the tax system that are crucial for corporations and business owners.

Basic taxation in Hong Kong

• Profit tax:

An important aspect of Hong Kong’s tax system is the profit tax rates, which are 8.25% for the first HKD 2 million (USD 255,000) and 16.5% thereafter. Besides rate determination, a unique aspect that sets Hong Kong apart is its fiscal year, which starts on April 1 and ends on March 31 of the following year.

This financial cycle is implemented to facilitate the convenience of businesses, synchronizing their financial and tax reporting with this cycle from April to March. For example, if the tax year begins on April 1, 2023, and ends on March 31, 2024, the company will conduct its financial activities and generate income during this period.

After the completion of the financial year on March 31, 2024, the company is required to prepare and file a Profit Tax Return (PTR) for this specified tax period.

Additionally, to simplify the filing of declarations, the Inland Revenue Department issues most forms by April 3, 2023, requiring employers to submit declarations within one month from this date. This allows for the efficient resolution of tax matters adapted to Hong Kong’s unique financial year schedule.

• Income tax:

Residents of Hong Kong receiving a salary are subject to income tax. This is important to consider when managing personnel and determining employees’ tax obligations.

• Property tax and stamp duty:

Moreover, there is a property tax and stamp duty, which relate to specific transactions such as property or stock sales.

Obtaining offshore profits tax exemption is possible if the company meets conditions such as management outside Hong Kong, the absence of employees and clients in the region, and other important criteria.

It is crucial to adhere to rules and maintain relevant documents to determine the place of business and avoid tax issues. The Hong Kong tax system provides a path for flexible management of tax obligations for global businesses.

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How to avoid taxation of income in Hong Kong?

To successfully avoid taxation of income in Hong Kong, a company should comply with specific conditions:

• The company’s management must be located outside of Hong Kong; the absence of employees in the region is a key condition. Visits to Hong Kong by the owner or staff should be rare and short.
• The company should actively negotiate and enter into contracts with customers and suppliers outside of Hong Kong. Ensuring that customers do not have direct influence in Hong Kong and receiving payments from outside the region are mandatory aspects.
• For financial transactions, a company may raise and make payments through professional firms such as accountants, lawyers, and registration agents located in Hong Kong. This does not affect the company’s eligibility for tax exemption, as these payments are considered ancillary services and not commercial activities.
• The company’s products must remain outside Hong Kong, and the company must not provide services or products in the region. This is another condition to ensure the independence of the business from local influence.

If all these conditions are met, the company can successfully apply for an offshore income tax exemption, providing additional flexibility in managing finances and remaining competitive in the international market.

Tax audits in Hong Kong

The Hong Kong tax authorities may initiate an audit of a company’s claims that it has no commercial activities in the region. This is usually done randomly through a random selection of transactions related to the sale of goods or provision of services to determine the place of their execution. Thus, it is important to systematically maintain complete records proving that all business activities occur outside Hong Kong:

• Keep email correspondence with customers and suppliers to prove the remoteness of your commercial interactions.
• Keep detailed notes of meetings with customers and suppliers, and prepare reports to document the nature of your activities outside of Hong Kong.
• Keep travel documents, reservations, and other evidence of visits to customers and suppliers overseas.
• Keep copies of sales, orders, and shipping documents to prove the origin and destination of products.

These documents will be important elements to demonstrate to the tax authorities that all your business operations take place outside Hong Kong, contributing to a successful offshore income tax exemption. Before planning to register a company in Hong Kong, we advise you to understand in detail the taxation issues and the choice of the form of your future company.

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