Hong Kong Corporate Taxation

Hong Kong’s Attractive Tax Regime

Hong Kong has earned international recognition for its straightforward and low tax system, positioning it as one of the world’s most business-friendly jurisdictions. This guide offers an in-depth overview of income tax rates, the corporate tax structure, profits tax returns, and tax incentives for companies in Hong Kong.

Hong Kong Corporate Tax Rate: Territorial Tax System

Hong Kong adheres to a territorial taxation system, where taxes are imposed exclusively on profits generated within or derived from conducting a trade, business, or profession within its borders. Profits tax does not apply to income earned from external sources, even if such profits are brought into Hong Kong.

The territorial principle is impartial, without distinction between residents and non-residents. If a business operates in Hong Kong but earns profits elsewhere, it is exempt from profits tax, regardless of whether those profits are remitted to Hong Kong. Conversely, if a non-resident derives profits from Hong Kong, they become liable for profits tax in the region.

Determining whether a business operates in Hong Kong and whether profits are derived from Hong Kong is primarily a matter of fact, with guidelines based on precedents from Hong Kong and other common law jurisdictions.

Flat Corporate Tax Rate
The Two-Tier Profits Tax Rates Regime effective from Year of Assessment 2018/19

Hong Kong offers two distinct profit tax rate options:

1. Single-Tier Corporate Tax System:
   In this system, corporations are taxed at 16.5% on assessable profits, while unincorporated businesses are taxed at 15%.
2. Two-Tier Profits Tax Regime:
   The Two-Tier Profits Tax Regime is applicable to both corporations and unincorporated businesses, with a reduced tax rate for the first $2 million of assessable profits.

This two-tier system became effective in the year of assessment 2018/19 (i.e., for financial years ending between 1 April 2018 and 31 March 2019). It aims to alleviate the tax burden on small and medium-sized enterprises (SMEs):

• For corporations, the first HK$2 million of profits is taxed at half the standard rate (i.e., 8.25%), while the remaining profits are taxed at the regular 16.5% rate.
• Unincorporated businesses have a similar arrangement, with the first HK$2 million of profits taxed at 7.5% and the rest at the standard 15% rate.

However, within a group of “connected entities,” only one entity can benefit from the two-tier rates, necessitating identification and proper election within the group.

Hong Kong Corporate Tax Rates

A one-time reduction of 75% in profits tax was applied to the year of assessment 2017/18, up to a maximum of HKD 30,000 per case.

Notably, certain enterprises are excluded from the two-tiered profits tax regime, including those opting for preferential half-rate tax schemes (e.g., professional reinsurance companies, captive insurance companies, corporate treasury centers, and aircraft leasing companies).

Additionally, a concessionary tax rate of 50% of the standard profits tax rate applies to trading profits and interest income from qualifying debt instruments (QDIs) issued in Hong Kong. Profits from QDIs, already taxed at 8.25% or 7.5%, do not count toward the HK$2 million threshold for applying the two-tier rates. This enables businesses with assessable profits from QDIs to maintain the half rate on such profits while benefiting from the lower rates on the first HK$2 million of non-QDI assessable profits.

This revamped tax structure aims to enhance the competitiveness of Hong Kong as a thriving business hub in the Asia-Pacific region.

Recent developments

Income Tax Basis Period

Corporate income tax in Hong Kong is assessed according to the Year of Assessment (YA), which ends on 31st March (i.e., 1st April – 31st March). Assessable profits for a YA are typically based on the accounting period concluding within that year of assessment.

Income Tax Audit Exemption Requirements

• Certain companies may be exempt from submitting audited accounts with their profits tax return:
• Dormant companies, as defined by the Companies Ordinance.
• Companies incorporated in jurisdictions where audit requirements are not mandatory.
• Hong Kong branches of foreign companies, provided certain information is supplied.
• Small corporations with total gross income not exceeding HKD 2,000,000 may require audits but are not required to submit them to the Tax Authority.

Withholding Tax Rules

Royalties and fees paid to non-resident entertainers or sportsmen for performances in Hong Kong are subject to withholding tax on their assessable profits. However, there are no withholding taxes on dividends and interest.

Relief from Double Taxation

Hong Kong has over 35 double tax treaties in place to eliminate double taxation, encouraging cross-border investments. With its territorial tax system, Hong Kong companies are generally not subject to double taxation on income earned outside the region.

Tax Treatment of Losses

Losses incurred can be carried forward to offset future profits within the same trade, but not between different trades. Group relief of losses and carrying losses back are not allowed. Capital loss expenses are also not deductible.

Net Income Vs. Taxable Income

A Hong Kong company is taxed on assessable profits, which are derived after adjustments to net profit/loss data. These adjustments include deductions for business expenses related to profit generation, capital allowances, and unutilized losses.