Incorporation of Hong Kong Companies
- Memorandum & Articles of Association
- Statutory Register
- Share Certificate
- First Board Minute
- Metal Common Seal
- Rubber Stamp
Company Secretarial & Compliance
- Acting as Company
- Annual Return
- General Meeting
- Board Meeting
- Increase of Capital
- Transfer of Shares
- Allotment of Shares
- Appointment of Directors
- Resignation of Directors
- Change of Company Name
- Change of Registered Address
Presence in HK without actual Office
- Mail Forwarding
- Fax Forwarding
Bank Account Opening
- Office Space Sourcing
Accounting & Auditing
Accounting & Book-keeping
- Year end Auditing
- Tax Computation and Return
- Profit Tax Return
- Taxation and Accounting Issues
Hong Kong Scope of Profits Tax
Profits tax is
levied under the Inland Revenue Ordinance on the "assessable profits"
of corporate entities, partnerships, trusts and sole proprietorships.
It is levied according to the "territorial principle" meaning that
it is the source of the income rather than the residential or non-residential
status of the entity that determines whether or not trading income
is or is not subject to Hong Kong profits tax.
principle means that only income which meets the following 3
preconditions is subject to Hong Kong profits tax:
- The entity
must trade in Hong Kong
- The income
must arise from such a trade
- The income
must arise in or be derived from Hong Kong
The residential or
non-residential status of the entity is irrelevant as is the fact
that the income is or is not exempt from tax in a foreign
jurisdiction. Advance tax rulings are available in the SAR and are
particularly favored and recommended on the question of whether or
not for profits tax purposes trading income is deemed onshore and
taxable or offshore and tax exempt.
"Source of income"
for profits tax purposes has been defined as the geographical
location of the operation which substantially gave rise to the
income, but the Inland Revenue's Practice Note No 21 adds more
of an office in Hong Kong: does not of itself render a company
liable to profits tax where that office is not generating profits
from within the territory.
Place where the
contract was negotiated and executed: A key criterion is the place
where the contract was negotiated and signed. Income relating to a
sale contract negotiated by the seller from the territory by way of
facsimile or telephone where the negotiation did not require travel
outside the territory is deemed Hong Kong source income for profit
tax purposes. Likewise if the contract is negotiated and signed
outside the territory and the goods sold are not sourced from within
the territory then any income arising is not deemed Hong Kong source
income for profits tax purposes. This is often achieved by utilizing
an offshore company which re-registers in the territory as a foreign
company but whose directors both remain non resident and negotiate
and execute the contract from the offshore jurisdiction.
Where the Hong Kong entity is merely a booking center in the sense
that it does not negotiate or draft the sale agreement (which is
carried out abroad) but merely issues an invoice on instructions,
operates a bank account and maintains accounting records covering
the transaction then the income from such a transaction is not
deemed Hong Kong source income for profits tax purposes.
Securities : Gains from shares and securities purchased and sold on
the territory's stock exchange are deemed Hong Kong source income
for profit tax purposes (assuming the entity is subject to profit
tax on such an activity).
Cross Border Land
Transportation: Income from cross-border land transportation is
deemed Hong Kong source income if the passengers or goods are
normally uplifted in Hong Kong.
Loans : Loan
interest on a loan made available to the borrower within the
jurisdiction of Hong Kong is deemed to be Hong Kong source income
for profits tax purposes and taxable in the hands of the Hong Kong
lender whereas loan interest on a loan made available to the
borrower in a foreign jurisdiction is not deemed Hong Kong source
income and is therefore not taxable.
Hong Kong Profits Tax Rates
number of rates apply:
- Companies pay
a standard rate of 17.5% on assessable profits.
other than corporate entities pay a rate of 16% on assessable
concessionary rates of profits tax which are substantially less
than the standard rates apply to the following businesses or
sources of income:
Interest or capital gains made on qualifying maturity
debt instruments are taxed at 8%.
re-insurance of offshore risks is taxed at 8% of
insurance businesses are assessed at 5% of the value of
the premiums arising in Hong Kong.
entity whose business is to grant rights to use a
trademark, copyright, patent or know how pays a flat
profit tax of 1.75% (or 17.5% on 10%) of the payment
received with all related expenses being non tax
deductible. If the recipient of the payment is a related
offshore licensing company the Hong Kong company must
withhold and hand over 1.75% of the fee paid over.
Income from the international operations of shipping
companies is exempt from tax unless the ships are
operating in Hong Kong waters or proximate to the same
in which case only that proportion of income earned in
Hong Kong is subject to local tax of 17.5%. Shipping
profits meeting the conditions of the double taxation
agreement with the USA are exempt from profits tax in
Irrespective of whether or not the company is managed
and controlled from Hong Kong assessable profits are the
proportion of income arising within Hong Kong (from the
uplift of passengers and freight locally) to the
proportion of worldwide income. Under a number of
international aircraft double taxation agreements the
government has agreed to include income arising abroad
for taxation in Hong Kong where that income is exempted
abroad under the agreement. Likewise profits meeting the
conditions of the double taxation agreements are exempt
from profits tax locally. The rate is 16% of assessable
sale of goods on consignment from Hong Kong on behalf of
a non resident is subject to a tax of 1% of the turnover
without any deductions unless the non resident can
produce accounts to show that he would have paid less
profit tax than consignment tax in which case a normal
rate of tax will apply .The selling of goods on
consignment is deemed to be the equivalent of creating a
entity whose business is to rent out a film, tape or
sound recording for use in any cinema or television
program pays a profit tax of 1.75% (or 17.5% on 10%) of
the payment received with all related expenses being non
Hong Kong Calculation of Taxable Base
A number of
factors including the territorial principle have created an
extremely attractive fiscal regime exempting categories of income
which in most other jurisdictions would normally be subject to a
income received by a Hong Kong parent company from either a
resident or foreign subsidiary is not deemed income in the
holding company's hands and is thus not subject to an assessment
to profits tax.
- There is no
separate schedule of capital gains tax in Hong Kong. Nor does
the territory follow the practice of other jurisdictions and tax
capital gains as trading income which is subject to profits tax.
However by way of exception a business whose activities is to
trade in capital assets is assessed to profits tax on any
profits made on the sales of those capital assets as if these
gains were trading income. Likewise if the asset is deemed a
revenue asset as opposed to a capital asset then any profits
made on its disposal are deemed trading income and assessed to
profits tax. The absence of capital gains tax (often together
with other factors) has had a number of fiscal consequences:
remitted to a Hong Kong parent which represent the
profitable disposal of its shareholding in a resident or non
resident subsidiary are not assessed to tax in the territory
both because the gains are capital gains and because (in the
case of a non resident company) income arising outside
jurisdiction is exempt from tax under the principle of
profitable disposal by a Hong Kong entity of foreign real
estate is not assessed to tax in the territory both because
the gains are capital gains and because of the principle of
territoriality. This includes a disposal effected by means
of the Hong Kong entity selling 100% of the shares in a
company whose sole asset is the foreign real estate.
currency gains and losses are considered to have a capital
nature they are neither taxable profits nor deductible
transfer by a Hong Kong entity of capital assets to a
foreign or resident subsidiary or branch at market value and
at a profit is considered a capital gain and thus does not
attract tax in Hong Kong (unless the assets are classified
as revenue assets).
- Rental income
from foreign real estate is not assessable income in Hong Kong
for profit tax purposes. (However depreciation & interest
payments on loans made to finance the real estate tax are non
deductible in the territory).
- The profits
and losses of the foreign branch or subsidiary of a Hong Kong
company are neither taxable profits nor deductible losses in
Hong Kong owing to the territoriality principle.
income received by a resident or non resident business entity on
deposits lodged with a financial institution are exempt from
profits tax (By way of exception if the deposit was made by a "financial
institution" then any interest received by the financial
institution is deemed trading income for profits tax purposes
and taxed accordingly).
- The tax
treatment of loan interest payments and receipts requires a
special mention. 3 situations apply:
interest repayments made by a Hong Kong borrower to a
foreign lender are only tax deductible in Hong Kong if the
foreign lender is a "financial institution". If the foreign
lender is not a financial institution but is the parent or
subsidiary of the Hong Kong borrower the interest payments
are not tax deductible in the territory unless the parent or
subsidiary is a connected company and is subject to Hong
Kong profits tax on the loan interest receipts.
- Loan interest
repayments received by a Hong Kong company on a loan made to
a 3rd party are not taxable income in the hands of the Hong
Kong lender if the loan was advanced to the borrower from a
foreign jurisdiction such as Gibraltar. If the loan was
advanced to the borrower from Hong Kong then the loan
interest repayments are taxable in the territory.
- A Hong
Kong parent company which borrows money to set up a
subsidiary or a branch in a foreign country cannot deduct
the cost of the loan for profit tax purposes since the
income earned by the borrower has a foreign source.
Therefore the loan should always be sourced by the foreign
subsidiary or the foreign branch in the foreign jurisdiction
in which it will be tax deductible.
- Owing to the principle
of territoriality there is no controlled foreign company
legislation under which the profits and capital gains of non
resident subsidiaries can be taxed as if they were the profits
of a resident parent company.(The converse applies in both the
United States and the United Kingdom).
- Consolidated group
accounting under which the profits of one company in the group
can be set off against the losses of another company in the
group so as to reduce the over all profit subject to profits tax
does not exist in Hong Kong.
- Losses can be carried
forward indefinitely. This compares favorably with other
jurisdictions which only allow losses to be carried forward for
a fixed period of time (usually 5 years).
- Since there are no
debt/equity thin capitalization rules in Hong Kong a foreign
parent can set up a resident subsidiary with a minimum of share
capital and a maximum of loan capital and thereby reduce taxable
profits arising in Hong Kong through excessive interest
- The repayment by a
foreign subsidiary to its Hong Kong parent of the principal of
loan capital or share capital is free of tax in the territory
including where the repayment is by way of a capital reduction
or a final dividend distribution in a liquidation.
- The following
sources of trading income are exempted from profits tax:
- Interest received
or capital gains made on the purchase, retention or sale of
a Government bond issued under the Loans (Government Bonds)
- Exchange fund debt
- Hong Kong dollar
denominated multi – agency debt instruments;
investment schemes which comply with the requirements of a
government supervisory authority are exempt from tax.
Specified investment schemes include investments in unit
trusts and mutual funds.
Profits Tax Deductible
The following allowances
are deductible from assessable profits for profits tax purposes.
- A deduction is allowed
for a contribution (or provision for a contribution) by an
employer amounting to not more than 15% of the employee's annual
salary into a recognized retirement scheme registered under the
Occupational Retirement Schemes Ordinance. (It is in any event
an offence for an employer to operate a pension scheme that is
not registered under this Ordinance). Since the Mandatory
Provident Fund Scheme came into effect on 1st December 2000
allowable deductions are either 5% of an employee's gross salary
or a maximum of US$2,560 per month.
- Full deduction is
allowed for charitable donations not exceeding 10% of annual
assessable profits after deduction of depreciation allowances
but prior to losses carried forward being added in.
- Hong Kong tax
paid on foreign income which by law is chargeable to profits tax
in Hong Kong is an allowable deduction for profits tax purposes.
(N.B. foreign source income is not normally subject to tax in
- Any property tax
already paid is deductible from income for profits tax purposes;
allowances for capital equipment are as follows:
- 100% first
year allowances for manufacturing plant and machinery;
- 100% first year
allowances for computer equipment;
- 60% of the cost of
all other plant and machinery can be written off in the
first year with a rate of 10-30% written off thereafter.
- 20% of the cost of
construction of an industrial building can be written off in
the 1st year with 4% per annum thereafter.
incurred refurbishing or renovating business premises can be
written off in 5 equal instalments.
- In May,
2004, LEGCO expanded the scope of deduction for research and
development expenses under profits tax to cover
is levied annually on the owner or occupier of real estate located
in Hong Kong. Since ownership may be split (eg an entity with a 100
year lease may grant a 50 year sublease to a 3rd party) separate
assessments may be made on the same parcel of land. Property tax
which is governed by the provisions of the Inland Revenue Ordinance
has the following characteristics:
- The annual assessment
to property tax is based on 100% of the annual rental income of
the property less any rates paid, any bad debts, a repairs and
outgoings allowance constituting a maximum of 20% of the annual
rental income (irrespective of whether or not more was actually
spent) and other allowable deductions. In determining "rental
income" the Inland Revenue will include any premiums, service
charges, management fees, rates, repairs and outgoings paid by
the tenant either to the owner or on behalf of the owner under
the terms of the lease. In order to assist the inland revenue to
assess the rental income the owner is obliged to keep records
for up to 7 years and inform the tax authorities of the actual
- Property tax is based
on the territorial principle and is levied on buildings, parts
of buildings, wharves, piers and other structures located in
Hong Kong. The fact that the owner is non resident, non
domiciled or a national of a foreign country is completely
irrelevant and does not exempt him from having to pay this tax.
- The tax rate is 15% of
the assessed annual rental income .
- Property tax is levied
on a provisional assessment basis which takes into account the
previous year's rental income with a tax credit being granted
where the previous year's rental income exceeds the current
year's rental income. Relief is also given where part of the
assessed rental income is a bad debt.
- The following
types of property are exempted from this tax:
- The properties of
- Charitable bodies
exempted from taxation;
- Business entities
who derive profits from and pay profits tax on rental income
derived from ownership of real estate are entitled to a
set-off of property tax against profits tax with a tax
credit being granted where the property tax exceeds the
corporation which purchases a property for its own
occupation does not pay property tax on the deemed rental
income which it could have earned if it had rented out the
- It is advisable for
properties to be owned by Hong Kong corporate entities since
property tax does not make allowances for either depreciation or
interest costs on a loan to finance the purchase, while such
costs are deductible for corporate profits tax purposes. A
foreign company cannot own real estate in Hong Kong unless it is
registered as a foreign company under the provisions of the
Hong Kong Stamp Duty
The laws on
stamp duty are set out in the Stamp Duty Ordinance. Stamp duty is
either a fixed fee or is calculated ad valorem depending on the
nature of the transaction. It is payable on:
- Leases, assignments
and conveyances of immovable property.
- The transfer of shares
or marketable securities
- The transfer of bearer
instruments (being instruments under which ownership is
transferred through physical delivery).
Immovable Property Stamp
2 separate rates of stamp
duty are payable on immovable property:
- The Conveyance of a
Freehold or the Assignment of a Leasehold: The rate of stamp
duty is progressive and varies from US$13 if value of the
transferred interest is less than US$128,000 to a maximum rate
of 2.75% where the property is valued at more than US$565,875 .
- The Granting of a
Short-Term Lease: The stamp duty rate is progressive and varies
between .25% and 1% of the annual rental value depending on
whether the lease is for less than one year or more than 3
years. Any agreement which increases the rent reserved by a
chargeable stamped lease is itself chargeable to stamp duty in
respect of the additional rent which it makes payable.
Transactions Exempted from Stamp Duty:
The following immovable
property transactions are exempt from stamp duty:
Property: Instruments transferring "non residential property"
are exempt from stamp duty. Non-residential property is defined
as property which may not by law be used at any time for
- Gifts to Charitable
Institutions or Public Trusts: Instruments transferring
immovable property by way of gift to a charitable institution or
public trust are exempt from stamp duty.
- Approved conveyances
on sale to diplomatic or consular bodies.
- A transaction
conveying an interest in immovable property between "associated
corporate bodies". Entities are defined as associated corporate
bodies when one entity holds over 90% of the share capital of
the other or when a 3rd entity holds over 90% of the share
capital of both entities. The association must remain for 2
years after the transfer in default of which the full level of
stamp duty must be paid over retrospectively. The financing of
the transaction cannot come from an unassociated body.
- Mortgages: Mortgages
are free of stamp duty.
Immoveable Property Stamp
Duty Anti-Avoidance Provisions
There are elaborate anti
avoidance provisions in place aimed at deterring speculation. Thus
where the beneficial owner of real estate executes an instrument in
favor of a third party under which he undertakes to hold the real
estate on trust for the third party duty is payable on this
instrument as if a conveyance had taken place. Likewise stamp duty
is payable where under an uncompleted contract of sale the vendor is
deemed by law to hold on trust for the purchaser.
Stamp Duty Payable on
Shares & Marketable Securities
Stamp duty of
.225% is payable on the transfer of shares or marketable securities
whereas .1% stamp duty is payable on the issued share capital of a
company up to a maximum stamp duty fee of HK$30,000. In the
long-term stamp duty on shares and securities is to be phased out
Transactions Exempted from Stamp Duty
transactions are exempt from stamp duty:
- Loan capital
transactions, bills of exchange, promissory notes, certificates
of deposit, exchange fund debt instruments and Hong Kong
multilateral agency debt instruments.
involving debentures, loan stocks, funds bonds or notes that are
not denominated in Hong Kong currency except to the extent that
they are redeemable in that currency.
- Stock donated
to charitable bodies or public trusts which are exempt from
taxation in Hong Kong.
- A transaction
conveying stock between "associated corporate bodies". Entities
are defined as associated corporate bodies when one entity holds
over 90% of the share capital of the other entity or when a 3rd
entity holds over 90% of the share capital of both entities. The
association must remain for 2 years after the transfer, in
default of which the full level of stamp duty must be paid over
retrospectively. The financing of the transaction cannot come
from an unassociated body.
Stamp Duty Payable
on Bearer Instruments
The amount of
stamp duty payable is 3% of the value of the instrument transferred.
Hong Kong Filing Requirements
and Payment of Tax
tax year starts on 1st April. The assessment to profits tax is
provisional and is based on the previous year's assessable profits
with 75% of the assessment being due by the 3rd quarter and the
final 25% being due at the year-end. Tax payments delayed less than
6 months are subject to a 5% non-deductible surcharge whereas
payments overdue by more than 6 months are subject to a 10% non-deductible
surcharge. A tax credit is granted where the previous year's
assessment exceeds the currents year's assessable profits.
are no withholding taxes in Hong Kong as such, but there are certain
circumstances in which a company making a payment to a foreign
associate (subsidiary or holding company) which is deemed to be Hong
Kong source income needs to needs to withhold the tax.
For instance, when
a Hong Kong entity pays royalties for the use of intellectual
property to its own offshore licensing affiliate, then tax is due of
10% of 16% = 1.6% and this must be withheld by the Hong Kong paying