Hong Kong

We have a team of professionals to help you with all your business needs. So, that you can focus on business expansion in Hong Kong.

WHY HONG KONG?

Hong Kong is an exceptional place with a low taxation rate and high standard of living, attracting hundreds of thousands of people from all around the world to do business. Hong Kong International Airport is one of the busiest airports in the world, connecting to half of world’s population within a five hours’ flight. Being Asia’s second largest and the world’s third largest Foreign Direct Investment recipient, Hong Kong welcomes people from all backgrounds with no discrimination.

ADVANTAGES

Its low taxation and high standard of living, attract hundreds of thousands of people all around the world.
Hong Kong International Airport is one of the busiest airports in the world.
Being Asia’s second largest and the world’s third largest Foreign Direct Investment recipient.
English and Chinese both are official languages. Hong Kong has distinct advantages as a hub for:

Trading companies

A large number of trading companies and banks are based here, which has resulted in the availability of excellent trade finance facilities.
Financial center with major international banks.
The world’s leading offshore RMB center.
Freeport with no import tariffs.
A simple and low tax system with a territorial basis of taxation, it means, the profits that are sourced from Hong Kong are only subject to corporate income tax.

Regional head-offices

Hong Kong’s strategic location makes it an ideal business gateway in Asia.
Hong Kong is a historic export and import hub of the Asian continent.
Hong Kong is in five hours’ flight accessibility from most major cities of the world and is well-connected by ferries and trains along with other efficient and affordable public transportation networks.

Regional sales-offices

Centre of free trade and ideal place to do business.
Impose fewer restrictions and allowing free market forces to regulate exports and imports.
Protective measures and subsidies as a means for avoiding balance-of-trade deficits.
More than 60 million affluent shoppers, largely from Mainland China, visit the territory every year, which makes Hong Kong a perfect testing ground for your products prior to entering other Asian markets such as China or Japan.

Regional holding companies

Asia’s 41st most leviable city, with a blossoming multinational population.
Expansion of double tax treaty network (DTT).
Tax-efficient jurisdiction to hold intellectual property.
Given sound infrastructure, an expanded network of treaties, and the existence of tax on local source income.
Hong Kong is compliant with international standards for tax transparency.

SIMPLE TAX REGIME

Hong Kong benefits investors with its low-tax regime. Tax in Hong Kong is bifurcated in slabs and is levied annually ;

In the first slab, profit up to 2 million HKD is taxed at the rate of 8.25%.
Profit beyond that amount would be subject to be taxed at 16.5%.
For proprietorship and partnership two tax slab of 7.5% and 15% are laid down.
The tax is levied only when corporations makes profit.

However, corporations established in Hong Kong can take advantage of a tax exemption by Inland Revenue Department (IRD) for their gains from the outward of the country. Hong Kong maintains three fundamental types of tax –

Corporate profits tax: Inward profits taxed at 8.25 to 16.5%. Outward profits not taxable.
Salary tax: Net Chargeable Income Tax rate;
Income from HKD 1 to HKD 50,000 is liable to tax at a rate of 2% ;
Income from HKD 50,001 to HKD 100,000 is liable to tax at a rate of 6%;
Income from HKD 100,001 to HKD 150,000 is liable to tax at a rate of 10%;
Income from HKD 150,001 to HKD 200,000 is liable to tax at a rate of 14% ; and
Income from Above HKD 200,000 is liable to tax at a rate of 17%.
Property tax: 15% on the net assessable value of the property.

In Hong Kong taxes not applicable in –

Capital gains tax.
Dividend tax.
Hotel accommodation tax (HAT).
Value-added tax, Goods & Services Tax, or Sales tax.
No withholding tax (except on royalties) .
No inheritance tax.
No estate duty.
No debt to equity rules.

HONG KONG COMPANIES

Hong Kong Law offers various legal structures. The most appropriate type of entity will depend on the intended activities, financial aspects, willingness to take on ongoing obligations, tax issues, and other factors. To establish in Hong Kong, a representative office, a branch, or a subsidiary (limited liability Company) can be considered in this respect.

No legal restriction for registration or institution of sole proprietorship except business registration compliance.
Partnership Ordinance governs unlimited and general partnerships in Hong Kong.
Company limited by shares – Members’ liability is limited by the articles of association to the amount due on the shares held by them.
Company limited by guarantee – Non-profit-making organizations are mostly registered under this category.

Procedure to establish an entity in Hong Kong –

Name & type of a company
Submission of an application.
Collection of certificates.
Authorizations or licenses

Hong Kong companies need to renew their Certificate of Business Registration, prepare accounts and undertake an audit and file a tax return on annual basis. A representative office is not required to register with the Hong Kong Companies Registry.

OUR SERVICES

Our Hong Kong office is a Licensed Trust or Company Service Provider (TCSP) with a highly qualified and committed team that will give you the support you need to set up your business in Hong Kong and to remain fully compliant at all times. Our team also has extensive experience with trusts, wealth planning and family office support and will help you to identify and put in place proper structures and saving strategies to ensure you can achieve what is most important for you.

Arbitration Support

Asset Tracing

Due Diligence Services

Escrow services

Nominee Director Services

M & A Services

Capital Market

Litigation Support Services

FREQUENTLY ASKED QUESTIONS: TWO-TIERED PROFITS TAX RATES REGIME

The Two-Tiered Profits Tax Rates Regime in Hong Kong is a key initiative designed to ease the tax burden on businesses, especially small and medium-sized enterprises (SMEs). Understanding its nuances is crucial for optimizing your company’s tax position. This regime was introduced to enhance Hong Kong’s competitiveness as a business hub and to support the growth of local enterprises by providing significant tax relief on initial profits.

What is the Two-Tiered Profits Tax Rates Regime?

Hong Kong's Two-Tiered Profits Tax Rates Regime taxes the first HKD 2 million of assessable profits at a significantly reduced rate of 8.25%. Any profits exceeding HKD 2 million are then subject to the standard tax rate of 16.5%. This progressive structure provides substantial tax relief, particularly benefiting smaller businesses and startups by lowering their overall tax liability and encouraging reinvestment. It was introduced in the 2017 Policy Address and came into effect for the year of assessment 2018/19 onwards, marking a significant reform in Hong Kong's tax landscape.

This system aims to foster a vibrant business environment, making it more attractive for new companies to establish themselves and for existing SMEs to expand without facing an immediate high tax burden on their initial success. Unlike a flat tax rate, this tiered approach recognizes the varying capacities of businesses and provides a targeted incentive for growth among smaller entities.

Who is eligible for the two-tiered rates?

All corporations and unincorporated businesses, including partnerships and sole proprietorships, operating in Hong Kong are generally eligible for the Two-Tiered Profits Tax Rates. There are no sector-specific restrictions, making it broadly applicable across the economy. However, a crucial condition is that only one entity within a group of "connected entities" can elect to benefit from the lower rate for its first HKD 2 million in profits. This prevents multiple related companies from each claiming the preferential rate, ensuring fairness and preventing tax avoidance schemes.

A "connected entity" generally refers to companies under common control, meaning one company has the ability to control another, or both are controlled by the same individuals or entities. This is determined based on factors like shareholding, voting rights, and appointment of directors. It is vital for business groups to carefully assess their structure and make a strategic election regarding which entity will utilize the lower tax rate to maximize their group's overall tax efficiency.

How does it benefit businesses?

The primary benefit is a substantial reduction in tax expenses for businesses with assessable profits up to HKD 2 million. For example, a company earning exactly HKD 2 million saves HKD 165,000 annually compared to the previous flat rate of 16.5% on the entire profit. This significant saving directly enhances a company's cash flow and profitability.

The freed-up capital can be strategically reinvested into various aspects of the business, such as research and development, hiring new talent, expanding into new markets, or upgrading infrastructure and technology. For startups, this additional capital can be a lifeline, aiding in initial growth and sustainability. For established SMEs, it offers a competitive advantage and fosters a more conducive environment for business growth and competitiveness in Hong Kong, encouraging economic development and innovation across various sectors.

Are there any specific conditions or limitations?

Yes, besides the "connected entities" rule where only one entity within a group can elect for the lower rate, there are no specific application requirements; the regime applies automatically to qualifying profits. However, businesses must maintain proper and comprehensive accounting records and submit timely tax returns to the Inland Revenue Department (IRD) to ensure accurate assessment of their assessable profits and eligibility for the two-tiered rates. The onus is on the taxpayer to correctly declare their profits and calculate their tax liability.

Failure to maintain adequate records or comply with all tax regulations can lead to penalties and a reassessment of tax liabilities, potentially negating the benefits of the two-tiered regime. It is also important to note that the regime applies only to profits derived from carrying on a trade, profession, or business in Hong Kong. Offshore profits, if applicable, are subject to different rules. Companies should seek professional advice to ensure full compliance and to optimize their tax position under this regime, especially regarding the 'connected entities' definition.

How is the tax calculated under this regime?

The tax is calculated in two distinct tiers. First, you calculate 8.25% on the first HKD 2 million of assessable profits. This is the preferential rate. Then, any assessable profits exceeding HKD 2 million are taxed at the standard rate of 16.5%. The sum of these two calculations is your total profits tax liability for the year of assessment.

Let's illustrate with an example: if a company's assessable profits are HKD 3 million, the calculation would be as follows:

Tier 1: HKD 2,000,000 x 8.25% = HKD 165,000

Tier 2: (HKD 3,000,000 - HKD 2,000,000) x 16.5% = HKD 1,000,000 x 16.5% = HKD 165,000

Total Profits Tax Payable: HKD 165,000 + HKD 165,000 = HKD 330,000.

This demonstrates how the initial portion of profits significantly reduces the overall tax burden, leading to considerable savings compared to applying the 16.5% rate to the entire HKD 3 million (which would be HKD 495,000).

FREQUENTLY ASKED QUESTIONS: OFFSHORE PROFIT CLAIMS

Understanding the nuances of offshore profit claims in Hong Kong is crucial for businesses aiming to optimize their tax position. Hong Kong operates under a territorial source principle of taxation, meaning only profits arising in or derived from Hong Kong are subject to profits tax. This system allows companies to claim tax exemption on profits that are genuinely sourced outside Hong Kong, provided certain conditions are met. Here, we address common questions to help clarify the process and requirements for making a successful offshore profit claim, emphasizing the importance of meticulous preparation and compliance.

When does a company start to make an offshore profit claim?

Companies typically initiate an offshore profit claim when filing their annual Profits Tax Return. This is not a pre-approval process or a separate application that needs to be submitted in advance. Instead, it is a declaration made within the tax return itself, where the company asserts that specific profits were sourced entirely outside Hong Kong. This self-declaration must be rigorously supported by the company's detailed accounting records and robust documentation that conclusively proves the foreign origin of the profits. It's important to ensure consistency between your accounting treatment of revenue and expenses and the tax claim you are making from the outset. Companies often begin considering this claim as soon as they engage in business activities that generate income from operations performed wholly outside Hong Kong, such as international trading where goods are never stored in Hong Kong, or services rendered entirely by overseas staff to overseas clients. Proactive preparation of supporting documents is essential from the very beginning of such activities.

What documents should be well-prepared when applying for the offshore profit claim?

Comprehensive documentation is absolutely critical for substantiating an offshore profit claim and effectively addressing any inquiries from the Inland Revenue Department (IRD). Key documents include a complete set of sales contracts and purchase orders that clearly show the parties involved and the location of the transactions. Detailed invoices for goods or services, along with corresponding bank statements that reflect the flow of funds originating and terminating outside Hong Kong, are also essential. For trading activities, shipping documents such as bills of lading, airway bills, and customs declarations are vital to demonstrate that goods did not pass through Hong Kong. Additionally, companies should prepare detailed operational charts and organizational structures illustrating where key business activities, such as negotiation, contract signing, and order fulfilment, were performed. Evidence of staff presence, assets, and actual operations overseas is paramount, which can be demonstrated through employment contracts for overseas staff, rental agreements for foreign offices or warehouses, and utility bills. Travel logs and communication records, including comprehensive emails, meeting minutes, and call records with overseas clients or suppliers, are crucial to illustrate the non-Hong Kong based nature of business decisions and execution. A thorough functional analysis outlining the specific activities performed outside Hong Kong, identifying where key decisions were made and executed, and by whom, is also highly recommended to clearly articulate the offshore nature of the profits.

What is an offshore claim tax query letter?

An offshore claim tax query letter, often simply referred to as an IRD query letter, is an official inquiry issued by the Inland Revenue Department (IRD) in Hong Kong. This letter is sent to a company when the IRD is reviewing its submitted Profits Tax Return and has specific concerns or requires further clarification and supporting evidence regarding an offshore profit claim that has been made. The issuance of such a letter indicates that the company's claim for tax exemption on profits is under scrutiny. The letter will meticulously specify the particular areas of concern, such as the nature of the business activities, the role of Hong Kong staff, or the flow of funds, and will explicitly list the additional documents, information, or explanations needed to justify the claim. This signals that your offshore claim requires a detailed, well-substantiated, and timely response to prevent the claim from being denied. Companies receiving such a letter should treat it with utmost seriousness, as a well-prepared and comprehensive reply is crucial for a successful outcome.

What happens if the IRD accepts the response to the offshore claim tax query letter?

When the Inland Revenue Department (IRD) accepts a company's response to an offshore claim tax query letter, it means the IRD has reviewed the submitted evidence and is satisfied that the profits in question were indeed sourced outside Hong Kong and thus qualify for tax exemption under the territorial source principle. This favourable outcome is typically communicated through an official letter from the IRD stating that “no tax adjustments are required in relation to the issues raised in the enquiry” for the specific assessment year. This grants the company a significant advantage, as it confirms the tax-exempt status of those particular profits. A key benefit of this acceptance is that, typically, the IRD will not send another detailed tax query letter questioning the business activities for the company's offshore claims for several subsequent years, provided the company's business activities and operational structure remain substantially unchanged. This provides a period of certainty and predictability regarding the company's tax position, allowing management to focus on business growth without constant concerns about tax inquiries related to offshore profits. It signifies a successful demonstration of compliance and the territoriality of income.

What happens if the IRD rejects the offshore claim?

If the Inland Revenue Department (IRD) concludes, after reviewing the submitted evidence and responses, that the company’s activities were indeed affected in Hong Kong, or that the documentation provided is insufficient to prove the offshore nature of the profits, the IRD would reject the offshore claim. This means that the profits previously declared as offshore and tax-exempt will be assessed as taxable income. Consequently, the IRD would issue a revised assessment, and a tax demand note for the total amount of taxes that are now deemed payable, often along with any applicable interest or penalties for late payment or under-declaration. The company would then be liable to pay profits tax on those previously exempted profits, typically at the standard Hong Kong profits tax rate (16.5% for corporations, or the two-tiered rates if applicable to the total assessable profits). In such a scenario, companies have the right to object to the assessment and potentially appeal the IRD's decision. However, this process can be complex and time-consuming, often requiring further legal and tax advice. It underscores the critical importance of having robust documentation and a clear operational structure from the outset to support any offshore profit claims.