Many countries consider Hong Kong an 'offshore' jurisdiction; the attitude of the government however is that the territory is not an offshore centre in the traditional sense of the word but rather a low tax area which levies tax according to the territorial principle. The tax laws of Hong Kong are extremely simple compared to other onshore jurisdictions and the fiscal advantages of operating there could be summarized as follows:

 

Territorial Corporate Tax System

 

Hong Kong follows a territorial system of taxation. In other words, tax will be levied only on profits arising in or derived from carrying on a trade, business or profession in Hong Kong. Profits tax is not applicable to profits whose source is outside Hong Kong. Hence, if you carry on a business in Hong Kong but your profits are derived from elsewhere, you are not liable to pay profits tax, irrespective of whether the profits have been remitted to Hong Kong. The territorial principle does not distinguish between residents and non-residents. You may be a resident in Hong Kong but if your profits are derived elsewhere, you are not liable to pay any tax on those profits. Likewise, if a non-resident derives profits from Hong Kong, he will be liable to pay profits tax in Hong Kong.

 

The questions of whether a business is carried on in Hong Kong and whether profits are derived from Hong Kong are largely questions of fact. However some guidance on the principles applied can be found in cases which have been considered by the courts in Hong Kong and in other common law jurisdictions.

 

Single-Tier Corporate Tax System

 

Hong Kong follows a single-tier tax system (sometime called the “STS”) because profits earned by companies are only taxed once, i.e. on the company that gained those profits. When that company declares dividends, the profits thus distributed are no longer taxable on the shareholders of the company.

 

Tax rates are extremely low by OECD standards. Taxation case law is minimal since the low tax rate means that the costs associated with challenging a decision of the revenue authorities usually outweigh any monetary gain.

 

A number of taxes that exist in most jurisdictions do not exist in Hong Kong. Thus there are no capital gains taxes, no withholding taxes, no sales taxes, no VAT, no annual net worth taxes and no accumulated earnings taxes on companies which retain earnings rather than distribute them. In the long term it is intended to completely phase out stamp duty on the sale and issue of shares and securities and to reduce direct taxes further.

 

Tax Rates in Hong Kong

 

Corporate Tax:The normal rate of Profits Tax is 16.5% for corporations and 15% for unincorporated businesses.

 

Individual Tax:The standard rate of Salaries Tax is 15%.

 

Withholding Tax :Royalties and fees paid to non-resident entertainers or sportsmen for their performances in Hong Kong are subject to withholding tax on their assessable profits. There are no withholding taxes levied on dividends interest or royalties

 

Capital Gains Tax: Hong Kong does not levy capital gains tax.

 

Indirect Taxes : Hong Kong does not levy value-added tax (VAT), goods and services tax (GST) or sales tax.

 

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