The low corporate tax rate and pro-business environment are the main reasons why business owners choose to start a business in Hong Kong. Ranked as the third easiest place to do business by the World Bank in 2020, it is a relatively straightforward process to set up a business in Hong Kong as it can be done remotely and there are no resident directors or minimum share capital requirements to set up an offshore company in Hong Kong. Before you setup offshore company in Hong Kong, it is important to understand the various Hong Kong offshore company tax your company may have to pay.
What to know about Hong Kong offshore company tax
#1 Corporate income tax
- Hong Kong operates based on a territorial tax system. This means that all companies, regardless of their tax residency, will generally be required to pay a corporate income tax rate of 16.5% on profits derived from business activities within Hong Kong. This could be advantageous if your offshore company conducts a significant portion of business activities outside of Hong Kong as it would mean that you will not be required to pay corporate taxes on those profits earned outside of Hong Kong.
- As of 2019, the Inland Revenue Department of Hong Kong has implemented a two-tiered profit tax system. Under this tax system, the corporate tax rate for companies for the first HKD 2 million of taxable income will be 8.25%. The remainder of the company’s profits will continue to be taxed at the standard corporate tax rate of 16.5%.
#2 Non-taxable items
- Besides profits earned outside of Hong Kong, there are other types of profits that are non-taxable in Hong Kong. This includes capital gains, bank deposit interest and dividends. There is also no withholding tax on dividend distributions or interest payments from a Hong Kong company to a resident or non-resident. Branch companies that repatriate their profits back to the parent company will not be required to pay a withholding tax. In addition, tax losses in Hong Kong can be carried forward indefinitely to offset taxable profits in the future.
#3 Value-added tax (VAT) and custom duties
- Unlike most jurisdictions, Hong Kong does not levy a VAT, goods and services tax (GST) or sales tax on goods and services sold in Hong Kong. There are also no custom duties levied on imports in Hong Kong.
#4 Property tax
- If your company purchases or invests in property, it may have to pay a standard property tax rate of 15% on the net assessable value of the land and building.
- Rental income earned by the property will be subjected to the standard Hong Kong corporate tax rate. Companies can choose to apply for a tax exemption from property tax if they are already paying corporate taxes on the rental income earned from the property or if the property is owned by the company for business purposes.
#5 Stamp duty
- Stamp duty can be levied on the sale and purchase of a stock or property by a company. For Hong Kong stocks, stamp duty is charged per transaction based on 0.2% of the price or market value of the stock, depending on which value is higher. Companies may be exempted from stamp duties for certain transactions such as the transfer of units of exchange-traded funds (ETF) listed in the Hong Kong Stock Exchange, transfer of shares between associated corporate bodies and certain stock borrowing and lending transactions.
- For conveyance on sale of property in Hong Kong, the stamp duty payable will depend on whether the property transferred is a residential property or a non-residential property. The stamp duty for the transfer of a residential property is 15% while the stamp duty for the transfer of a non-residential property can be up to 4.25%. The stamp duty will be applied to either the market value of the property or the price the property was transacted at, depending on which value is higher.
#6 Mandatory Provident Fund
- Implemented in 2000, the Mandatory Provident Fund (MPF) is a compulsory pension fund for residents in Hong Kong, aimed to help them cope with retirement. The MPF scheme requires an offshore company in Hong Kong to make a mandatory contribution of 5% of the employee’s monthly salary to the employee’s MPF. The level of contribution is capped at HKD 30,000 per month.
#7 Accounting period for Hong Kong offshore company tax
- Hong Kong’s fiscal year starts on 1 April and ends on 31 March. Typically, tax returns will be issued on the first working day of April. Companies will be required to file within 1 month from the date of issuance of the tax return. However, companies whose financial years end later may request an extension for filing their tax returns. Ultimately, the filing deadline will depend on when the company’s accounting year ends. Companies that appoint a tax representative can request an extension of the tax return deadline under the block extension scheme.
#8 Audit requirements for Hong Kong offshore company tax
- It is mandatory for all companies that incorporate in Hong Kong to file an audited financial report on an annual basis. The financial report must be audited by an auditor that is registered and certified by the Hong Kong Institute of Certified Public Accountants. The company should prepare the necessary financial documents such as financial statements, bank statements, receipts, invoices, merchant account statements, general ledger and trial balance and submit them to the certified auditing firm so that they can complete the audit successfully. Once the financial report has been audited, the company must file the audited financial report with the Inland Revenue Department together with the tax return.
#9 Preferential tax treatment
- Some industries or business activities in Hong Kong may enjoy a lower corporate tax rate. For example, onshore and offshore funds can be exempted from corporate taxes if the income is derived from some specific transactions. Certain profits earned by a qualifying corporate treasury centre, as well as qualifying aircraft and ship leasing activities will also enjoy concessionary tax rates. In addition, businesses that engage in research and development may enjoy enhanced deductions for such expenses from their taxable income.
Find out more about Hong Kong offshore company tax and company registration
Hong Kong offshore company tax rates are generally considered to be favourable because of the relatively low corporate tax rate and absence of sales tax and import duties. There are also quite a number of non-taxable items and tax benefits for companies that conduct certain business activities. As such, it is quite attractive to open offshore company in Hong Kong.
Managing your tax and accounting obligations in Hong Kong can be tedious without the necessary legal expertise and knowledge. In Hong Kong, it is a mandatory requirement for all companies to submit an audited financial report, together with their tax return.
Tetra Consultants can simplify the process for you by providing annual accounting and tax services for your company. Tetra Consultants also provides you with a fast and easy way to setup offshore company in Hong Kong through our service package which includes company registration with the Hong Kong Companies Registry; provision of local company secretary and registered address; opening of a corporate bank account; and tax registration. Alternatively, you may wish to consider incorporating a company in Singapore due to its similar business environment and tax regime. Tetra Consultants will provide you with a Hong Kong vs Singapore offshore company comparison so that you can decide on the most optimal jurisdiction to set up your company in.
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