Hong Kong is one of the jurisdictions that are famous for its simple and low tax regime. There are mainly three types of taxes in Hong Kong namely the Profit Tax (16.5%), Salaries Tax (15%) and Property Tax (15%). There is no withholding tax, GST, VAT etc. in Hong Kong.
Hong Kong adopts a territorial source principle of taxation. Only profits that have a source in Hong Kong are taxable at 16.5% under the current Profit Tax rate.
Basic Principles for Determining the Source of Profits
The Courts have over the years considered the subject of the source of profits. The following principles have emerged from authoritative court decisions -:
- Matter of fact - The question of locality of profits is a hard, practical matter of fact. No universal rule can apply to every scenario. Whether profits arise in or are derived from Hong Kong depends on the nature of the profits and of the transactions which give rise to such profits.
- The operations test - The broad guiding principle is that one looks to see what the taxpayer has done to earn the profits in question and where he has done it. In other words, the proper approach is to identify the operations which produced the relevant profits and ascertain where those operations took place.
- Gross profits from transactions - The distinction between Hong Kong profits and offshore profits is made by reference to the gross profits arising from individual transactions. Only those business activities which directly produce the gross profits are taken into consideration in determining the source of profits. Activities such as general administration are normally not relevant.
- Place where decision is made - The place where the day-to-day investment/business decisions take place is only one factor which has to be taken into account in determining the source of profits. It is not usually the deciding factor.
- Business presence overseas - A business may maintain a presence overseas which earns profits outside Hong Kong but the absence of a business presence overseas does not, of itself, mean that all the profits of a Hong Kong business invariably arise in or are derived from Hong Kong. However, in the vast majority of cases where the principal place of business is located in Hong Kong and there is no business presence overseas, profits earned by that business are likely to be chargeable to Profits Tax in Hong Kong.
For more details about Territorial Principal of Taxation, please refer to the Inland Revenue Department website.
Offshore claim is subject to IRD review and approval and the company may need to provide details of the company’s operation and business records (e.g. contracts, invoices, shipping documents, business emails, travel itineraries of the related person, etc.) from the Company to substantiate its offshore claim.
Please note that IRD will not issue any official letter upon successful offshore claim application, it will only issue letter to state that the company’s profit is not subject to Hong Kong Profit Tax.
Please note that operating as “offshore” does not exempt the company from complying the regulations of keeping proper books and accounts and preparation of annual audited financial statement by qualified auditor practicing in Hong Kong.