Corporate Income Tax Rate                               (%)16.5(a)

Capital Gains Tax Rate                                        (%)0 

Branch Tax Rate                                                   (%)16.5(a)

Withholding Tax                                                   (%)  

Dividends                                                               0 

Interest                                                                   0 

Royalties from Patents, Know-how, etc.  

Paid to Corporations                                           4.95/16.5(b)

Paid to Individuals                                               4.5/15(b)

Branch Remittance Tax                                      0 

Net Operating Losses                                        (Years)  

Carryback                                                            0 

Carryforwards                                                     Unlimited
 

(a)See Section B for the proposed two-tier tax system.

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(b)This is a final tax applicable to persons not carrying on business in Hong Kong. The general withholding tax rate is 4.95% for payments to corporations. For payments to individuals (including unincorporated businesses), the general withholding tax rate is 4.5%. However, if a recipient of payments is an associate of the payer and if the intellectual property rights were previously owned by a Hong Kong taxpayer, a withholding tax rate of 16.5% applies to payments to corporations and, for payments to individuals (including unincorporated businesses), a 15% rate applies.

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TAXES ON CORPORATE INCOME AND GAINS

 

Profits tax. Companies carrying on a trade, profession or business in Hong Kong are subject to profits tax on profits arising in or derived from Hong Kong. However, certain royalties received from a Hong Kong payer by a foreign entity that does not otherwise carry on a trade, profession or business in Hong Kong are liable to a withholding tax in Hong Kong (see Section A).

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The basis of taxation in Hong Kong is territorial. The determination of the source of profits or income can be extremely complicated and often involves uncertainty. It requires case-by-case consideration. To obtain certainty concerning this and other tax issues, taxpayers may apply to the Inland Revenue for advance rulings on the tax implications of a transaction, subject to payment of certain fees and compliance with other procedures.

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Rates of profits tax. The corporate rate of profits tax is 16.5%.

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In the 2017 Policy Address, the Chief Executive of the Hong Kong SAR government proposed to implement a two-tier profits tax system. Under the proposal, the profits tax rate for the first HKD2 million of profits of enterprises will be lowered to 8.25% (that is, 50% of the normal profits tax rate). Profits above that amount will continue to be subject to the standard tax rate of 16.5%. However, each group of enterprises may only nominate one enterprise to benefit from the lower tax rate. The Hong Kong SAR government aims to implement the proposal in 2018.

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Tax incentives. The following tax incentives and enhanced deductions are available in Hong Kong:

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• Interest income and trading profits derived by corporations from qualifying debt instruments with a maturity period of less than seven years are taxed at a rate of 8.25% (that is, 50% of the normal profits tax rate), while interest income and trading profits derived from instruments with a maturity period of seven years or longer are exempt from tax.

• Income derived from the business of reinsurance of offshore risks by professional reinsurers that have made an irrevocable election is taxed at a rate of 8.25%.

• Income derived from the business of insurance of offshore risks by authorized captive insurers that have made an irrevocable election is taxed at a rate of 8.25%.

• Profits derived by authorized and certain bona fide widely held mutual funds, collective-investment schemes and unit trusts are exempt from tax.

• Profits derived from qualifying corporate treasury activities by qualifying corporate treasury centers that have made an irrevocable election are taxed at a rate of 8.25%.

• Profits of qualifying aircraft lessors and qualifying aircraft leasing managers that have made an irrevocable election are taxed at the concessionary tax rate of 8.25%. In addition, instead of tax depreciation allowances, the deemed taxable amount with respect to income derived from the leasing of aircraft to an aircraft operator by a qualifying aircraft lessor equals 20% of the tax base of the lessor concerned (that is, their gross rentals less deductible expenses, but excluding tax depreciation allowances).

 

In the 2017 Policy Address, the Chief Executive of the Hong Kong SAR government proposed to provide additional tax deductions for expenditure incurred by enterprises on research and development (R&D). The first HKD2 million eligible R&D expenditure will receive a 300% tax deduction, with 200% for the remainder. The Hong Kong SAR government aims to implement the proposal in 2018.

Tax exemption for nonresident funds. Nonresident persons, including corporations, partnerships and trustees of trust estates, are exempt from tax in Hong Kong if their activities in Hong Kong are restricted to certain specified transactions and to transactions incidental to such transactions. An entity is regarded as a nonresident if its place of central management and control is located outside Hong Kong. Specified transactions are broadly defined to cover most types of transactions typically carried out by investment funds, such as transactions involving securities (for unlisted securities, the exemption is subject to certain specified conditions), future and currency contracts, commodities and the making of deposits other than by money-lending businesses.

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Anti-avoidance measures provide that under certain circumstances, a resident investor in an exempt nonresident fund is deemed to derive a portion of the exempt income of the fund and is subject to tax in Hong Kong on such income, regardless of whether the fund makes an actual distribution.

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Proposed tax exemptions for resident open-ended fund companies. Under a bill being scrutinized by the Legislative Council of Hong Kong, subject to certain safe-harbor rules and anti-avoidance provisions, an open-ended fund company (OFC) would be exempt from tax in Hong Kong with respect to its assessable profits derived from qualifying transactions and incidental transactions if it satisfies the following conditions:

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• It is a resident person with its central management and control exercised in Hong Kong.

• It is non-closely held (as defined).

• It only carries out transactions in permissible asset classes through or arranged by specified persons.

 

Anti-avoidance measures contained in the bill provide that under certain circumstances, a resident investor in an exempt OFC fund is deemed to derive a portion of the exempt income of the OFC and is subject to tax in Hong Kong on such income, regardless of whether the OFC makes an actual distribution.

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Capital gains. Capital gains are not taxed, and capital losses are not deductible for profits tax purposes.

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Administration. A fiscal year runs from 1 April to 31 March. If an accounting period does not coincide with a fiscal year, the profit for the accounting period is deemed to be the profit for the fiscal year in which the period ends. Special rules govern commencements and cessations of businesses and deal with accounting periods of shorter or longer duration than 12 months.

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Companies generally make two payments of profits tax during a fiscal year. The first payment consists of 75% of the provisional tax for the current year plus 100% of the final payment for the preceding year. The second payment equals 25% of the provisional tax for the current year. The timing of payments is determined by assessment notices rather than by set dates, generally during November to April of the fiscal year.

Dividends. Hong Kong does not impose withholding tax on dividends paid to domestic or foreign shareholders. In addition, dividends received from foreign companies are not taxable in Hong Kong.

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Foreign tax relief. In certain circumstances, a deduction is allowed for foreign taxes paid. A foreign tax credit is available under the full comprehensive double tax treaties entered into between Hong Kong and other jurisdictions. However, the amount of the credit may not exceed the amount of tax payable under the Hong Kong tax laws with respect to the relevant item of income. For details concerning Hong Kong’s double tax treaties, see Section E.

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The content is based on information current as of 1 January 2018, unless otherwise indicated in the text of the chapter. Changes to the tax laws and other applicable rules in various countries covered by this publication may be proposed. Therefore, readers should seek independent tax advice from their local and international firms to obtain further information.

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This publication contains information in summary form and is sourced from the Ernst & Young Worldwide Corporate Tax Guide, and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Aston & Willson LLP  or EYGM Limited nor any other member of an organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.