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Profit Tax

The companies in Hong Kong are not treated as resident or non-resident companies; the principle of taxation by territory is applied. This means that Hong Kong companies are subject to taxation only  when the income was received from a source located in Hong Kong, in which case Hong Kong companies are taxed at a rate of 16.5% of the profits. If the company had no activity on the territory of Hong Kong and did not receive the income from the sources located in Hong Kong, they are not the subject of taxation.

According to the territorial principle the company is subject to taxation in Hong Kong if the following three conditions are observed at the same time:

  • company must conduct business in Hong Kong;
  • income must be derived directly from the declared business;
  • income must be derived or obtained from the sources in Hong Kong.

 While the first two terms seem clear enough, the problem of determining the origin of income always raises many questions both among tax authorities and tax payers.

Below are basic principles that guide the tax authorities of Hong Kong in determining the origin of income. But before proceeding to consider each of them, it is necessary to point out the official position of Hong Kong Inland Revenue Department; that there are no universal rules that cover every occasion.

Opening the office in Hong Kong: does not in itself make the company  a mandatory taxpayer, if the office does not receive income in Hong Kong.

The lack of a separate foreign unit in a Hong Kong company is not considered as a sign that the company receives income in Hong Kong.

Place of contract: one of the main criteria. The income generated from commercial contracts, negotiations on which were held by the seller from the territory of Hong Kong, by fax or telephone, and  on concluding did not demand a trip out of Hong Kong, for tax purposes shall be considered an income received in Hong Kong. On the contrary, if the contract is negotiated and signed outside Hong Kong and goods under a contract supplied are not from Hong Kong, the income earned on such a contract is not considered as an income derived in Hong Kong for tax purposes.
Revenue from goods produced in Hong Kong: fully taxable profit. When the production facilities are placed partially outside Hong Kong, for example, in China, the portion of the profits derived from sales of these products is exempt from taxation in Hong Kong.

Bookkeeping: in case the Hong Kong company has business activities outside Hong Kong, but entrusts accounting, as well as exposure of invoices,or account management to its Hong Kong office, the revenue generated from such activities will not be considered as an income derived in Hong Kong for tax purposes.

Quoted securities: the income earned from the sale of shares and other securities, purchased or sold on the Hong Kong stock exchange, for tax purposes shall be considered an income received in Hong Kong. In other words, place of origin of such income is determined by the location of the exchange.

Non-quoted stocks and securities: the income from the sale of these securities is determined by the same principles as the income from the common trading activities, that is the main criterion is the place of the contract.

International shipments: usual place of receipt of income is the destination of passengers or cargo.

The loans: interest on the loan obtained by one Hong Kong company (the creditor) from another Hong Kong company (the borrower) in accordance with the territorial principle are taxed with the creditor. While interest on loans given to a borrower in the territory of another country (provided that the contract was not concluded not in Hong Kong) will not be considered as an income derived in Hong Kong and is therefore not taxable.

In addition to the territorial principle of taxation there are many other factors that make the tax regulations in Hong Kong more attractive compared to other jurisdictions, for example, the following types of income are not taxable:

  • dividends received by the Hong Kong parent company from its units, regardless of whether the unit is a resident or non-resident of Hong Kong;
  • proceeds from the lease of real estate located outside Hong Kong;
  • interest on deposits in Hong Kong and foreign banks (except deposits placed by financial institutions, in which case the interest earned on deposits is taxed according to general practice).