Tax Compliance Services in Hong Kong: An Overview
Hong Kong Special Administrative Region (SAR) is situated in Eastern Asia on the southeast coast of Mainland China. Chinese English are the official languages of Hong Kong SAR, and the currency being the Hong Kong Dollar (HKD). The currency of this destination continues to link closely to the United States dollar (USD), thereby maintaining an arrangement established in 1983.
Hong Kong SAR is one of the world's freest economies. This destination became a member of the Asia Pacific Economic Cooperation in the year 1991 and of World Trade Organization (WTO) on 01.01.95
Over the past few decades, There has been a transformation in Hong Kong SAR from being a labour-intensive manufacturing-based economy to a high-value-added and knowledge-based economy, with a special focus on international trade, tourism, financial services, etc. Since the handover in 1997, this destination has become increasingly integrated with Mainland China through tourism, trade, and financial links. The place has also established itself as the premier stock market for Chinese firms intending to list abroad and a prime renminbi (CNY) offshore centre.
Types of Taxes in Hong Kong
Tax on Corporate Income
Hong Kong SAR has adopted a territorial basis of taxation. Profits tax must be payable by every person (defined to include a corporation, partnership, and sole proprietorship) that carries out a profession, trade or business in Hong Kong SAR on profits which arise in or are derived from this destination from the same. Generally, the tax residence of a person is irrelevant, and there isn’t any distinction between residents and non-residents regarding liability to profits tax, except in a tax treaty context. Non-residents conducting a profession, trade, or business in this destination attract tax on profits which arise in or derived here unless they are from jurisdictions having a tax treaty with Hong Kong and are protected by the treaty.
Effective from 01.01.23, under the refined FSIE regime, 4 types of offshore income, namely (1) interest, (2) dividends, (3) disposal gains from selling equity interests (disposal gains), and (4) Intellectual Property income (collectively, 'specified foreign-sourced income'), is considered to be sourced from Hong Kong SAR and attract the profits tax provided the receipt of the income is in Hong Kong SAR by an MNE entity that carries on a profession,tradeor business in this destination (irrespective of its asset or revenue size) and the recipient entity fails in meeting a relevant exception from the deeming provision. The exceptions are:
- For interest- Requirement of Economic substance
- For disposal gains and dividends: Requirement of Economic substance or requirement of participation
- For Intellectual Property income: Requirement of Nexus
Effective from the Assessment yr (AY) 2018/19, there exists a two-tiered profits tax rates regime in this destination.
Duties are imposed on limited categories of dutiable commodities (i.e. liquor, methyl alcohol,tobacco, and hydrocarbons), irrespective of them being imported or locally manufactured.
Property tax is levied on an annual basis to the owner of any lands or buildings (except consular and govt. properties ) in this destination at the standard rate of 15% on the net assessable value of such buildings or lands. The net assessable value of a property is the consideration to be paid to the owner for the right of using the land or buildings, fewer rates paid by the owner and a 20% notional allowance.
Rental income derived by a corporation from a Hong Kong property attracts profits tax. The corporation which attracts profits tax may apply for an exemption from property tax in respect of the property. If no exemption is applied, the property tax paid can be used to offset the profits tax payable by the corporation.
Stamp duty is imposed on non-transfer of Hong Kong stock through sale and purchase at 0.26 per cent of the consideration (or the market value, provided it is higher) per transaction. Hong Kong stock can be best understood as a stock whose transfer must be registered in Hong Kong SAR.
Special Stamp Duty (SSD)
The SDD applies to the reselling of residential property within 36 months from the acquisition date. The SSD is levied on top of the stamp duty and must be paid on conveyance on sale or agreement for the sale of residential property, with a few exemptions. The SSD payable will be computed on the basis of the consideration as stated or the market value (whichever being higher) of the resold property at the regressive rates provided below-
- 20% for residential properties held for 6 months or less.
- 15% for residential properties held for a time period > 6 months but for 12 months or less.
- 10% for residential properties held for a time period > 12 months but for 36 months or less.
Buyer's Stamp Duty / BSD
This must be paid on the acquisition of residential properties in Hong Kong by any person (including foreign companies and Hong Kong companies) other than a Hong Kong permanent resident. The BSD is levied at a flat rate of 15 per cent on the stated consideration or the property's market value so acquired, whichever is higher. The BSD is charged in addition to the stamp duty and the SSD (if applicable). However, there are exemptions in some situations.
Government Rates and Rent
Rates are an indirect tax imposed on Hong Kong SAR's properties Rates are charged at 5% of the rateable value, i.e. the property's estimated annual rental value at the designated valuation reference date of 1 October.
Hong Kong SAR's privately owned lands are generally held through a government lease under which rent must be paid to the govt. of Hong Kong SAR in return for the right of holding and occupying the land for the term (i.e. the duration)stated in the lease document. Presently, government rent is computed at 3% of the property's rateable value and is adjusted in step with any changes in the rateable value.
There aren’t any payroll taxesIn Hong Kong SAR, except the Mandatory Provident Fund (MPF) contribution.
The below-mentioned aspects must be considered in this regard -
Plastic Shopping Bag (PSB) Charging Scheme
Except for plastic bags which are used for the reason of food hygiene, all plastic bags (including flat-top bags) being used for retail sales attract PSB charges. Retailers must charge a minimum of HKD 1 for each PSB provided to consumers. The retailers retain the proceeds from the PSB.
Withholding Taxes (WHT)
Hong Kong SAR doesn’t levy WHT on interest and dividends currently. However, the treaties offer a maximum WHT rate on interest and dividends should Hong Kong SAR charge such WHT in the future. Some of the treaties also offer a reduced WHT rate on interest and dividends if conditions specified in the treaties are met.
Tax Administration in Hong Kong
The key aspects related to tax administration in Hong Kong are discussed below -
The assessment year (or tax year) starts on 1 April of a yr and ends on 31 March of the following yr. The period that is used for the computation of the taxable profits for an AY is known as the basis period, which is normally the FY, i.e. the financial year ending in the AY.
The issuance of the tax returns is done on the 1st working day of April each year. Effective from the AY 2018/19, there are various supplementary forms for profits tax filing purposes, and assessees must be filing the supplementary forms that are applicable to them along with the tax return issued.
The filing deadline is usually within 1 month from the date of issuance of the tax return. However, an extension for filing the tax returns is granted to the corporations whose FY ends between 1 December and 31 March and the representation of whom is done by a tax representative. The exact filing due date is dependent on the accounting year-end date of the assessment.
The basis of assessment is the accounting profits of the FY ending within the AY, with appropriate adjustments for the purpose of tax. A tax return is usually filed along with a tax computation reflectingthe tax adjustments to the accounting profits to arrive at the allowable tax losses or taxable profits for a given AY.
Corporate assessees must attach their audited accounts as supporting documents while filing a profits tax return unless they are qualifying as a small corporation as defined by the HKIRD, i.e. Hong Kong Inland Revenue Department (i.e. mainly those having gross income for a basis period of not in excess of HKD 2 million plus a few other conditions).
The attachment of the supporting documents along with the tax return isn’t required by the Small corporations but still they must keep those documents and submit them upon request. A branch of a foreign corporation carrying out business in Hong Kong SAR must file a profits tax return on an annual basis, and the Hong Kong, Inland Revenue Department, may need the audited accounts of the foreign corporation for supporting the Hong Kong branch's profits tax return.
There shall be the issuance of a notice of assessment or statement of loss after the acceptance of the tax return by the HKIRD. Assesses may be liable for post-assessment investigation or field audit on the basis of risk areas or as per the computerised random selection procedures of the Hong Kong Inland Revenue Department at a later date.
Payment of Tax
Tax is usually paid in 2 instalments. The dates of tax payment, which generally fall between November of the year pertaining to the issuance of the return and April of the following year, are ascertained by the CIR and specified in an assessment notice. A system of provisional tax payments is applicable in cases of payments estimated tax being made during the current year. The provisional profits to be paid are normally estimated on the basis of the assessable profits of the previous year. The provisional profits tax already paid is credited against the final profits tax assessed for the assessment year, which is determined after the filing of the return.
General Anti-Avoidance Rules (GAARs)
The Inland Revenue Ordinance, i.e. IRO includes a GAAR (i.e. section 61A) permitting the HKIRD for disregarding a counteract or transaction in respect of the tax benefit provided by a transaction if the sole or dominant purpose of making such a transaction is the obtainment of a tax benefit. The obtainment of the tax benefit being the dominant or sole purpose of entering into a transaction will be assessed as per a set of factors provided in sec 61A.
Another GAAR in the IRO is sec 61, which provides power to the HKIRD for disregarding a transaction reducing or liable to reduce the amt of payable tax by any person if that transaction is regarded as artificial or fictitious. Although both GAARs can be used, in practice, sec 61A is more often invoked by the HKIRD in tackling tax avoidance schemes.
Services provided by Enterslice
Based on our extensive technical knowledge and deep understanding of industry practices, we can help our clients in managing their tax obligations and the identification of ways for reducing their tax charges. Through the deployment of the latest tools and new technology, we can help in the management of tax risks and obligations seamlessly and efficiently – domestically and globally. We consciously listen and work closely with our clients for understanding the issues for developing strategies aligned with their tax objectives and vision.
We are dedicated to enable the success of their tax future irrespective of the stage of their business. We offer various fully integrated services covering industries with particular expertise in the following services.
Tax Compliance Advisory
Complying with local tax and accounting rules is essential in the current environment. We work alongside our clients for developing a strategy for their tax function for meeting their tax obligations efficiently and effectively –for reducing costs, mitigating risks, improving quality and driving strategic value across the organisation.
We bring our expertise to helping our clients in tackling regulatory change, turning data into value, and streamlining compliance and planning while facilitating effective collaboration across tax, finance and legal departments and beyond.
Tax Policy Advisory
Assessees are increasingly facing pressure for the justification of their tax positions which has resulted in various tax disputes both locally and globally. We help our clients in the management and resolution of local and multi-jurisdictional tax issues and develop appropriate strategies for mitigating future issues.
Assistance in Fund Set up
The New Funds Exemption in Hong Kong offers a generous tax exemption regime for funds in and outside Hong Kong. Our tax professionals help in the formulation of effective strategies for the optimization of taxes, implementation of innovative tax planning and effective maintenance of compliance. We guide our clients via the full spectrum of fund tax issues, private offering memorandum language and tax effects of trading strategies. Our main focus is on exceptional guidance, both during start-up and throughout ongoing operations.
Guidance on R&D tax
The fight for intellectual property (IP) has resulted in the grant of generous tax concessions and tax incentives by many governments. We assist in assessment with regards to the qualification of the companies for benefiting from the R&D super-deductions in Hong Kong and checking the compliance of the companies with eligibility criteria for availing such tax incentives.
Mergers and Acquisitions
As M&A activities have become part of mainstream business, we help our clients in navigating through complex cross-border transactions. We understand the practical implications of tax developments in local jurisdictions and help the clients throughout the deal process while avoiding potential pitfalls.
International Tax Planning
The implementation of the OECD's BEPS initiatives, along with the increasing focus on tax transparency, has resulted in significant changes to local laws and regulations. Consequential to OECD’s ‘BEPS 2.0’ initiative, organisations will have to deal with even more tax uncertainty in the coming years.
It is critical for organisations to understand the effect of BEPS 2.0 on their business. Our team can assist the clients regarding the impact assessment of the same and the degree of focus they need for responding effectively to the challenges the BEPS proposals may bring. We can help the clients in the identification of potential impacts and possible responses, development of communications plans, and guide the clients in supporting their organisation’s current and future actions.