Navigating the Hong Kong Tax Regime: Understanding the intricacies of Hong Kong’s tax system

Hong Kong is known for its low tax rate and relatively simple tax system.

For more information contact our DBi Partner in Hong Kong: -Kenneth-, KYT Limited

Understanding the intricacies of Hong Kong’s tax system is essential for companies operating in or considering expansion into the region. In this article, we will explore the basics of the Hong Kong tax regime including the latest Foreign-Sourced Income Exemption (“FSIE”) regime.

Tax regime in a nutshell

Hong Kong is known for its low tax rate and relatively simple tax system. Hong Kong has a two-tiered profits tax rates regime which aims to reduce the tax burden of Hong Kong companies. In this regard, the first HK$2 million of assessable profits for corporations are taxed at 8.25%, while the remaining assessable profits are taxed at 16.5%.

Hong Kong also adopts a territorial source system, which means that only income or profits arising in or derived from Hong Kong by persons carrying on a trade, profession or business in Hong Kong would be subject to profits tax. In principle, income that is not sourced from Hong Kong is generally not subject to tax in Hong Kong.

Moreover, Hong Kong does not impose withholding tax on dividends, which means that Hong Kong companies can repatriate profits to their shareholders (either in or outside Hong Kong) without withholding tax leakage in Hong Kong.

FSIE regime

To uphold the EU’s standards to combat tax evasion, Hong Kong has implemented the FSIE regime in respect of which passive income is subject to profits tax. In this regard, four types of foreign-sourced income, including (i) dividends, (ii) interest, (iii) disposal gains, and (iv) intellectual property (“IP”) income, are deemed to be sourced in Hong Kong and thus chargeable to profits tax if such income is received by a MNE entity in Hong Kong.

Nonetheless, such income remains tax exempt in Hong Kong if one of the relevant conditions are met:

1. Economic substance (for dividends, interest and disposal gains in relation to non-IP assets);

2. Participation exemption (for dividends and disposal gains with respect to equity interests);

3. Nexus exemption (for disposal gains on IP assets as well as general IP income); or

4. The foreign-sourced income is not received or deemed received in Hong Kong.

If an MNE entity has specified foreign-sourced income and fails to meet any of the above conditions, double taxation relief is potentially available if the MNE entity has paid tax in a territory outside Hong Kong, which is of substantially the same nature as Hong Kong profits tax.

Conclusion: Hong Kong tax regime offers significant opportunities for businesses with international operations and/or investments. By understanding the tax implications and potential benefits, businesses can optimize their tax planning strategies and capitalize on Hong Kong’s status as a leading global financial centre. It is advisable for businesses to seek professional tax advice to ensure compliance with Hong Kong tax laws and maximize tax efficiency in their operations or investments.

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