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HONG KONG SAR – Media OutReach – 22 February 2022 – Hong Kong is famous for its simple taxation system
and low tax rate, so would most probably be the first set-up to consider when investors
enter the Asian market (particularly the Mainland China market). However,
without a better understanding of the benefits, investors may not realise just
how attractive Hong Kong is. Cheng & Cheng Taxation Services Limited (Cheng
& Cheng Taxation) provides 10 quick facts about the taxation system investors
need to know before deciding to move to Hong Kong.
Benefits of setting up a Hong Kong
intermediate holding company:
1.
Hong Kong does not have withholding tax in most circumstances
Most countries impose withholding tax when money is transferred out of the country. This tax could be even higher than the local corporate income tax
rates. However, Hong Kong is the complete opposite. In general, there is no
withholding tax on dividend and interest, or on services, while only a low
withholding tax will be imposed on royalties. When a Hong Kong company has to
pay royalties to an overseas entity, it has to withhold tax on behalf of the
overseas entity. The general tax rate is between 2.475% and 4.95%, but under
some circumstances the tax rate could be as high as 16.5%.
The fact that Hong Kong does not charge
withholding tax on dividend and interest makes it an ideal place for setting up
an intermediate holding company.
2.
Hong Kong does not tax on capital gains
Capital gains tax planning is common in Hong
Kong, because there are huge differences between tax rates on long-term capital
gains and short-term trading gains. While short-term trading gains are subject
to normal tax rates of 16.5%, long-term capital gains are subject to a tax rate
of 0%.
There is no clear definition that distinguishes
between long-term and short-term investments. There are six “badges of trade” tests
that are generally used to judge the difference, which leaves room for tax
planning opportunities before the investment decision is made. Investments in
securities and immovable properties for long-term investment purposes are also
eligible for the non-taxable capital gain claim.
From a group structure perspective, the
non-taxable capital gain claim provides more flexibility in the exit of an
underlying investment or subsidiary. This adds to the benefits of setting up an
intermediate holding company in Hong Kong.
3.
Hong Kong does not tax on dividend income
Dividend income from both Hong Kong and
foreign investments are non-taxable under Hong Kong Profits Tax. Hong Kong–sourced
dividend income is exempted under Section 26 of the Inland Revenue Ordinance to
avoid double taxation on the same profits, while foreign-sourced income is
generally non-taxable in Hong Kong.
Fund distribution income is generally exempt
from Hong Kong Profits Tax under the same logic.
4.
Hong Kong has already entered into DTAs with 45 tax jurisdictions
Hong Kong has been rapidly expanding its
Comprehensive Double Taxation Agreement (DTA) network in recent years to
facilitate the use of Hong Kong entities to carry out cross-border business and
investment. The number of DTAs has already reached 45. Please refer to the
following website for a detailed list of DTA partners [https://henrykwongtax.com/home/hong-kong-tax-treaty-network/].
The expanded DTA network will effectively
reduce the overseas withholding tax when a Hong Kong company sets up an overseas
subsidiary or does business with overseas business partners.
It has become a global practice that a
taxpayer has to apply for a Certificate of Resident Status in order to utilise
the tax benefits under a DTA. As an international city, located in the central
part of Asia and being so close to Mainland China, Hong Kong is in a good
position to attract multinational corporations to build up economic substance (including
personnel and an office) here. For more details on the requirements for
obtaining Hong Kong tax resident status, please visit the “Tax Residency
Certificate Video” section of the following website [https://henrykwongtax.com/home/trc-videos/].
Benefits as a trading company:
5.
Hong Kong does not have GST or VAT
To facilitate the development of the trading
industry in Hong Kong, Hong Kong does not impose goods and services tax (GST)
or value-added tax (VAT). Only certain specific items, such as like liquor and
tobacco, are subject to tax.
More pertinently, while digital services tax (DST)
has become a global trend, Hong Kong does not currently plan to introduce DST, a
fact that will attract corporations working in the digital economy arena.
As such, multinational corporations tend to
set up a Hong Kong office as their Asian trading hub and sales office. They
first sell the products to the Hong Kong group company, which will subsequently
sell the products to customers in other Asian countries.
6.
Hong Kong does not adopt the worldwide taxation system
Unlike many developed countries, Hong Kong
adopts a territorial taxation system. Regardless of whether a company is a Hong
Kong resident or non-resident, only Hong Kong–sourced profits are subject to
Hong Kong Profits Tax, in most circumstances. In other words, if a Hong Kong
company carries out its operations outside Hong Kong, it will have the
technical basis to pursue an offshore claim, even when the relevant profits are
deposited with the bank accounts in Hong Kong.
The Inland Revenue Department (the IRD) issues
an enquiry letter to taxpayers that pursue an offshore non-taxable claim in
Hong Kong to ensure their operations are carried out outside Hong Kong. As
such, it is important for taxpayers to plan their inter-company arrangements
and operational flow in advance, so as to defend against any challenge by the
IRD. Sufficient trade transaction documents should be in place as the burden of
proof is on the taxpayer.
On the other hand, under the Common Reporting
Standard (CRS) and Automatic Exchange of Information (AEOI), taxpayers that pursue
an offshore claim in Hong Kong should be aware of their foreign tax risk.
Double non-taxation is not encouraged under the OECD’s base erosion and profit shifting (BEPS) framework. Nevertheless, an
offshore claim is one of the effective ways of avoiding double taxation issues,
particularly with countries without a DTA with Hong Kong.
7.
Hong Kong is well known for its low corporate income tax rate
The corporate income tax rate in Hong Kong is
16.5%, which is among the lowest across the globe. For the first HK$2 million
of profits, the tax rate is reduced by half, to 8.25%. The low tax rate has
attracted a lot of Mainland China enterprises and multinational corporations to
set up companies and operations in Hong Kong.
Taxpayers in certain specified industries (such
as insurance, shipping and corporate treasury centres) can enjoy a special tax
rate of 8.25%, while taxpayers carrying out R&D activities in Hong Kong can
enjoy an enhanced tax deduction of 200% or 300%. Please visit the following website for more
details on the tax benefits: https://henrykwongtax.com/newsletter/inland-revenue-ordinance-section-15f-double-taxation-risk-on-mnc-with-research-development-rd-functions-in-hong-kong/
By setting up operations in Hong Kong to
enjoy the low tax rate, the group / company could certainly benefit from a
lower group effective tax rate to reduce the tax burden.
Employer obligations:
8.
Hong Kong employers have no obligation to withhold tax for employees
Unlike many other tax jurisdictions, Hong
Kong employers in general do not have an obligation to withhold tax on behalf
of their employees when the remuneration is paid. The employees are under their
own obligation to settle their Hong Kong Salaries Tax position.
A withholding tax obligation only arises when
an employee will permanently leave Hong Kong. In such a case, the employer has
to notify the IRD at least one month before the expected date of departure. The
employer is also required to temporarily withhold payment of salaries until
receipt of the “letter of release” from the IRD.
9.
Employers have to report salaries paid to employees, even when they work
outside Hong Kong
Every April, employers are required to file an
Employer’s Return (BIR56A and IR56B) with the IRD to report the remuneration
paid to its directors and staff, regardless of whether the work was carried out
in or outside Hong Kong. It is a common misconception that filing the
Employer’s Return is not required if the employees work outside Hong Kong.
The mismatch between salary expenses incurred
by a corporation and the Employer’s Return is one of the catalysts that will
trigger a field audit and investigation by the IRD. As such, employers should
also report remuneration paid to both Hong Kong and non-Hong Kong employees. Employees
are under their own obligation to lodge a non-taxable offshore claim to the IRD
if they work outside Hong Kong.
Having said that, it is worthwhile for the
employers to make a note in the IR56B that the employee did not perform his or
her job duties in Hong Kong. Meanwhile, all employment contracts should be well
structured to avoid any challenge by the IRD.
Transfer pricing rule:
10.
Hong Kong already has its own transfer pricing rule
Large corporations in Hong Kong are now
required to file transfer pricing documentation in Hong Kong, which comprises
Master File, Local File and Country-by-Country (CbC) reporting. Since the
implementation of the transfer pricing rule on 13 July 2018, we are also seeing
an increased trend by the IRD to carry out transfer pricing audits on
taxpayers.
Hong Kong follows the international threshold
for CbC reporting. Multinational groups with consolidated revenue of EUR750
million (HK$6.8 billion) are required to file a CbC notification and report in
Hong Kong. An important point to highlight is that, even though a multinational
group has already submitted a CbC report in another tax jurisdiction, they must
submit their CbC notification in Hong Kong, even when there is an information
exchange mechanism.
Below is the specific threshold for transfer pricing
Master File and Local File in Hong Kong:
|
A |
Criteria (A): Based on |
Threshold |
|
(i) |
Total annual revenue |
≥ HK$400 million |
|
(ii) |
Total assets |
≥ HK$300 million |
|
(iii) |
Employees |
≥ 100 |
|
B |
Criteria (B): Based on |
Threshold (HK$) |
|
(i) |
Transfers of properties |
≥ $220 million |
|
(ii) |
Transactions in financial |
≥ $110 million |
|
(iii) |
Transfers of intangibles |
≥ $110 million |
|
(iv) |
Any other transactions |
≥ $44 million |
Taxpayers above the threshold are required to
prepare a Master File and Local File on an annual basis.
For more details of Hong Kong and Mainland China tax news, please visit
Cheng & Cheng Taxation’s website at https://henrykwongtax.com.
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