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The Advantages of Hong Kong’s Territorial Tax System for International Business Activities

By: Andy Chen, COGENCY GLOBAL INC. on Tue, Jun 04, 2013

The Heritage Foundation and Wall Street Journal’s 2012 Index of Economic Freedom[1] (the “Index”) ranked Hong Kong as the freest economy in the world ahead of other leading global financial centers such as Singapore, Switzerland, Ireland and the United States for the 19th consecutive year. The Index’s number one rating of Hong Kong emphasized the jurisdiction’s “simple and efficient” tax system for both salary and corporate taxes, which makes it easier to carry on international business activities from within the territory.

Highlights of Hong Kong’s Territorial Tax System
Hong Kong has a territorial tax system where a company’s profits are only subject to tax in Hong Kong if it has, or is deemed to have, a source from within the territory. The top profits tax rate (for a HK private limited company with profits derived from a local source) is 16.5%.[2]  Additional advantages of Hong Kong’s simplified tax system include:

  • Hong Kong Territorial TaxThere are no taxes on dividends, interest or capital gains.
  • Any distribution made by a HK private limited company to parties outside of Hong Kong is free of withholding tax.
  • Hong Kong’s estate duty was abolished in 2006.

There are many applications of the territorial tax concept in the operation of international business transactions. For instance, a Hong Kong trading company which purchases finished goods (e.g. OEM garments or electronics, raw materials, etc.) from mainland China and sells wholesale to buyers in Brazil will be exempt from Hong Kong’s profits tax if the trading company can demonstrate to the Hong Kong Inland Revenue Department (“IRD”) that the source of trading profits was acquired via offshore sources (i.e. in Brazil). In practice, the IRD will look at the totality of facts including the flow of paper, flow of goods/services and flow of money before determining whether the profits of a trading company were derived from a place outside of Hong Kong.

Factors That Can Result in Taxation of Profits of an HK Trading Company
Generally speaking, some of the factors resulting in the profits of a Hong Kong trading company being considered taxable in Hong Kong include, but are not limited to:

  • The contracts of purchase and sale are effected in Hong Kong
  • The sale is made to a Hong Kong customer
  • The effecting of the purchase and sale contracts does not require traveling outside of Hong Kong but is carried out in Hong Kong by use of telephone, fax, e-mail or other electronic means including the internet

Why Hong Kong is Often the Jurisdiction of Choice for International Business
An advance ruling for profits tax purposes on the source of profit can be obtained from the IRD should a trading company wish to seek clarity in its business operations. The certainty that such a ruling can provide to enterprises involved in international business transactions, combined with the advantages of the territorial tax system, make Hong Kong an especially attractive jurisdiction in which to do business.

Author Andy Chen is the General Manager of COGENCY GLOBAL INC. COGENCY GLOBAL INC. (Hong Kong) Limited (“COGENCY GLOBAL INC. Hong Kong”), a wholly-owned subsidiary of COGENCY GLOBAL INC. located in Hong Kong. COGENCY GLOBAL INC. Hong Kong provides a full range of company formation, secretarial and related services, as well as corporate service support for the full implementation and ongoing administration of international tax structures related to Hong Kong private limited companies. For more information about COGENCY GLOBAL INC.'s Hong Kong services, click here.

 

This article is provided for general informational purposes only and should not be considered or relied on for tax or legal advice.  Please seek competent tax and legal advice for your specific transaction requirements.


[1] The rankings for the Index of Economic Freedom are scored on a country’s rule of law, limited government, regulatory efficiency and open markets:  http://www.heritage.org/index/press-release-asia-pacific

[2] See Tax Rates of Profits Tax posted on Hong Kong Government website.

Topics: International Corporate Services