A corporate tax is a regulatory fee charged on the profit of a firm. After deducting expenses and calculating operating costs including the cost of goods sold (COGS) and depreciation from revenues, authorized tax rates are applied to calculate the legal obligation a business owes the government. Rules regarding corporate taxation vary around the world. All current expenses involved in the operation of a business are fully tax-deductible. Investments and real estate purchased for the intent of generating income for the business are also deductible. Tax is payable by an individual carrying a trade, operating a business, or providing a service. This applies for all business entities, whether a corporation, partnership, or sole proprietorship. It is considered to be more beneficial for business owners to pay corporate taxes as compared to individual taxes as corporate taxes often come with returns deductions on medical insurance for families as well as fringe benefits including retirement plans and tax-deferred trusts.
History of Hong Kong’s Corporate Tax
Prior to World War II, there was no taxation law in Hong Kong. The British imposed the idea of having one for the purpose of war support to be gifted to them in financial terms. The business community was shaken up and objected against such policies. The expatriates saw it coming and could only hope for the tax rates to be as low as possible. The initial tax policy differed in its key aspects. At the time, there was a scheduled system of three separate taxes on three different kinds of income: property tax was charged on the rental value of property, salaries tax was charged on income from employment, and profits tax was charged on the profits of business. The system was based on the source principle, meaning that tax was only charged on income derived from a source in Hong Kong. In other words, income derived from outside Hong Kong was not taxable. The tax system designed was established by the War Revenue Ordinance 1940. The highest rate of tax was 10%.
After the war, the British and Hong Kong governments again proposed to establish a normal income tax and also planned to increase the rates of tax as high as possible. A 50% tax rate was proposed, but the business community again opposed and the Chinese businessmen were unyielding in their opposition. They formed an organization called the Chinese Anti-Direct Tax Commission and marched in protest on the government house. They also wrote letters of complaint to the Colonial Office in London. As a compromise, the system devised in 1940 was revised in 1947. Its name was changed to the Inland Revenue Ordinance from the War Revenue Ordinance, but its basic structure remained much the same and the highest rate of tax was 10%. Since then, the act has gone through many other amendments.
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Current Corporate Tax Policies in Hong Kong
Hong Kong is lauded for its limited taxations and fair policies for foreign residents and corporations. The tax rate for corporations is 16.5%; it is 15% for incorporated businesses. Hong Kong is globally famous for its simple and low-tax establishments, making it the fourth-most business-friendly jurisdiction in the world according to the World Bank in 2019. Hong Kong uses a territorial system of taxation. This means that tax is imposed only on profits generated from trade, business, or profession in Hong Kong. Profit tax does not apply to profits which have a source from outside Hong Kong. Hence, if one carries on a business in Hong Kong but the profits are derived from elsewhere, the person is free of tax liabilities. These laws are the same for residents and foreigners. If a Hong Kong resident generates business profits from elsewhere, then the resident is not subjected to corporate taxation, but if they are derived from Hong Kong, then the resident must pay taxes. Likewise, if a non-resident derives profits from Hong Kong, the non-resident will be liable to pay tax in Hong Kong but not otherwise. When the qualifying debt instrument (QDI) scheme was first introduced, a tax concession at 50% of the normal tax rate was granted.
Hong Kong follows a flat rate principle of single-tier and double-tier corporations. As of April 1, 2018, a two-tier profits tax rates regime has been applied. The two-tier profits tax regime applies to both corporations and unincorporated businesses by lowering the tax rate for the first HK$2 million of assessable profits. The first HK$2 million of profits will be taxed at one-half of the general tax rate which is 8.25% for corporations, however, the remaining profits will continue to be taxed at a 16.5% tax rate. For unincorporated businesses, the first HK$2 million of profits will also be taxed at one-half of the tax rate, which is 7.5%, and the remaining profits will continue to be taxed at a 15% tax rate.
How to Pay Corporate Taxes in Hong Kong
Years of assessment run from April 1 to March 31. The assessable profits for each financial year are evaluated by adjusting the accounting profits or losses according to existing tax laws and regulations. The month in which the accounting period ends generally determines the deadline by which the company must file its tax return and financial statements. After filing within the given deadline, there are many options available for payment. One can pay taxes by mail, telephone, Internet, ATM, banks, or in person. Business registration fees, stamp duties, and tax reserve certificates may also be involved. Taxpayers living abroad may pay taxes through bank draft, crossed cheque in an overseas bank account, arranged payment in Hong Kong through a related party, or telegraphic transfer. The continued negligence of taxes after two assessment notices will result in direct legal action as defined by Part XII of the Inland Revenue Ordinance for recovering the total outstanding amount.
Under the two-tier tax system, taxpayers are sometimes charged a provisional tax rate. The eligible taxpaying entity will be chargeable to 2018/19 Provisional Profits Tax at the two-tiered tax rates.
Foreign incorporated companies are obliged to file tax returns in respect of their Hong Kong branch operations on the same basis period as a locally incorporated company. A notice of assessment is issued after the tax return has been filed with the concerned tax authority. Tax collection of both provisional tax of the preceding year and final profits tax of the current year are generally filed together. Provisional tax will be payable during the tax year based on the preceding year’s tax liabilities. Therefore, the demand for provisional tax for the current tax year will be issued together with the notice of assessment for the tax year that would just have ended. The due dates for the payment of final tax and the provisional tax are specified on the combined notice issued.
There are certain exemptions for corporate tax under specific conditions. Among these are publicly offered funds by Securities and Futures Commission (SFC) of Hong Kong. Other similar schemes which comply with the requirements of a supervisory authority under acceptable regulatory regime are exempt from profits tax in Hong Kong. These SFC-licensed fund managers arrange qualified investment funds under specified transactions for tax exemption on profits tax so that profits are derived from offshore funds and from operating ships in Hong Kong. Offshore means that the company has no customers or suppliers for their business in Hong Kong, the employees of the business entity operate their business solely outside of Hong Kong, the company provides no services in Hong Kong, the business entity signs contracts and negotiates with its suppliers and customers outside of Hong Kong, the company’s products do not enter Hong Kong, the company has no employees based in Hong Kong, and the owner or any overseas employees rarely visit Hong Kong. Offshore companies do not have to pay capital tax. Taxation on gains which the business makes from sale of stocks, bonds, precious metals, and property, are considered exempt. Businesses do not have to pay value added taxes or sales taxes. There is also no withholding tax on dividends and interest that are imposed on companies, nor is there collection of social security benefits. Dividends from offshore companies are also not subjected to any liable tax rates, while property tax is charged at the standard rate of 15% on 80% of the rent receivable on incorporated businesses of real estate.
As of May 24, 1996, interest income and trading profits derived from qualified debt instruments (QDI) in Hong Kong with an original maturity of less than five years are subject to a concessionary tax rate equivalent to 50% of the normal profits tax rate. Applicable from the 2003-04 year of assessment, this concession was expanded to cover a medium-term debt instrument issued in Hong Kong on or after March 5, 2003, with a maturity of up to seven years but not less than three years. Interest income and trading profits derived from long-term debt instruments issued in Hong Kong on or after March 5, 2003, with a maturity of fewer than seven years are exempt from taxation.
Hong Kong’s Taxation Compared to Those of Other Countries
Hong Kong is sometimes regarded as a tax haven for business owners and workers alike. This is partly because the government has huge fiscal reserves equivalent to more than 12 months of expenditure. The interest received on these reserves is a crucial source of revenue and helps keep the tax burden light. Ever since the time of 19th-century opium dealers, Hong Kong has been famous as a tax-free port. Its unique infrastructure, low tax rate, duty-free status, lack of interference from government, and substantial capital market have made it an attractive market for foreign investors. Hong Kong is one of the most business-friendly countries in the world. In Asia, its primary competitors in this regard are Qatar, the United Arab Emirates, and Singapore. However, Singapore has a goods and services tax as well as a remittance tax from foreign profits. Taxation in Hong Kong is proportional to income. The city’s most affluent pay the most, and low-income households are hardly taxed at all. Salaries tax is set at 2% for homes earning less than HK$40,000 a year and increases progressively to 17% for those earning HK$120,000 or more. The country keeps government reserves flowing by selling government-owned land to private industries and businesses. In the 2017-18 financial year, 27% of Hong Kong’s HK$612 billion revenue came from land sales. The government also makes money by leasing land.
Hong Kong is a special administrative region of China and it is one of the leading financial hubs of Asia. Many of the world’s top leading banks have their business operations there. The small island also holds the largest stock exchange market in Asia. To make conditions more favorable and easier for foreign investors, the region also has its own currency so foreigners won’t have to worry about transactions regarding the Chinese yuan. These and many other factors cause Hong Kong to rank well in global lists when compared to other neighboring Asian countries.