In which situations are Hong Kong Companies barred from Claiming Tax Incentives?

Just as is the case in almost any other location in the world, the companies of Hong Kong are required to pay a certain amount of corporate tax. However, the most notable fact about corporate tax in Hong Kong is the fact that corporate tax rates there are among the lowest in the world. The assessable profits of most companies in Hong Kong are taxed at 16.5%; however, such is not the case with unincorporated businesses, which are taxed at a rate of 15%. Hong Kong uses a territorial system of taxation with regard to how its companies are taxed. In other words, tax is only to be imposed on profits which originate from the company’s carrying out a trade, business, or profession in Hong Kong. Profits tax does not apply to any profits which have a source from outside Hong Kong. Therefore, anyone who owns a business located in Hong Kong which also has its profits derived from elsewhere will not be required to pay any profits tax. This is true regardless of the location in which the profits were received. The territorial system of taxation also does not distinguish between those who are tax residents and those who are not. Therefore, a person who is a tax resident of Hong Kong who derives profits from elsewhere will not be legally obliged to pay any taxes on those profits. Conversely, one who is not a tax resident of Hong Kong but earns profits which originate from Hong Kong will be required to pay the profits tax to the tax authorities of Hong Kong.

The companies of Hong Kong may also benefit from claiming one or more tax incentives. One of the tax incentives which is on offer is a tax exemption on profits which are derived by offshore profits and funds which have been derived from ships which operate in Hong Kong. Similarly, there is also a tax deduction on profits which have been derived from business activities involving the reinsurance of offshore risks. Such profits are to be taxed at half of the usual rate of corporate tax in Hong Kong. Tax deductions also exist for certain expenditures on research and development which are made in Hong Kong. Companies which benefit from these tax deductions may claim either of two: Type A expenditure deductions which provide a tax deduction equal to the amount of the expenditure, or Type B expenditure deductions which provide a tax deduction at a rate of 300% for the first HK$2 million spent and at 200% for the rest of the expenditure. There are also tax incentives which have been introduced in order to encourage companies from abroad to establish corporate treasury centers in Hong Kong. Each of the tax incentives which exist in Hong Kong today were introduced to benefit the economy of Hong Kong by stimulating business activity which is conducted there.

However, if a Hong Kong company has not fulfilled the relevant criteria for a tax incentive to be claimed, the company will not be permitted to claim the tax incentive. For example, the tax deductions for expenditures on research and development only apply to specific types of expenditures. Thus, if a company makes an expenditure on research and development which is not listed as one of the eligible expenditures, the company in question would be barred from claiming the tax incentive.

As an aside, the tax system of Hong Kong contains many intricate details which not everyone is always able to easily understand. This is where we at Paul Hype Page & Co play our role. We are able to assist anyone who is in need of assistance pertaining to taxation in Hong Kong. Should you happen to be such a person, do not hesitate to contact any of our tax experts. We will provide you with all the information which you might need to best navigate the demands of the tax system of Hong Kong.