Hong Kong is renowned within the world for the low and straight forward tax regime that makes it one of the world’s most business-friendly jurisdictions. The profits taxation in Hong Kong may be a territorial-based one with the profits earned from a trade, profession, or business carried only in Hong Kong with a profit rate of 16.5% (8.25% rate on profits but HKD 2 million).
Just to make this a bit more clear, the profits that are derived from a source that's outside and aren't taxable as per the Hong Kong tax laws. So, if an individual runs a business in Hong Kong but earns the advantage of another place, then they are not required to pay the tax in Hong Kong for these profits.
For a corporation in Hong Kong to urge the profits exemption status and be granted the Hong Kong tax exemption for the profits, the company shouldn't have any operations that are happening in Hong Kong, nor should they need a physical address in Hong Kong. To be a touch more precise about the activities in Hong Kong, it means there should be no sale and buy of any goods or services in Hong Kong.
Even though it's been mentioned that there's no physical address that's needed in Hong Kong, this doesn't mean that there's no need for the virtual office address for receiving the mail. The virtual office address is understood because of the registered address, and this is often a crucial part of incorporating a corporation in Hong Kong.
A profit tax exemption is essentially the exemption of the tax on the profits that are derived from a source out of Hong Kong and to say this Hong Kong tax exemption, a filing of the claim is required alongside the filing of the annual profit income tax return. And a replacement Hong Kong business that has just been incorporated would get the primary profits income tax return after 18 months from the date of the incorporation of the company.
After the company gets the primary profit income tax return notification, you'd tend about three months for the filing of the return alongside its audit report. Just in case you've got your profits coming from out of Hong Kong and need to say for the Hong Kong tax exemption for the profits, you'd have to let the auditor know beforehand. This is often in order that the auditor can present your accounts, profits income tax return, and therefore the tax computation during a way where your profits aren't subjected to the taxation of the profits in Hong Kong.
As and when the IRD, which is additionally called the Inland Revenue Department, gets the appliance, they might begin the investigation of your profits to make certain that the profits your company earnings springs out of Hong Kong and you're eligible for the Hong Kong tax exemption. Usually, the method takes a long time. You'd need to answer a batch of questions that will get to you many months later or sometimes even a year later.
Also, you'd be requested to supply the answers alongside the documents to support them just like the copies of the director’s travel record, email correspondences with customers/suppliers, and therefore the contracts, etc. Hence, it's essential to keep all the business documents, receipts, and emails correctly and during a well-organized manner for using it later.
You would also undergo some back and forth communication between the IRD and yourself until the appliance has been approved. Aside from the very fact that this will take time, it also costs tons if you're alone and wishes to rent legal help for it, sort of a tax advisor for drafting the replies to the IRD in order that you are not answering any questions with the incorrect answer. But all this is often not that bad if you opt to let knowledgeable assist you, as also the results are often bad as if the questions are answered incorrectly, the IRD may ask you to pay tax on all of your profits!
Hence, the simplest way to get it completed earlier and for you to not spend much is hiring a workplace that takes care of everything from the Hong Kong company formation to the filing of the annual return and therefore the Hong Kong tax exemption. And before you'll plow ahead into the filing, it's better to know every part of the taxation in Hong Kong as explained below.
There are numerous reasons why many foreign entrepreneurs and investors choose Hong Kong because of the preferred jurisdiction for initiating and expanding their business operations. These reasons are something that you simply got to know too since you're close to doing an equivalent hoping for the simplest from your business established in Hong Kong.
The main reasons why people prefer to start a business in Hong Kong are:
Taxation in Hong Kong is explained below so one can get a far better picture of the profit tax exemption within the end.
On the assessable profits, Hong Kong features a flat company rate of 16.5% and a 15% income tax. The company rate is reduced to eight .25% on profits of HKD 2 million or less. This flat company rate may be quite simpler in comparison to other jurisdictions.
As mentioned above, the taxation in Hong Kong works on the territorial system where the tax would be levied on the profits that are derived or are arising from completing a trade, profession or business in Hong Kong. Hence, the profits tax isn't applied to the gains from a source out of Hong Kong. Thus, if you're carrying on a business in Hong Kong but the profits are coming into the company from elsewhere out of Hong Kong, you're not susceptible to paying the profits tax.
A significant advantage of the taxation of the profits in Hong Kong is that the territorial principle doesn't differentiate between the residents and therefore the non-residents. you would possibly even be a resident of Hong Kong, but if your profits are derived from a village outside Hong Kong, you're not susceptible to pay any profits tax for it. Likewise, an equivalent is within the case for those that aren't residents of Hong Kong and own a corporation and conduct business in Hong Kong.
There is an issue that also comes up with whether the business carried on in Hong Kong and whether the profits that are derived in Hong Kong come under this category. But in these situations, the cases are dealt with in a different way where they need to be considered by the Hong Kong courts and in other common law jurisdictions. to know them better, the cases would need to be studied to know all about the situations in each case.
If you're not aware, there's another Hong Kong tax exemption that's a touch less famous than the profits tax exemption. Hong Kong follows a single-tier legal system, that's also called the “STS” sometimes since the profits earned by companies are only taxed once, that's for the business that gained those profits. And when that firm declares dividends, the earning are then distributed thanks to which they're not taxable on the shareholders of the company.
For a specific year of assessment for the taxation in Hong Kong, the profits tax is payable on the assessable earnings. Though it's possible to succeed in the assessable profits particularly at the top of the year concerned, an income tax that's entirely supported by the figures of the previous year is going to be issued.
As a good warning, don't hope to only miss out on the payment and not get punished for late or missing filings. Late or missing income tax returns may be a severe offense that might cause prosecution and hefty penalties. As great because the system of taxation in Hong Kong is, it also has strict rules that are followed, which is what makes Hong Kong have one among the simplest taxation systems within the world.
This is the most taxation in Hong Kong which has been given briefly above also. It's the company income taxation in Hong Kong that's assessed in reference to a Year of Assessment (YA). That is, the amount of profit earned by the business is subjected to 16.5% company tax (8.25% on profits up to HKD 2 Million) per annum during the top of the assessment year. The top of the year of assessment is dated 31st March where it starts from the previous year on the date 1st April.
So, if a year ends on the date 31st March 2017, it's referred to as the Year of Assessment (YA) 2016-2017. Moreover, the assessable profits for a YA are entirely supported by the accounting period that ends within that year of assessment. Thus, you'll have your company’s accounting year endways March 31st, December 31st, or the other year-end date.
Though there's no withholding that's levied on the interests and dividends. So, again you'd not worry about any withholding for your company.
Hong Kong may be a free port, and hence there's no tariff on general imports. Though, for a few items to enter the country, they might need to pay tax for the passage of these items like liquors, tobacco, hydrocarbon oil, methanol, etc.
Also referred to as Goods & Services Tax (GST) during a few other countries, there's no VAT or nuisance tax imposed in Hong Kong.
Now you've got a correct picture of the legal system in Hong Kong and what the central taxes are that need to be paid and why. Here are some incentives that you simply can enjoy from the company you're opening in Hong Kong that also includes the Hong Kong tax exemption for the offshore profits:
With all the matters cleared above about the taxation in Hong Kong, it's understood that the low tax rates and therefore the territorial principle in Hong Kong are what make the place famous for the companies and startups.
Moreover, as per the territorial principle, the quantity that arises from Hong Kong is chargeable to the Profit Tax which is currently at the speed of 16.5%. aside from this, the quantity that's derived from out of Hong Kong wouldn't be subjected to any profit tax.
And thanks to this territorial principle, it's completely legal and possible for your Hong Kong company to say the Hong Kong tax exemption for the profits. to form this more clear, the kinds of services which will enjoy the tax-free earnings in Hong Kong are if:
The claim for the Hong Kong tax exemption on the income of a corporation isn't automatic and has got to be applied for. There are two methods on how you'll apply for it and that they are:
But it's advised to start the filing work before the request comes in order that you're correctly prepared. The documents needed for the failings of the taxation in Hong Kong are:
For a successful claim, you'd got to support it with the sufficient documentation and if you've got hired an honest agency to require care of all the tasks like ours, it's good to cross-check and see if the entire set of documents are given during the primary profits income tax return of the company alongside the offshore Hong Kong tax exemption of the profits.
When your company is issued the annual income tax return for the primary time, confirm you add on the Hong Kong tax exemption for the profits that are earned from out of Hong Kong.
In case the documents are insufficient for IRD, they might request the company to offer additional information and documents to support the claim of the Hong Kong tax exemption. After you provide the knowledge, the IRD may review randomly selected activities and check whether the varied actions involved in these transactions were those that were taken place outside of Hong Kong.
Hence, it's strongly recommended to possess all the entire transaction records for illustrating the very fact that every activity was taken place outside Hong Kong, such as:
This list is an example of the documents required for answering the Tax Query Letter. you ought to consult a knowledgeable accountant if you would like advice on the precise documents and guidelines for your company because it could also be difficult to understand all the items needed.
The Tax Query Letter is the official letter from the IRD about the profits exemption request by the IRD. This letter will determine whether or not you'll claim the offshore activities and profits exemption for the company, so it’s important you get every single detail correct.
This letter will outline the activities of the company during a given period of your time, and after the IRD reviews this letter, will either grant the profits exemption for the company or deny it and assess the taxes to be paid by the company. If some details are unclear though, the IRD won't automatically deny a company’s profits exemption request. they'll send a second or third follow up letter to collect more information about certain activities or details, and based on your provided information and documents, judge whether these company activities are taxable or not.
Once the IRD issues the Tax Query Letter, the company will normally have 1 to 2 months to answer the questions and supply the required documents. the company should provide the knowledge and documents in a timely manner, however, the deadline is often extended just in case the company needs longer to make the response letter.
Once the company has successfully been granted the profits exemption, it'll normally have this offshore status for 4-5 years, during which the IRD won't send another Tax Query Letter questioning the business activities for the company. However this length would be up to the discretion of the IRD, and in some cases, the status could also be shorter or longer supported the business activities and nature of every company.
Here are some general questions that the IRD may ask about the company’s activities in their Tax Query Letter:
These are some sample questions that are asked by the IRD for the tax query letter.
It is advised to hunt for professional advice before replying to the IRD, as they need the experience to properly handle these profits exemption cases. If misinformation or improper filing is formed, this will cause further tax implications for the company; within the worst case full assessment of profits as taxable under the Hong Kong laws and regulations.
In case the Hong Kong company satisfies all the mentioned conditions above and is eligible for the Hong Kong tax exemption for the profits earned, it can apply for the profits tax exemption in Hong Kong while filing its annual profits income tax return.
It is strictly advised and recommended that each one of the documents should be kept to prove the offshore transaction status of the company. The IRD would do everything to verify that your company has no commercial activity in Hong Kong and therefore the claim is legitimate. they will randomly select any transactions and review the events for deciding when it happened.
So, in short, it's highly recommended that every and each document has got to be retained in order that it can assist you to demonstrate if the company doesn't engage in any commercial activity in Hong Kong.