The Tax Law in Hong Kong states that profits arising or derived outside Hong Kong are not subject to Hong Kong tax. However, it is the responsibility of the taxpayer to provide sufficient evidence and documentations to satisfy the Tax Department for their offshore claim, a case of “Guilty until proven Innocent”
In order to claim that the Company’s business activities were not carried on in Hong Kong and hence the profits earned not subject to Hong Kong Profits Tax, the Company must provide evidence to the Tax Department to support their offshore claim. This simple concept can however produce cases which are not clear cut and hence difficult to ascertain the final outcome of the offshore claim.
If the Company has no presence in Hong Kong (i.e. no office and no staff) and is involved in the trading of goods, buying from overseas suppliers and selling to overseas customers then the offshore claim is more clear and matters can be easily resolved with the Tax Department. However, if the Company has no presence in Hong Kong (i.e. no office and no staff) but is involved in the trading of goods, buying from Hong Kong suppliers and selling to overseas customers then the offshore claim becomes more problematic. The offshore concept is that profits arising or derived outside Hong Kong is not subject to Hong Kong profits tax, however, the Company is engaged in business with a Hong Kong supplier, the question is how to prove to the Tax Department that work was not performed in Hong Kong regarding the Hong Kong supplier’s transactions. This is sometimes extremely difficult to do.
In respect of a Company receiving commission, the determining factor is what work was performed to earn the commission. If the work involved in earning the commission was performed overseas then an offshore claim can be submitted. Again the Company must successfully provide evidence to the Tax Department to support the offshore claim.
A Hong Kong company can claim “Tax Apportionment” for its offshore activities and it will then only need to be pay on its Hong Kong sourced income. The claim has to be supported with the relevant documentation and CMS will be able to assist you accordingly.
Hong Kong profits tax is ONLY charged on profits derived from a trade, profession or business carried on in Hong Kong. Consequently, this means that a company which carries on a business in Hong Kong, but derives profits from another place, is not required to pay tax in Hong Kong on those profits. Hong Kong sourced income is currently subject to a rate of taxation of 16.5 per cent. There is NO TAX in Hong Kong on capital gains, dividends and interest earned.
The factor that determines the locality of profits from trading in goods and commodities is generally the place where the contracts for purchase and sale are effected. The term “Effected” does not only mean where the contracts are legally executed, it also covers the negotiation, conclusion and execution of the terms of the contracts. If a business earns commission by securing buyers for products or by securing suppliers of products required by customers, the activity which gives rise to the commission income is the arrangement of the business to be transacted between the principals. The source of the income is the place where the activities are performed. If such activities are performed in Hong Kong, the income has a source in Hong Kong. Consequently, if a Hong Kong company’s trading or business activities are based outside Hong Kong, say in China, USA, Europe etc. no income tax will be levied in Hong Kong. This makes Hong Kong an extremely cost- effective tax planning vehicle for trading.
Hong Kong uses a two-tiered profits tax system, applying a lower rate to the first HKD 2 million of assessable profits and a higher rate to everything above that.
Entity Type
Limited Company
Profits up to HKD 2 million
8.25%
Profits above HKD 2 million
16.5%
For example, a corporation with an annual Net Profit of HK$5 million (US$645,000) would pay 8.25% on the first HK$2 million i.e. HK$ 165,000 (US$21290) and 16.5% on the remaining HK$3 million i.e. HK$495,000 (US$63870), for a total profits tax bill of HKD660,000 (US$85160).
Accounting & Audit
All Hong Kong Limited companies are required to maintain accounting records and comply with statutory audit requirements on an annual basis. Financial statements should be in compliance with the Hong Kong Companies Ordinance and be prepared in accordance with the accounting standards issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”).
Companies are required to keep accounting records of the following:- a) All sums of money received and expended, and the matters in respect of which the receipts and expenditure take place, b) sales and purchase orders, and c) all assets and liabilities. The accounting records must be to GAAP international standards and contain the information necessary to give a true and fair view of the state of the company’s affairs and to explain its transactions. The accounting records must be sufficient to show and explain the company’s transactions and to disclose with reasonable accuracy the company’s financial position and financial performance. They must contain daily entries of all sums of money received and expended by the company, the matters in respect of which the receipt and expenditure takes place and a record of the company’s assets and liabilities.
We are pleased to advise that we can assist clients in preparing the annual Profit/Loss Account and Balance Sheet as well as arrange an INDEPENDENT Audit. Please note that we will NEVER audit financial accounts that we have prepared due to the potential conflict of interests.
CMS provides tailored accounting packages for SME’s along with a range of supporting services to meet your company’s specific requirements.
CREATING TAX SUBSTANCE IN HONG KONG
As a rule, the more central management and business activities take place in Hong Kong by the local company, the stronger a claim for having sufficient tax substance.
The place of management and control of a company is usually one of the critical factors in determining tax residency. Therefore, a HK Company, although incorporated in Hong Kong, but managed and controlled from out a foreign tax jurisdiction, is likely to be regarded as a tax resident in that foreign tax jurisdiction whereby it then will also be exposed to foreign corporate income tax.
It is vital for HK Company to keep sufficient tax substance in Hong Kong with a view to mitigate its foreign tax exposures as well as obtain the Certificate from the HK-IRD smoothly and successfully for the purpose of tax treaty benefits. One should note that further to implementation of automatic exchange of information in the near future, tax information will be more and more transparent among tax authorities of various jurisdictions.
CMS has extensive knowledge in obtaining Hong Kong Tax Residence Certificates in order to assist clients to qualify for cross border DTAs (Double Taxation Treaties).