Hong Kong is a paradise for investors. For decades, it has trained all efforts towards creating the best business environment to attract investors. From favorable tax regimes and stable financial systems to huge government support, nothing is left to chance in leveraging business operations.
It is because of this that every financial multinational wants to have a base in this Special Administrative Region of China. When you plan to venture into this business environment, it is crucial to understand everything about taxation and investment to avoid getting into conflict with the law and grow rapidly. Here is everything that investors need to know about Hong Kong taxation and investment.
The Hong Kong Business investment climate
The Hong Kong Special Administrative Region operates independently in most of its systems except the military and political system. It is led by a Chief Executive who works with an executive council that is responsible for decision-making. The main roles of the council as a legislative institution is passing laws, monitoring government work, and controlling expenditure.
Because of its strategic location, Hong Kong is mainly seen as the main gateway to the mainland China and primarily operates as a business economy because it has no natural resources. For years, Hong Kong has emerged as a financial hub with almost all top financial multinationals having a presence there.
The copyright and intellectual property rights
Hong Kong does not have business controls and is responsible for formulation and enforcing individual copyright laws in line with the Copyright Ordinances Cap 528. Using the legislation, Hong Kong has been very vigilant in protecting startups to encourage innovations.
Banking and foreign investment
Hong Kong is a financial hub that most banking institutions never rest until they enter. The unique trading point for the banking system’s effectiveness is the Hong Kong administration’s expertise in interest rates derivatives, private banking, trading in currencies, syndicate loans arrangements, and foreign exchange. The banks have to obtain operational licenses. Overall, Hong Kong has three main types of banks; deposit-taking firms, restricted banks, and licensed banks that collectively called three-tier banking system.
Hong Kong administration does not restrict foreign investment. Therefore, you can invest and own a company 100%. Every company operating in Hong Kong must operate in line with the company’s ordinance that defines the registration process, required documentation, and rules of operations.
To encourage more investors, Hong Kong provides incentives to businesses. These include duty-free status, freedom interference, and low tax regimes among others.
How to set up a business in Hong Kong ?
The key principle of running a business entity in Hong Kong
The main form of businesses in Hong Kong is a limited liability company, sole proprietorship, partnership, and representative office. To form a company, the Companies Ordinance that was passed in 2014 must be followed.
- For a limited liability company to be formed, you are required to have the requisite capital, shareholders, board of management, necessary fee & taxes, Hong Kong office, shares, and control meetings.
- For a representative office, there are no legislation requirements because it is not allowed to transact business. Note that it cannot engage in business deals but only collects info for the mother company.
- Company branch office, unlike the representative office, it is subject to profit tax because it is legally mandated to transact business on behalf of the mother company. To register a branch office, you will be required to provide copies of documents that define the Mother Company, details of the main company directors, certified certificate of incorporation, and a copy of the latest audited accounts.
Accounting and filling of returns
All limited liability companies operating in Hong Kong must have an auditor to explain the books to the board. Though private limited liability companies are not required to file yearly financial statements, they have to maintain clear records at all times. The public companies have to file returns of audited books with the Hong Kong Companies Registry.
Note that all accountants are certified by KCICPA (Hong Kong Institute of Certified Public Accountants). Besides, the institute also developed standards on financial reporting, quality control, assurance, and auditing rules.
The business taxation system in Hong Kong is largely territorial. This means that only the income generated in Hong Kong is subject to taxation while that generated elsewhere is exempted. If your business owns property that generates income, it will be required to remit property taxes to Company Ordinance. Your business is considered a resident if it is incorporated, managed, and controlled in Hong Kong (check our entrepreneur visa service).
Focus on taxable income:
- Business taxable income: The profit tax is charged on all profits that are made while doing business in Hong Kong. The levy is 16.5% and must be paid for both private and public companies. The taxable income is the total profit that accrues from the business operations in Hong Kong with the exemption of profits from properties sale and offshore generated revenue.
- If your business is in shipping, airline, and insurance, a separate formula is available for calculating the amount of tax. The following income is also subject to tax;
- Exhibition fee in shows, television, and sound recording.
- Fees paid for renting movable property.
- Royalties and grants
Deductibles: Deductibles are expenses that you incurred when operating a business to get a profit. These include interests charged on borrowed loans, rent, bad debts, depreciation, repairs, the cost of implements, fees, contribution to employees, and training costs.
Relief from double taxation: All businesses that operate from Hong Kong are sure of protection from double taxation. Any income generated outside Hong Kong is not subject to taxation to avoid double taxation. Hong Kong uses unilateral tax relief and tax treaties to ensure that no business is subject to double taxation. Note that the treaties that Hong Kong enters with other countries are built on the Organization for Economic Cooperation and Development model agreement. The latest is the Common Reporting Standards that seeks to standardize reporting of tax avoidance between OECD members and other countries.
Tax filing: The Hong Kong financial year starts on 1st April and ends the subsequent year on 31st March. Businesses are required to base their tax filing based on the year that has just ended.
About Withholding taxes
Withholding dividends, interests, branch remittance tax, and social security contribution are not taxed. Besides, Hong Kong does not have a payroll tax. All employees who earn over 7,100 HKD are required to pay a 5% contribution to MPF (Mandatory Provident Fund).
If a non-resident receives loyalties from a payer who is obligated to pay respective taxes, only 30% of the total amount is taxed. However, if the loyalties were paid to a non-resident by a person doing business in Hong Kong, all of it will be taxed at the normal rate for common salaries (16.5%).
- VAT: There is no VAT on services and products sold in Hong Kong.
- Capital tax: The capital tax was removed in 2012.
- Real Estate Tax: If you own property that generates income, a tax of 15% on the income is levied.
- Transfer tax and stamp duty: If When documents are connected through lease, transfer, and even sale of immovable items such as chairs, a stamp duty will be charged. Lease of immovable items is 0.25% while stamp duty is 0.2%.
- Customs duty: Hong Kong operates as a free port and, therefore, there are no customs duties. The only items that attract such levies are hydrocarbon oil, methyl alcohol, tobacco, and alcoholic beverages.
The rate of personal income tax is very low in Hong Kong compared to other countries. It includes income tax rates at 2-7%, Social security at 5%, and Royalties at 4.95-16.5%. The main principle for person’s taxation is to only tax income that is generated in Hong Kong.
Note that the personal income tax is inclusive of salaries, office income, pension, and interest on income. These do not include capital gains. While all people including expatriates and self-employed are required to pay personal income tax, people who only come and stay less than 60 days every year are exempted from taxation.
Remuneration of employees and their rights: The Employment Ordinance guides the workplace environment. Employees who work in business for 4 weeks continuously are considered to be on a continuous contract unless a termination is agreed on. For people below the age of 15 years, full employment is forbidden under the employment law. The employer must provide employees work with a safe and healthy working environment at all times.
Benefits and wages: In Hong Kong, the minimum for every hour is Hong Kong Dollars 32.50. However, the law does not provide for regulations on overtime. The law further requires that payments are made promptly and a paid off-duty of 12 days provided for annually.
Employing foreigners in a company: Hong King encourages employers first to consider the local people and only allows foreign nationals when the skills being sought are not available in Hong Kong. If you are allowed to bring a foreign national to work in Hong Kong, you must get an employment visa before he/she can be allowed to move in.