Hong Kong has a significant trading economy and is a center for both multinational and local companies operating in Asia. Although not commonly regarded as a tax haven, Hong Kong companies have significant tax advantages including low rates of taxation and the ability to legally earn profits tax-free under certain conditions.
Hong Kong companies can easily carrying out business in the Peoples Republic of China and throughout Asia. Hong Kong incorporated companies are increasingly becoming the chosen entities for conducting trading activities in Asia as they benefit from a tax friendly environment and business friendly legal system.
Below are the highlights of the benefits of Hong Kong companies
Taxation of Hong Kong Companies
Taxation of Hong Kong companies is based on a territorial source principle rather than based on residency. This translates to individuals and companies incorporated in Hong Kong paying tax only on income or profits earned or sourced in Hong Kong.
The taxation system is relatively straightforward with the following major categories
Profits Tax - based on a company's trading profit
Salaries Tax - based on an individual's income
Estate Duty - no estate duty is payable with effect from 11 February 2006
There are no taxes on capital gains, no withholding taxes on dividends or interest and no sales taxes.
Profits Tax of Hong Kong Companies
Profits tax of Hong Kong companies is levied at the rate of 17.5% (FY2005 and FY2004) / 16% (FY2003) on taxable profits arising in Hong Kong. Deductions are given for expenses incurred in earning assessable profits.
The determination of where profits are earned is the key to whether profits are taxable in Hong Kong. If profits are earned from activities that take place entirely outside of Hong Kong then these profits would not be taxable in Hong Kong. It is possible for certain 'back office' functions to take place in Hong Kong without creating a tax liability; it is even possible for funds to be received and paid out of the company's bank account in Hong Kong without jeopardizing the tax status.
It should be noted that the offshore profits tax exemption outlined above is a legal exemption and not achieved through non disclosure. There is well developed case law and it is even possible to obtain advance rulings from the Hong Kong tax authorities.
Salaries tax is levied on the income of individuals arising from employment within Hong Kong. There is a sliding tax scale with a ceiling of 16% of taxable income. Various allowances and relieves are available. Apportionments may be used for individuals based in Hong Kong if part of their duties are performed outside of the SAR. Professional tax planning is often beneficial to ensure the maximization of allowances and the minimization of income subject to tax.
Estate duty in Hong Kong has been abolished with effect from 11 February 2006