Hong Kong adopts the territorial source tax system, whereby only income arising in or derived from a trade, profession or business carried on in Hong Kong is subject to profits tax. The tax rates varies depending on factors such as the general form through which the business is being conducted, such as by means of a sole proprietorship or a general partnership (15%) versus a limited company or a limited partnership (16.5%).
In addition, the tax rate also depends on the amount of profit generated, i.e. profits up till the threshold of HKD 2,000,000 are subject to either a rate of 7.5% or 8.25%, whereas profits above HKD 2,000,000 are subject to a rate of either 15% or 16.5% respectively.
Who and What is Subject to the Tax?
As a general principle, only profits derived from revenue nature are subject to Hong Kong profits tax, whereas profits derived from capital nature will not be subject to the profits tax. Although this principle seems relatively straightforward, that being said, in practice, the difference between revenue and capital nature can often be hard to distinguish and it has been tested in Court as seen in the tax case Hong Kong Profits Tax & Aviation Fuel Supply Company v CIR.
A company incorporated in Hong Kong for example is exposed to Hong Kong (corporate) tax on profits unless it can lodge an offshore non-taxable claim for its offshore sourced profits.
On the other hand, a company incorporated outside of Hong Kong and which carries on business in Hong Kong and earns Hong Kong sourced profits is rather likely subject to Hong Kong tax, therefore having tax reporting obligations in Hong Kong.
Similarly, non-resident entertainers and non-resident sportsmen performing in Hong Kong for a remuneration fee are likely to be seen to carry out a business in Hong Kong, also subject to Hong Kong profits tax.
The subsequent related tax assessment is raised upon their agents in Hong Kong, i.e. the parties that pay the fee to these entertainers and sportsmen. Those agents have the obligation to withhold an amount of tax from the payable remuneration.
Profits Tax Management
We assist our clients in managing their international tax exposure. We provide suggestions and solutions on how to strengthen clients’ offshore claim where necessary and possible, thereby always making sure that our tax advisors comply with the relevant local tax rules and regulations of Hong Kong.