Hong Kong adopts territorial tax system. Profits tax shall be charged on every person carrying on trade, profession or business in Hong Kong in respect of the profits arising in or derived from Hong Kong from such trade, profession or business regardless of the nationality, domicile or residence of a person.
Under the general charging rules, only Hong Kong sourced income shall be subject to profits tax whereas certain income which would not be taxed in Hong Kong is deemed to be arising in or derived from Hong Kong from such trade, profession or business in Hong Kong. These income includes royalties received by a non-resident for the use of or right to use the intellectual property (“IP”) in Hong Kong or outside Hong Kong but the payer claim deduction on the royalties paid for profits tax purpose.
Expenses that are incurred in the production of chargeable profits are deductible and capital expenditure are generally not deductible except there are special tax relief for certain capital expenditure.
With effect from the year of assessment (“YOA”) 2018/19, the two-tiered profits tax rate regime is implemented in Hong Kong. The applicable tax rates are as below:
|Assessable Profits||Corporations||Unincorporated Businesses|
|First HKD 2 million||8.25%||7.5%|
|Above HKD 2 million||16.5%||15%|
However, for the purpose of anti-avoidance measure, each group of connected entities can only elect one entity within the group to benefit from the two-tiered tax rate for a given year of assessment.
Under the domestic law, the taxability of profits determined by
- whether the person is carrying on trade, profession or business in Hong Kong;
- whether the profits are arising in or derived from Hong Kong; and
- whether profits are generated from such trade, profession or business.
The residency of corporation is irrelevant.
However, under the comprehensive Double Taxation Agreements (“DTAs”), Hong Kong resident usually refers to a company incorporated in Hong Kong or a company incorporated outside Hong Kong but is normally managed or controlled in Hong Kong.