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Hong Kong Calculation of Taxable
Base
A number of factors including the territorial
principle have created an extremely attractive
fiscal regime exempting categories of income
which in most other jurisdictions would normally
be subject to a profits tax:
- Dividend
income received by a Hong Kong parent company
from either a resident or foreign subsidiary
is not deemed income in the holding company's
hands and is thus not subject to an assessment
to profits tax.
- There
is no separate schedule of capital gains
tax in Hong Kong. Nor does the territory
follow the practice of other jurisdictions
and tax capital gains as trading income
which is subject to profits tax. However
by way of exception a business whose activities
is to trade in capital assets is assessed
to profits tax on any profits made on the
sales of those capital assets as if these
gains were trading income. Likewise if the
asset is deemed a revenue asset as opposed
to a capital asset then any profits made
on its disposal are deemed trading income
and assessed to profits tax. The absence
of capital gains tax (often together with
other factors) has had a number of fiscal
consequences:
- Profits
remitted to a Hong Kong parent which
represent the profitable disposal of
its shareholding in a resident or non
resident subsidiary are not assessed
to tax in the territory both because
the gains are capital gains and because
(in the case of a non resident company)
income arising outside jurisdiction
is exempt from tax under the principle
of territoriality.
- The
profitable disposal by a Hong Kong entity
of foreign real estate is not assessed
to tax in the territory both because
the gains are capital gains and because
of the principle of territoriality.
This includes a disposal effected by
means of the Hong Kong entity selling
100% of the shares in a company whose
sole asset is the foreign real estate.
- Since
currency gains and losses are considered
to have a capital nature they are neither
taxable profits nor deductible losses.
- The
transfer by a Hong Kong entity of capital
assets to a foreign or resident subsidiary
or branch at market value and at a profit
is considered a capital gain and thus
does not attract tax in Hong Kong (unless
the assets are classified as revenue
assets).
- Rental
income from foreign real estate is not assessable
income in Hong Kong for profit tax purposes.
(However depreciation & interest payments
on loans made to finance the real estate
tax are non deductible in the territory).
-
The profits and losses of the foreign branch
or subsidiary of a Hong Kong company are
neither taxable profits nor deductible losses
in Hong Kong owing to the territoriality
principle.
-
Interest income received by a resident or
non resident business entity on deposits
lodged with a financial institution are
exempt from profits tax (By way of exception
if the deposit was made by a "financial
institution" then any interest received
by the financial institution is deemed trading
income for profits tax purposes and taxed
accordingly).
-
The tax treatment of loan interest payments
and receipts requires a special mention.
3 situations apply:
- Loan
interest repayments made by a
Hong Kong borrower to a foreign lender
are only tax deductible in Hong Kong
if the foreign lender is a "financial
institution". If the foreign lender
is not a financial institution but is
the parent or subsidiary of the Hong
Kong borrower the interest payments
are not tax deductible in the territory
unless the parent or subsidiary is a
connected company and is subject to
Hong Kong profits tax on the loan interest
receipts.
- Loan
interest repayments received
by a Hong Kong company on a loan made
to a 3rd party are not taxable income
in the hands of the Hong Kong lender
if the loan was advanced to the borrower
from a foreign jurisdiction such as
Gibraltar. If the loan was advanced
to the borrower from Hong Kong then
the loan interest repayments are taxable
in the territory.
- A
Hong Kong parent company which borrows
money to set up a subsidiary or a branch
in a foreign country cannot deduct the
cost of the loan for profit tax purposes
since the income earned by the borrower
has a foreign source. Therefore the
loan should always be sourced by the
foreign subsidiary or the foreign branch
in the foreign jurisdiction in which
it will be tax deductible.
- Owing
to the principle of territoriality there
is no controlled foreign company
legislation under which the profits and
capital gains of non resident subsidiaries
can be taxed as if they were the profits
of a resident parent company.(The converse
applies in both the United States and the
United Kingdom).
- Consolidated
group accounting under which the profits
of one company in the group can be set off
against the losses of another company in
the group so as to reduce the over all profit
subject to profits tax does not exist
in Hong Kong.
-
Losses can be carried forward indefinitely.
This compares favorably with other jurisdictions
which only allow losses to be carried forward
for a fixed period of time (usually 5 years).
-
Since there are no debt/equity thin capitalization
rules in Hong Kong a foreign parent can
set up a resident subsidiary with a minimum
of share capital and a maximum of loan capital
and thereby reduce taxable profits arising
in Hong Kong through excessive interest
payments.
-
The repayment by a foreign subsidiary to
its Hong Kong parent of the principal of
loan capital or share capital is free of
tax in the territory including where the
repayment is by way of a capital reduction
or a final dividend distribution in a liquidation.
-
The following sources of trading income
are exempted from profits tax:
- Interest
received or capital gains made on the
purchase, retention or sale of a Government
bond issued under the Loans (Government
Bonds) Ordinance;
- Exchange
fund debt instruments;
- Hong
Kong dollar denominated multi –
agency debt instruments;
- Specified
investment schemes which comply with
the requirements of a government supervisory
authority are exempt from tax. Specified
investment schemes include investments
in unit trusts and mutual funds.
Profits Tax Deductible Allowances
The
following allowances are deductible from assessable
profits for profits tax purposes.
- A
deduction is allowed for a contribution
(or provision for a contribution) by an
employer amounting to not more than 15%
of the employee's annual salary into a recognized
retirement scheme registered under the Occupational
Retirement Schemes Ordinance. (It is in
any event an offence for an employer to
operate a pension scheme that is not registered
under this Ordinance). Since the Mandatory
Provident Fund Scheme came into effect on
1st December 2000 allowable deductions are
either 5% of an employee's gross salary
or a maximum of USD2,560 per month.
- Charitable
donations made to approved charitable institutions
or trusts of a public character or to the
government of the Hong Kong Special Administrative
Region, amounting in aggregate not less
than HKD100 but not exceeding 35% (10% for
years of assessment up to and including
2002/03; and 25% for years of assessment
2003/04 to 2007/08) of the adjusted assessable
profits before deduction of donations, are
allowable for deduction in computing the
assessable profits.
-
Hong Kong tax paid on foreign income which
by law is chargeable to profits tax in Hong
Kong is an allowable deduction for profits
tax purposes. (N.B. foreign source income
is not normally subject to tax in the territory).
-
Any property tax
already paid is deductible from income for
profits tax purposes;
-
Depreciation allowances for capital equipment
are as follows:
-
60% of the cost of all other plant and
machinery can be written off in the
first year with a rate of 10-30% written
off thereafter.
-
20% of the cost of construction of an
industrial building can be written off
in the 1st year with 4% per annum thereafter.
- Expenditure
incurred refurbishing or renovating
business premises can be written off
in 5 equal installments.
- In
May, 2004, LEGCO
expanded the scope of deduction for
research and development expenses under
profits tax to cover design-related
expenses.
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Hong
Kong Sales Taxes
Hong
Kong does not currently have a sales tax,
but there has been much discussion of the
need for one. In March, 2004, then
Financial Secretary Henry Tang announced that
the introduction of a sales tax was likely
to be at least three years away. But the Hong
Kong government said in December 2006, that
it will abandon plans for a goods and services
tax.
Tang
used his maiden budget speech to make the
case for the introduction of a GST-style indirect
tax. “Hong Kong's tax base is narrow. In the
long run, we need to broaden it to secure
a steady source of revenue,” he observed,
adding that:
“In
Hong Kong, non-tax revenue accounts for about
40 per cent of total revenue, whereas the
figure for OECD economies is around 14 per
cent. This shows that Hong Kong has a far
heavier reliance than those economies on non-tax
revenue, such as land revenue and investment
income.”
He continued: “Hong Kong is the only developed
economy that does not have one. GST is broad-based
and equitable, and is capable of yielding
a sizeable and steady revenue. Depending on
any exemptions, a GST of 5 per cent would
generate around $20-30 billion revenue for
the government in a full year."
“Besides,
being less sensitive than direct taxes to
the cyclical movement of the economy, GST
can enhance the government's ability to withstand
the pressure on public finances brought about
by an economic downturn.”
Tang announced at the time that the government
had established an internal committee to conduct
a detailed survey into the implementation
of a sales tax in the territory, drawing upon
the experiences of other nations. The committee
was expected to report to the Financial Secretary
by the end of 2004. “After that, I will announce
what will be done next. We are likely to need
at least three years to implement GST.”
In
his 2006 budget speech, Mr Tang said that
while Hong Kong's financial position had been
improving gradually, the jurisdiction still
faced the problem of a narrow tax base: At
the time, about one in three employed people
paid tax and most of the revenue from salaries
tax comes from the minority of taxpayers.
To
broaden the tax base, Mr Tang reiterated that
he will consider introducing a goods and services
tax - after publishing a consultation paper
on the subject later in the year to seek the
public's views.
In
a surprising about turn, the Hong Kong government
said in December 2006, that it will abandon
plans for a goods and services tax in the
face of widespread public hostility to the
idea.
Public
consultation has showed that people have concerns
that a GST would be inflationary, would be
regressive and would discourage tourists.
“We
have heard clearly a strong opposition to
the GST from the public,” said Financial
Secretary Henry Tang Ying-yen. He said that
the government would still put forward ideas
for widening the tax base, something that
has been strongly urged on Hong Kong by the
IMF and other bodies, but that they would
not include the GST as an option.
Commenting
on the motion at the time, Henry Tang said
that: "We are disappointed at the outcome.
Actually the biggest difference between the
government and the Hon Yeung Sum's motion,
that this Council opposes the introduction
of a Goods and Services Tax, is that the actual
effect of the motion will suffocate further
discussion on broadening the tax base and
a Goods and Services Tax. I hope in this incident,
that LegCo members have not misjudged public
sentiment nor have they lost a valuable chance
to discuss a very important subject in the
community."
He
continued: "Actually, there was a lot
of discussion today regarding various different
types of taxes. New taxes, for example capital
gain tax, progressive tax or dividend tax
and indeed they have raised a number of questions
as well as concern about the GST. This is
exactly why we should continue this discussion
and we should continue to consult."
Hong Kong Property Tax
Property tax is levied annually on the owner
or occupier of real estate located in Hong
Kong. Since ownership may be split (eg an
entity with a 100 year lease may grant a 50
year sublease to a 3rd party) separate assessments
may be made on the same parcel of land. Property
tax which is governed by the provisions of
the Inland Revenue Ordinance has the
following characteristics:
- The
annual assessment to property tax is based
on 100% of the annual rental income of the
property less any rates paid, any bad debts,
a repairs and outgoings allowance constituting
a maximum of 20% of the annual rental income
(irrespective of whether or not more was
actually spent) and other allowable deductions.
In determining "rental income"
the Inland Revenue will include any premiums,
service charges, management fees, rates,
repairs and outgoings paid by the tenant
either to the owner or on behalf of the
owner under the terms of the lease. In order
to assist the inland revenue to assess the
rental income the owner is obliged to keep
records for up to 7 years and inform the
tax authorities of the actual sums received.
- Property
tax is based on the territorial principle
and is levied on buildings, parts of buildings,
wharves, piers and other structures located
in Hong Kong. The fact that the owner is
non resident, non domiciled or a national
of a foreign country is completely irrelevant
and does not exempt him from having to pay
this tax.
- The
tax rate is 15% (2008/9 onwards) of the
assessed annual rental income.
- Property
tax is levied on a provisional assessment
basis which takes into account the previous
year's rental income with a tax credit being
granted where the previous year's rental
income exceeds the current year's rental
income. Relief is also given where part
of the assessed rental income is a bad debt.
- The
following types of property are exempted
from this tax:
- The
properties of foreign governments;
- Charitable
bodies exempted from taxation;
- Business
entities who derive profits from and
pay profits tax on rental income derived
from ownership of real estate are entitled
to a set-off of property tax against
profits tax with a tax credit being
granted where the property tax exceeds
the profits tax;
- A
corporation which purchases a property
for its own occupation does not pay
property tax on the deemed rental income
which it could have earned if it had
rented out the building.
- It
is advisable for properties to be owned
by Hong Kong corporate entities since property
tax does not make allowances for either
depreciation or interest costs on a loan
to finance the purchase, while such costs
are deductible for corporate profits tax
purposes. A foreign company cannot own real
estate in Hong Kong unless it is registered
as a foreign
company under the provisions of the
Companies Ordinance.
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Hong Kong Stamp Duty
In
November 2010, Financial Secretary Mr John
C Tsang proposed to introduce a Special Stamp
Duty (SSD) on residential properties as part
of the the government's attempts to curb speculation
and cool the property market (see below).
The
laws on stamp duty are set out in the Stamp
Duty Ordinance. Stamp duty is either a
fixed fee or is calculated ad valorem depending
on the nature of the transaction. It is payable
on:
- Leases,
assignments and conveyances of immovable
property.
-
The transfer of shares or marketable securities
-
The transfer of bearer instruments (being
instruments under which ownership is transferred
through physical delivery).
Immovable Property Stamp Duty Rates
2
separate rates of stamp duty are payable on
immovable property:
- The
Conveyance of a Freehold or the Assignment
of a Leasehold: With effect from April
1, 2010, the rate of stamp duty is progressive
and varies from HKD100 to 4.25% if the value
of the transferred interest is more than
HKD21,739,120. The
2007 Finance bill reduced the stamp duty
rate on transactions of properties with
a value between HKD1 million and HKD2 million
from 0.75% to a fixed amount of HKD100.
- The
Granting of a Short-Term Lease: The
stamp duty rate is progressive and varies
between 0.25% and 1% of the annual rental
value depending on whether the lease is
for less than one year or more than 3 years.
Any agreement which increases the rent reserved
by a chargeable stamped lease is itself
chargeable to stamp duty in respect of the
additional rent which it makes payable.
Immovable Property Transactions Exempted
from Stamp Duty:
The
following immovable property transactions
are exempt from stamp duty:
- Non-Residential
Property: Instruments transferring "non
residential property" are exempt from
stamp duty. Non-residential property is
defined as property which may not by law
be used at any time for residential purposes.
- Gifts
to Charitable Institutions or Public Trusts:
Instruments transferring immovable property
by way of gift to a charitable institution
or public trust are exempt from stamp duty.
- Approved
conveyances on sale to diplomatic or consular
bodies.
- A
transaction conveying an interest in immovable
property between "associated corporate
bodies". Entities are defined as
associated corporate bodies when one entity
holds over 90% of the share capital of the
other or when a 3rd entity holds over 90%
of the share capital of both entities. The
association must remain for 2 years after
the transfer in default of which the full
level of stamp duty must be paid over retrospectively.
The financing of the transaction cannot
come from an unassociated body.
-
Mortgages: Mortgages are free of
stamp duty.
Immoveable Property Stamp Duty Anti-Avoidance
Provisions
There
are elaborate anti avoidance provisions in
place aimed at deterring speculation. Thus
where the beneficial owner of real estate
executes an instrument in favor of a third
party under which he undertakes to hold the
real estate on trust for the third party duty
is payable on this instrument as if a conveyance
had taken place. Likewise stamp duty is payable
where under an uncompleted contract of sale
the vendor is deemed by law to hold on trust
for the purchaser.
Stamp Duty Payable on Shares & Marketable
Securities
Stamp
duty of 0.2% is payable on the transfer of
shares or marketable securities whereas 0.1%
stamp duty is payable on the issued share
capital of a company.
Securities Transactions Exempted from Stamp
Duty
The
following transactions are exempt from stamp
duty:
- Loan
capital transactions, bills of exchange,
promissory notes, certificates of deposit,
exchange fund debt instruments and Hong
Kong multilateral agency debt instruments.
-
Transactions involving debentures, loan
stocks, funds bonds or notes that are not
denominated in Hong Kong currency except
to the extent that they are redeemable in
that currency.
-
Stock donated to charitable bodies or public
trusts which are exempt from taxation in
Hong Kong.
-
A transaction conveying stock between "associated
corporate bodies". Entities are defined
as associated corporate bodies when one
entity holds over 90% of the share capital
of the other entity or when a 3rd entity
holds over 90% of the share capital of both
entities. The association must remain for
2 years after the transfer, in default of
which the full level of stamp duty must
be paid over retrospectively. The financing
of the transaction cannot come from an unassociated
body.
Stamp Duty Payable on Bearer Instruments
The
amount of stamp duty payable is 3% of the
value of the instrument transferred.
Stamp
Duty Concession in Respect of ETFs
The
Financial Secretary proposed in the 2010/2011
budget to extend the stamp duty concession
in respect of the trading of exchange traded
funds (ETFs) to cover ETFs with the value
of Hong Kong stock not exceeding 40% of the
aggregate value of the underlying portfolio.
The measure was to be implemented with immediate
effect. ETFs satisfying the requirement can
apply to the Inland Revenue Department for
the concession under section 52 of the Stamp
Duty Ordinance.
Special
Stamp Duty (SSD) on Residential Properties
Following
a significant inflow of hot money, leading
to substantial increases in asset prices in
Hong Kong, the Financial Secretary, John C
Tsang, announced new anti-property speculation
measures in November 2010. Among them was
the SSD on residential properties, charged
on top of the current ad valorem property
transaction stamp duty.
Any
residential property acquired on or after
November 20, 2010, either by an individual
or a company, listed or unlisted, and regardless
of where it is incorporated, and resold within
24 months will be subject to the proposed
SSD.
The
SSD will be payable jointly and severally
by both the buyer and the seller in the resale
transaction, and will be calculated based
on the consideration for the resale transaction
at regressive rates for different holding
periods.
It
will be charged at 15% if the property is
held for six months or less; 10% if the property
is held for more than six months but for 12
months or less; and 5% if the property is
held for more than 12 months but for 24 months
or less.
It
is also proposed to disallow deferred payment
of stamp duty, including SSD, for residential
property transactions of all values, while,
to deter non-compliance, the existing statutory
sanctions will be extended to cover the SSD.
Any person who fails to pay the SSD by the
deadline for payment shall be liable to penalties
up to 10 times the amount of the SSD payable.
Not
long after Tsang's announcement, Secretary
for Transport and Housing, Eva Cheng, told
the Legislative Council that it will introduce
additional
measures to cool the property market if
the stamp duty and other curbs on speculative
buying are not successful.
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Hong Kong Filing Requirements
and Payment of Tax
The
tax year starts on April 1. The assessment
to profits tax is provisional and is based
on the previous year's assessable profits
with 75% of the assessment being due by the
3rd quarter and the final 25% being due at
the year-end. Tax payments delayed less than
6 months are subject to a 5% non-deductible
surcharge whereas payments overdue by more
than 6 months are subject to a 10% non-deductible
surcharge. A tax credit is granted where the
previous year's assessment exceeds the currents
year's assessable profits.
Corporations
and partnerships may be able to file their
profits tax returns for 2009/10 and 2010/11
electronically using the eTAX system. However,
businesses must satisfy a number of conditions
in order to use this internet filing service.
These conditions include: a corporation’s
gross income should not exceed HKD2m (USD257,000);
it should not be claiming a foreign tax credit;
it should not have obtained an advance ruling
on any of its tax matter in relation to that
year of assessment; and it should not have
paid or accrued to a non-resident person any
sum for the use of intellectual property.
A partnership
must satisfy all of the conditions applicable
to a corporation. In addition, it cannot have
more than six partners during the basis period
for that year of assessment (including those
partners who have retired); and all of its
partners should be individuals.
Hong
Kong Withholding Tax
There are no withholding taxes in Hong Kong
as such, but there are certain circumstances
in which a company making a payment to a foreign
associate (subsidiary or holding company)
which is deemed to be Hong Kong source income
needs to withhold the tax.
For
instance, when a Hong Kong entity pays royalties
for the use of intellectual property to its
own offshore licensing affiliate, then tax
is due of 30% of 16.5% = 4.95% (4.5% for an
unincorporated business) and this must be
withheld by the Hong Kong paying company.
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