Q: What kind of Tax would be required for HK companies?

Basically, HK companies are required to pay for Profits tax only.

For the first HK$2,000,000 of assessable profits, the tax rate is 8.25%, where the amount above would be 16.5%

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For information, here are the taxes which Hong Kong does not impose:

• No sales tax or VAT

• No withholding tax on dividends and interest

• No capital gains tax

• No tax on dividends

• No estate tax

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Q: What is assessable profits?

The Assessable Profits (or Adjusted Loss) are the net profits (or loss) [other than profits (or loss) arising from the sale of capital assets] for the basis period, arising in or derived from Hong Kong.

 

Q: What does this mean for "arising in or derived from Hong Kong"?

Hong Kong adopts a territorial source principle of taxation and Only profits which have a source in Hong Kong are taxable here.

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Q: How to determine the Source of Profits?

The following principles have emerged from authoritative court decisions -

1/ Matter of fact

The question of locality of profits is a hard, practical matter of fact. No universal rule can apply to every scenario. Whether profits arise in or are derived from Hong Kong depends on the nature of the profits and of the transactions which give rise to such profits.

2/The operations test
The broad guiding principle is that one looks to see what the taxpayer has done to earn the profits in question and where he has done it. In other words, the proper approach is to identify the operations which produced the relevant profits and ascertain where those operations took place. The source of profits must be attributed to the operations of the taxpayer which produce them and not to the operations of other members of the taxpayer's group.

3/Antecedent or incidental activities
The relevant operations do not comprise the whole of the taxpayer's activities. The focus is on establishing the geographical location of the taxpayer's profit-producing transactions as distinct from activities antecedent or incidental to those transactions.

4/Place where decision is made
The place where the day-to-day investment/business decisions take place is only one factor which has to be taken into account in determining the source of profits. It is not usually the deciding factor.

5/Gross profits from transactions
The distinction between Hong Kong profits and offshore profits is made by reference to the gross profits arising from individual transactions.

6/Business presence overseas
A business may maintain a presence overseas which earns profits outside Hong Kong but the absence of a business presence overseas does not, of itself, mean that all the profits of a Hong Kong business invariably arise in or are derived from Hong Kong. However, in the vast majority of cases where the principal place of business is located in Hong Kong and there is no business presence overseas, profits earned by that business are likely to be chargeable to Profits Tax in Hong Kong.

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Q: What kind of items can be used for deductions from account?

Generally, all outgoings and expenses, to the extent to which they have been incurred by the taxpayer in the production of chargeable profits, are allowed as deductions.  And there are specifically prohibited items:

• domestic or private expenses and any sums not expended for the purpose of producing the profits;

• any loss or withdrawal of capital, the cost of improvements and any expenditure of a capital nature;

• any sum recoverable under insurance or contract of indemnity;

• rent of or expenses relating to premises not occupied or used for the purpose of producing the profits;

• taxes payable under the I.R.O., except Salaries Tax paid in respect of employees' remuneration;

• any remuneration or interest on capital or loans payable to or, subject to section 16AA, contribution made to a mandatory provident fund scheme in respect of the proprietor or the proprietor's spouse or, in case of a partnership, to its partners or their spouses.

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