Now that Hong Kong has emerged from its business deep freeze after COVID restrictions, this is an opportunity to revisit what makes Hong Kong an attractive jurisdiction from which to springboard into Greater China or as a regional office base for business into Asia.
- Hong Kong relies on a territorial tax system, under which local residents are only taxed on their Hong Kong income.
- Foreign-source income is not subject to local tax.
- Individuals are subject to Salaries Tax on any income arising in or derived from an office, employment or pension in Hong Kong. It is levied at progressive rates on the net chargeable income and is capped at 17%.
- Taxes are not levied on capital gains, dividends and/or interest, and withholding taxes only apply to certain types of royalties.
- There is also no VAT in Hong Kong , while stamp and custom duties remain marginal.
- Corporate tax is set at 16.5% of assessable profits for corporations and 15% for unincorporated businesses.
Two-tier profits tax regime
One of the most significant changes in the Hong Kong tax system was the introduction of a two-tier profits tax system. The new system came into effect on 1st April 2018 and was designed to reduce the tax burden on small and medium-sized enterprises (SMEs).
Under the two-tier profits tax system, the first HKD 2 million of assessable profits of a company is taxed at a lower rate of 8.25%, while the remaining profits are taxed at the standard rate of 16.5%. This tax relief measure is expected to benefit around 150,000 SMEs in Hong Kong.
Cross-border transactions are easy and supported by a regulatory framework between China and Hong Kong.
These include the Arrangement for the Avoidance of Double Taxation between Hong Kong and China, which allocates the right to tax between the two jurisdictions, and the Closer Economic Partnership Arrangement, which enables Hong Kong businesses to open wholly owned subsidiaries in the China market in previously restricted industries.
Refined FSIE Regime
While Hong Kong continues to adhere to the territorial source principle of taxation, Hong Kong constituent entities of a multinational enterprise group, wherever headquartered and irrespective of group asset size and revenue, are now subject to a refined FSIE regime in respect of in-scope offshore passive income received in Hong Kong.
The refined FSIE regime applies to four types of passive income:
ii) income from intellectual properties;
iv) disposal gains in relation to shares or equity interests.
Active income such as trading income and services income will continue to be exempt from profits tax if it is regarded as offshore sourced based on Hong Kong’s existing source rules.
In-scope offshore passive income continues to be exempt from profits tax in Hong Kong under the FSIE regime if the entity concerned satisfies the economic substance or nexus approach requirements.
The Hong Kong government has also introduced a tax concession for carried interest issued by private equity funds. The tax concession, which was implemented in July 2020, allows eligible private equity fund managers to pay a concessionary tax rate of 0% on their carried interest income. This tax concession is expected to enhance Hong Kong’s competitiveness as a hub for private equity funds in the Asia Pacific region.
Pure equity holding companies will be subject to a reduced economic substance requirement. This has been done to encourage the development of the trust and family office industry and encourage the establishment of family offices in Hong Kong.
To avoid possible double taxation and relieve compliance burdens, the refined FSIE regime provides a participation exemption in respect of offshore dividends and disposal gains in relation to shares or equity interest.
Regardless of whether the economic substance requirement is met, the relevant income will continue to be tax-exempt in Hong Kong if the above conditions are satisfied, subject to specific anti-abuse rules.
Recognizing that affected taxpayers would suffer double taxation if they do not qualify for exemption under the refined FSIE regime, a unilateral tax credit will also be introduced such that overseas taxes paid in respect of in-scope offshore passive income received from jurisdictions that have not concluded comprehensive double taxation agreements with Hong Kong will be creditable against the Hong Kong tax payable on the same income under the refined FSIE regime.
The BUD Fund
(Branding, Upgrading and Domestic Sales)
The BUD Fund was firstly launched in 2012 to provide funding support for non-listed Hong Kong enterprises to undertake projects to develop brands, upgrade and restructure their business operations and promote sales in Mainland China.
Between 2018 and 2021, the Hong Kong Government decided to further extend its geographical scope to include the Association of Southeast Asian Nations and all economies with which Hong Kong has signed Free Trade Agreements, eg with Australia, or Investment Promotion and Protection Agreements, thus creating two parallel Programmes.
All non-listed enterprises registered in Hong Kong under the Business Registration Ordinance, and with substantive business operations in Hong Kong, are eligible to apply.
The programme covers three areas:
- upgrading and restructuring;
- domestic sales and promotion of international sales .
The BUD Fund is open to applications all year round.
The application’s vetting time is set at 60 working days from the date of receipt of a complete application accompanied by all necessary documentation proof and clarifications as requested by the Hong Kong Productivity Council .
Each approved project should be completed within 24 months.
Funding will be provided on a matching basis, i.e. the Hong Kong Government will cover a maximum of 50% of the total approved project cost and the enterprise has to contribute no less than 50% of the total approved project cost.
The total cumulative funding ceiling per enterprise under the Mainland and the FTA Programmes is HKD7,000,000 (AUD 890,000)
Project Monitoring – Reporting requirements
Projects with duration of over 18 months are required to submit a Progress Report and Annual Audited Accounts covering the first twelve months.
The Progress Report should include a summary of the project progress against the project implementation plan set out in the Approved Project Proposal appended to the funding agreement as well as a statement of income and expenditure for the reporting period.
Both projects that are 18 months or below or more than 18 months to up to 24 months, need to submit a Final Report and Final Audited Accounts.
Another recent development in Hong Kong’s tax law is the implementation of the Automatic Exchange of Financial Account Information (AEOI) regime. The AEOI regime, which was launched in 2018, is part of the city’s commitment to the global fight against tax evasion. The regime requires financial institutions in Hong Kong to collect and report financial account information of foreign tax residents to the Hong Kong Inland Revenue Department, which will then share the information with other participating jurisdictions.
Research and Development (R&D) Cash Rebate Scheme
The Hong Kong government has also introduced several investment incentives aimed at encouraging businesses to invest and innovate in the city.
One such incentive is the Research and Development (R&D) Cash Rebate Scheme, which was launched in April 2019. The scheme provides cash rebates to eligible companies conducting R&D activities in Hong Kong. Companies can claim a cash rebate of up to 40% of their eligible R&D expenditure, subject to a cap of HKD 10 million per year.
Green bond Grant Scheme
In addition to the above, the Hong Kong government has also implemented several measures to promote the city’s green finance sector.
These measures include the introduction of a green bond grant scheme, which provides a subsidy of up to HKD 800,000 to eligible green bond issuers to offset the costs of obtaining third-party certification. The government has also launched a Green Finance Certification Scheme, which aims to raise awareness and build capacity for green finance in Hong Kong.
Overall, the recent developments in Hong Kong’s tax law and investment incentives demonstrate the government’s commitment to enhancing the city’s business environment and promoting economic growth after COVID hibernation.
The two-tier profits tax system, AEOI regime, R&D cash rebate scheme, and tax concession for carried interest are expected to encourage investment and innovation in Hong Kong, while the measures to promote green finance will support sustainable development in the city.
These developments are likely to reinforce Hong Kong’s position as a leading international financial centre and a hub for business and investment in the Asia Pacific region.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please also note that the law may have changed since the date of this article.