Time of establishment of the company
Hong Kong is Asia’s largest business centre and the richest city in China. It offers attractive taxation and commercial, financial and legal services at the highest level. Whether it’s import, export, online sales, international trade or other intangible services, Hong Kong brings together all types of business. Taxation of foreign entities’ business activity is 0%. Economically and politically stable Hong Kong has a well-founded reputation. This zone retains its autonomy to issue HKD (Hong Kong Dollar) money.
Good to know:
- Hong Kong has a public register of commercial companies;
- the tax system is territorial in nature – income from operations carried out in Hong Kong territory is taxed but the one run outside Hong Kong – not;
- the legal system is based on Anglo-Saxon law;
- accounting is compulsory and annual accounts must be prepared and submitted;
- opening an account in Hong Kong is not as simple as it seems – economic justification is required;
- Hong Kong is considered to be a tax haven, but it is still used for trading with e.g. China;
- the Hong Kong company may be anonymous when using the services of a shareholder and nominee.
Establishing a company in Hong Kong can be done remotely, without the need for a notary’s power of attorney and a lengthy legalisation procedure.
Company registration procedure
Registration of company
The establishment of the company in Hong Kong includes:
- Checking if the selected company name is availabile in the Companies Register.
- Preparation of the articles of incorporation and articles of association.
- Filling in the application for registration.
- Submission of documents to the Companies Register.
- Obtaining a registration certificate.
At least one shareholder is required to establish a company. The maximum number of shareholders is 50. Foreign and nominated shareholders are allowed.
At least one director is required to run the company, which may be a shareholder. It is also necessary to appoint a secretary who must be resident.
The Company must have a registered address in the territory of Hong Kong, which will appear on the Company’s business documents and postal details. A virtual office with a dedicated telephone number is available.
The time to establish a company is about 3 working days.
No minimum capital required.
Taxes and finances
Hong Kong’s tax system is based on a territorial principle, which means that income from sources outside Hong Kong is not taxed. As a result, individuals, corporations, partnerships and trusts pay income tax on all their income from sources located in Hong Kong (except for income from the sale of so-called capital assets, i.e. fixed assets).
The majority of taxes known in EU countries do not exist here. There is no VAT, capital income tax, interest income, stamp duties or inheritance tax. There are no social security contributions and there is no minimum wage. Wages are simply regulated by the demand and supply of labour.
Only profits originating in Hong Kong are taxed in Hong Kong. Profits from other sources are not subject to income tax. The principle itself is very clear, but its application in specific cases can sometimes be controversial.
Tax bases for Hong Kong companies’ profits
Hong Kong has adopted a territorial basis for the taxation of profits from trade, business or professional activities in Hong Kong. Profit tax shall be collected only on profits made in or from Hong Kong. In other words, it means that a person doing business in Hong Kong but making profits elsewhere does not have to pay tax on those profits in Hong Kong. Unlike Hong Kong, most countries in the world do tax worldwide profits, including profits from offshore sources.
Prerequisites for being subject to income tax
According to the tax office regulation, a person is subject to income tax under the following conditions:
- is a trader, professional or self-employed person in Hong Kong;
- derives income from trade, occupation or business; and
- profits arise in or originate in Hong Kong.
The first two conditions are clear. The third part needs to be developed. Let us look at the basic principles for determining the source of profits.
Basic rules for determining the source of profits
Courts have analysed for years the subject of the source of profits. The following principles emerged from court decisions:
- The facts are the key
The question of the location of profits is a practical matter connected with the facts of the case. No universal rule can apply to every scenario. Whether profits are made in or from Hong Kong depends on the nature of the profits and the transactions that give rise to such profits.
- A test of action taken
The basic principle is to check what actions the taxpayer has taken to make profits and where he has made them. In other words, the right approach is to identify the operations that have generated the profits and where these operations have taken place. The source of profits must be allocated to the activities of the taxpayer which gave rise to them and not to the operations of other members of the taxpayer’s group.
- Previous or incidental operations
Significant activities do not constitute the taxpayer’s entire activity. The emphasis is on the geographical location of the transactions which gave rise to profits on the part of the taxpayer, as opposed to previous or incidental actions in relation to those transactions.
- Place where the decision was taken
The place where investment and business decisions are made on a daily basis is only one of the factors to be taken into account when determining the source of profits. However, this is not usually the decisive factor.
- Gross profit from the transaction
The distinction between Hong Kong and offshore profits is made by reference to gross profits from individual transactions.
- Presence of the company abroad
The company can operate abroad and thus make profits outside Hong Kong, but the absence of a foreign business presence does not in itself mean that all profits from Hong Kong operations invariably originate in or come from Hong Kong. However, in the vast majority of cases, where the company has its principal place of business in Hong Kong and is not present on the foreign market, its profits are likely to be subject to income tax in Hong Kong.
- Contracts for the purchase and sale of goods
The location of profits from trading in goods is generally determined by the place where the purchase and sale agreements are executed. “Execution” means not only the legal execution of a contract. It also includes the negotiation, conclusion and performance of a contract. Following the judgment of the Court of Appeal in Magna Industrial Co. Ltd. v. CIR, it is clear that a broader approach is necessary. The right way to do this is to check all relevant operations carried out for profit and not just the purchase and sale of goods. In Magna Industrial Co. Ltd. v CIR, the Court of Appeal noted that:
Of course, the question of the purchase and sale of goods is important, but there are also other questions: for example: how were the goods bought and stored? How were the orders obtained? How were orders handled? How were the goods shipped? How was the financing organised? What was the payment method?
How relevant facts are considered
In considering the relevant facts, the nature and quality of the activities are much more important than quantity. It is the cause and effect of actions in relation to the profit achieved that are decisive factors. Facts not directly related to commercial activities are considered irrelevant in determining the location of profits. This is e.g. renting out office space, recruiting staff, setting up an office, etc. This for example in the case of the rental of office space, the recruitment of staff, the establishment of an office, etc. If the purchase and sale contracts are carried out in Hong Kong, the profits are taxed in Hong Kong. If the purchase and sale contracts are carried out outside Hong Kong, profits shall not be taxed in Hong Kong. If a purchase or sales contract has been entered into in Hong Kong, the preliminary presumption is that the profits are taxable in Hong Kong. However, other relevant facts will have to be examined in order to determine the source of profits.
In the case of sales to a Hong Kong customer (including sales to a Hong Kong office in Hong Kong acting for a foreign customer), the sales contract is considered as having been performed in Hong Kong.
Where the conclusion of the contract of sale and purchase does not require travel outside Hong Kong but takes place in Hong Kong by telephone or electronic means, including the Internet, the contract shall be deemed to have been performed in Hong Kong. Profits from trading activities shall be considered as wholly taxable or totally non-taxable. No division shall apply.
Place of production
The source of profits in the case of manufacturing industry is the place where the products are produced. Profits from the sale of goods manufactured in Hong Kong are fully taxable in Hong Kong. If the goods are manufactured partly in Hong Kong and partly outside Hong Kong, that part of the profits which is attributable to the production of goods outside Hong Kong will not be considered as having been generated in Hong Kong. The place where the manufactured goods are sold is irrelevant.
Production under a processing or assembly agreement with a continental Chinese operator
- Hong Kong companies are usually involved in two types of trading on the continent: contract services and import processes. In the case of contract services, the document that governs the contractual relationship between the parties is the processing agreement – it defines the rights and obligations of the Hong Kong company and the company from the continental part a the one dealing with processing. The Hong Kong-based company is responsible for supplying raw materials and machinery without remuneration and for providing technical know-how, while the continental processing company is responsible for providing factories, tools and manpower. In return for processing services, the Hong Kong company pays subcontractors from the continental part. It is the Hong Kong company that is entitled to raw materials and finished products. Specifically, the continental processing company is a separate subcontractor, distinct from the Hong Kong company, so the issue of profit-sharing should not arise at all. According to the Department, Hong Kong operations on the continent complement Hong Kong’s activities in Hong Kong. Typically, a 50:50 scale profit-sharing is assumed for operations carried out by a Hong Kong company in the continental part.
- In import processes, manufacturing is carried out by a foreign investment enterprise (FIE) based in continental China, linked to a Hong Kong-based company. The Hong Kong-based company sells raw materials to FIE and buys finished products from FIE. The Hong Kong-based company trades in raw materials and finished products while FIE produces finished goods. The legal title to raw materials and finished products is transferred to FIE/transferred by FIE to the Hong Kong company. The Department is of the opinion that the profits from Hong Kong’s commercial transactions in Hong Kong cannot be attributed to the production activities of an investment firm operating in the continent. The source of profits from trading activities should be attributed to the Hong Kong company in which they were established. No proportionate distribution of profits shall be applied.
Production carried out by an independent subcontractor in continental part of China.
Where installation work is commisioned to a variety of contractors on the continent, jobs are numerous, of low value and short duration, and Hong Kong is minimally involved in installation work, then production on the continent is not considered to be carried out by a Hong Kong-based company. Given that the Hong Kong company does not carry out any production activities outside Hong Kong, its profits should be fully subject to profit tax without proportional distribution.
Sales or purchase commissions
When a company receives commissions by providing products to buyers or by providing adequate resources to suppliers of products ordered by customers, the activity that leads to the generation of commission income is a business agreement to be enforced between principals. The source of income is the place where the agent carries out its activities. If such activities are carried out in Hong Kong, the revenue shall originate in Hong Kong.
Factors such as where principals are located, how they are identified by the agent, and where incidental operations are performed before or after the commission is earned are not materially relevant in determining the source of commission income.
Where commission income is earned by a person doing business in Hong Kong but the activity leading to the commission is done entirely outside Hong Kong, the commission is not taxable in Hong Kong.
The following are some examples of tests to determine the source of the main types of other business profits:
|Taxation in Hong Kong
|Profits from lease agreement of the real estate||Taxable if the real estate is located in Hong Kong
|Profits made by the owner from the sale of real estate
|Taxable if the real estate is located in Hong Kong
|Profits on the purchase and sale of listed shares and other listed securities
|They shall be taxed if the exchange on which the shares or securities are traded is located in Hong Kong. If the purchase and sale were freely circulating, they shall be taxed if the purchase and sale contracts were made in Hong Kong.
|Profits related to business activities (other than those of a financial institution) arising from the purchase and sale of unlisted shares and other unlisted securities
|To be taxed where purchase and sale contracts are performed in Hong Kong.
|Profits from provision of services||Taxable if the services, for performance of which the remuneration was paid, are performed in Hong Kong
|Licence payments from the provision of services
|Taxable if a licence or right of use is acquired and granted in Hong Kong|
|Licence payments received by the undertaking
Intellectual property rights royalties received in Hong Kong by a non-resident
|Taxable if the intellectual property right is exercised in Hong Kong in respect of royalties received or credited on or after 25 June 2004, or if the intellectual property right is exercised outside Hong Kong, it shall be taxable if the royalty is deductible in determining the taxable profits of the taxpayer.
|Interest the company is entitled to||Taxable if the lender makes funds available to the borrower in Hong Kong
Distribution of profits and costs
When profits are derived from production or service activities involving significant activities, both inside and outside Hong Kong, the distribution of profits shall be proportionate. In matters relating to contracting, a 50:50 apportionment shall apply as standard, taking into account the contractual terms imposed on the parties to the agreement. In other cases where the apportionment is proportionate, the principle applied will depend on the circumstances of the case. In applying the apportionment, a question may arise concerning the allocation of indirect costs. In short, where these expenses contribute both to profits in Hong Kong and to offshore profits, they should be apportioned in such a proportion that profits made in Hong Kong and offshore profits remain in relation to total profits.
In order to ensure the proper functioning of the territorial principle, the Tax Office Department issues tax interpretations regarding the source of profits from business activities for the purposes of profit tax. Such a service is subject to a fee.
Accounting is mandatory whether or not the company operates in Hong Kong. The obligation includes the obligation to submit annual reports.
Type of activity
The most popular form of business is Hong Kong Private Limited Company, corresponding to a limited liability company. There is also a public limited company, where we have the opportunity to start various types of business, including the activities of an investment fund.
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