Introduction
Hong Kong companies are among the most sought-after tools in international tax planning. They are actively used in international trade and other types of activities. Thanks to its developed legislation and non-zero taxes, Hong Kong cannot be called an offshore. However, the advantages provided by this jurisdiction are comparable to offshore ones. In terms of business conditions, Hong Kong continues to rank high in authoritative international ratings.
Hong Kong (Xianggang) is a Special Administrative Region of China and a major international financial centre. The official languages are Chinese and English. The currency is the Hong Kong Dollar (HKD). Hong Kong’s economy is entirely built on market principles, and its legal system is based on English common law. Hong Kong’s main trading partners are Mainland China, the United Kingdom, India, Korea, Singapore, the USA, Taiwan, and Japan.
Difference Between Hong Kong and Offshore Zones
Hong Kong is a transparent taxable jurisdiction integrated into international tax cooperation because:
- Corporate taxation is provided in Hong Kong.
- Hong Kong companies are required to prepare and submit audited financial statements.
- Information about shareholders and directors of Hong Kong companies is public. Details of beneficial owners are available upon request by government authorities.
- Tax exemption for companies earning income only outside Hong Kong is not granted automatically and requires comprehensive documentary evidence.
- Hong Kong participates in international tax information exchange.
All this makes Hong Kong companies prestigious corporate tools recognised worldwide. Companies registered in Hong Kong and legally conducting their activities find it significantly easier to prove the legality of the origin of their funds when making investments in other countries, which is their significant advantage over offshore companies.
General Characteristics of Hong Kong Companies
The current Hong Kong Companies Ordinance (Cap. 622) came into force in March 2014. According to it, companies in Hong Kong can be registered in the following legal forms:
- Private company limited by shares;
- Public company limited by shares;
- Private unlimited company with a share capital;
- Public unlimited company with a share capital;
- Company limited by guarantee without a share capital.
In addition to companies, business forms in Hong Kong can include sole proprietorships, partnerships (general or limited), open-ended fund companies (OFC), private funds in the form of limited partnerships (LPF). In most cases, private companies limited by shares are used in international business, which have the following characteristics:
| Share Capital | No minimum share capital requirement. In practice, upon incorporation, the company must issue at least one share, and the issued and paid-up share capital can be from 1 HKD. |
|---|---|
| Shareholders | The company may have no more than 50 members. The liability of members is limited to any unpaid amount on their shares. There are no citizenship or residency requirements for shareholders. |
| Director | The company must have at least one director who is an individual. The director can be a citizen and resident of any country. |
| Secretary | The company must have a secretary who is a resident of Hong Kong. Usually, this is a local company providing secretarial services on a professional basis. The secretary is responsible for maintaining corporate registers, filing reports, and ensuring compliance with legislative requirements. |
| Registered Office | The company must have a registered office (legal address) within Hong Kong for receiving correspondence and official notifications. |
| Financial Statements | Companies maintain accounting records, annually prepare and submit audited financial statements. |
| Controlling Persons | The company must maintain a register of persons with significant control over it (essentially beneficial owners). “Significant” control constitutes more than 25% of shares or voting rights or other significant influence. |
| Confidentiality | The Company’s name, current status, and information about directors and shareholders are available on the Registry’s website. The register of controlling persons is maintained within the company and provided only upon request by the Registry or Hong Kong law enforcement agencies. |
Taxation of Hong Kong Companies
Hong Kong’s taxation system was formed based on the English model and largely inherited the principles of the British Commonwealth’s tax policy package adopted in 1947. In Hong Kong, there is no division of companies into resident and non-resident; instead, the territorial principle of taxation is adopted. This means that Hong Kong companies are taxed only if the income is derived from sources in Hong Kong or the activities leading to this income were carried out in Hong Kong. If a company has not conducted activities in Hong Kong and has not received income from sources in Hong Kong, it is not subject to taxation.
The key legislative act in the tax sphere is the Inland Revenue Ordinance (Cap. 112). The tax authority of Hong Kong is the Inland Revenue Department (IRD).
Key Features of the Tax Regime for Business in Hong Kong
- A two-tiered profit tax rate applies to companies. Regarding profit not exceeding 2 million HKD (approximately 256,000 USD), a rate of 8.25% applies. The amount exceeding this threshold is taxed at 16.5%.
- The tax base is the accounting profit of the company, adjusted for tax purposes. Expenses incurred to earn taxable profits are deductible.
- There is no tax on received dividends and capital gains (with exceptions).
- There is no withholding tax when a Hong Kong company pays dividends and interest (to residents and non-residents alike).
- For profit tax purposes, the status of resident or non-resident does not matter (tax can arise for both). The decisive role is played by the source of income and the place of the company’s activities.
- Income received by the company from activities outside Hong Kong and from sources outside Hong Kong is generally not subject to taxation (with exceptions).
- Passive income from foreign sources (dividends, interest, royalties, income from the sale of shares) received by a Hong Kong company that is a member of an international group may be subject to taxation. Relevant changes came into force in 2023.
- Companies must file profit tax returns and audited financial statements.
- There are no indirect taxes in Hong Kong (such as VAT or sales tax).
- Hong Kong has concluded about 50 bilateral double taxation agreements (DTAs), including with several EU countries, the UK, China, Malaysia, UAE, Russia, Thailand, and others.
You can read more about the taxation of companies in Hong Kong, as well as financial reporting and auditing of Hong Kong companies in our special material.
Exemption of Foreign Profits for Hong Kong Companies
Trading (operational) Hong Kong companies that earn income exclusively from outside Hong Kong are entitled to apply for exemption from tax. For this, the company must confirm to the tax authority that it meets the relevant conditions. The requirement of absence of activity in Hong Kong is interpreted broadly and includes a number of components:
- The company must not have a fixed place of business in Hong Kong, including offices, shops, workplaces;
- The goods sold must not be produced in Hong Kong;
- There should be no employees working in Hong Kong;
- Contracts must be concluded and executed outside Hong Kong;
- The company must not have suppliers and counterparties in Hong Kong;
- Transportation of goods must be carried out between ports located outside Hong Kong.
In this regard, for companies claiming tax exemption, it is important to:
- Carefully document operations (each transaction/operation must be confirmed by contracts, invoices, shipping documents, etc.);
- Be ready to provide documentary evidence of the source of profits outside Hong Kong (including the structure and place of management of the company, the place of conclusion and execution of transactions, location of counterparties and the procedure for settlements with them, description of the company’s actions aimed at generating profits, etc.);
- Maintain effective communication with the company’s secretary and auditors, providing explanations and documents in a timely manner.
The “offshore tax claim” procedure is first carried out after submitting the profit tax return for the first year in which the company received profits. If the nature of the company’s activities has not changed subsequently, such a procedure is repeated every 3-4 years or more frequently at the discretion of the IRD.
Taxation of Foreign Passive Income in Hong Kong
From 2023, certain passive income of Hong Kong companies, previously not taxed, has become subject to taxation. This concerns the following income of companies that are members of international groups and received from sources outside Hong Kong:
- Dividends;
- Income from the disposal of equity interests (and from 2024, also other assets);
- Interest;
- Income from intellectual property (IP).
Such income, despite being sourced from abroad, is recognised as received in Hong Kong and, therefore, is subject to taxation. However, this income can also be exempt from tax if the following new requirements are met:
| Category of Income | Condition for Tax Exemption |
|---|---|
| Dividends and Income from Disposal of Equity Interests | Economic substance in Hong Kong, or there must be a qualifying participation relationship between the recipient and the payer of the income. |
| Interest and Income from Disposal of Assets (excluding IP) | Economic substance in Hong Kong. |
| Income from IP or Disposal of IP | Compliance with the nexus requirement between income from the IP object and the expenses incurred on it. |
It should be noted that economic substance (which implies having staff, expenses, and making managerial decisions in Hong Kong) excludes the possibility of claiming exemption of foreign operational profits from tax under the “offshore tax claim” procedure (see above).
We suggest that you read more about the new rules on taxation of passive income in Hong Kong.
Withholding Tax
When a Hong Kong company pays dividends or interest, there is no withholding tax in Hong Kong (regardless of the recipient’s status—individual or legal entity, resident or non-resident of Hong Kong).
When paying royalties to non-residents of Hong Kong, withholding tax is levied at the existing (two-tiered) rates on 30% of the total payment amount. Thus, the effective withholding tax rate when paying royalties is 2.475% and 4.95%.
When assessing the tax implications of payments between Hong Kong companies and countries with which it has concluded DTAs, one should proceed from the provisions of the relevant DTA.
Application of Hong Kong Companies
A Hong Kong company may engage in any types of activities not prohibited by law and not requiring special licensing, including:
- International trade in goods (including agency, distributorship, and other intermediary activities);
- Provision of services (including digital services);
- Activities in the IT sector;
- Freight forwarding activities;
- Shipping and maritime transport;
- Holding or sub-holding activities;
- Investing in subsidiaries;
- Being rights holders or users of IP objects;
- Owning movable and immovable property, etc.
From a taxation point of view, a Hong Kong company can operate under one of the following models:
- Enjoy full exemption from profit tax provided that activities and profits are exclusively outside Hong Kong;
- Pay applicable taxes in Hong Kong within the existing moderate taxation framework (8.25% / 16.5%);
- Use domestic preferential tax regimes (such as corporate treasury centre, certain types of insurance, ship and aircraft leasing, certain types of maritime activities, family investment holdings). These regimes are available only if there is sufficient economic substance in Hong Kong.
Anti-Tax Avoidance Rules in Hong Kong
When discussing modern international tax planning, it’s important to mention the restrictions aimed at preventing tax avoidance and other abuses. In Hong Kong, the following tools are provided for these purposes:
- General Anti-Avoidance Rule (GAAR). The IRD is authorised to deny a tax benefit (defined as avoiding, deferring, or reducing the amount of tax liability) if such a benefit is the main or one of the main purposes of the taxpayer’s involvement in a scheme/transaction.
- Transfer Pricing (TP) Rules. In 2018, Hong Kong adopted TP rules concerning transactions between related parties, including loans. The IRD has the authority to control the arm’s length nature of prices used in such transactions and to adjust the taxpayer’s profits or losses as if the transaction had been carried out between independent parties.
- Restrictions on Interest Deductibility. Deduction of interest is not allowed if it is paid to a recipient who is not subject to taxation in Hong Kong on their interest income. However, an exception is provided for cases of interest payments to foreign associated persons by a taxpayer engaged in intra-group financing activities.
- Participation in the BEPS Action Plan. Hong Kong has committed to implementing four minimum BEPS standards (the Base Erosion and Profit Shifting plan):
- Countering harmful tax practices;
- Preventing treaty abuse;
- Country-by-Country Reporting;
- Improving dispute resolution mechanisms.
- International Tax Information Exchange. Hong Kong participates in the Convention on Mutual Administrative Assistance in Tax Matters and the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA CRS). As of 2024, Hong Kong tax authorities exchange information on Hong Kong accounts of non-residents with 85 countries.
At the same time, Hong Kong lacks:
- Controlled Foreign Company (CFC) rules;
- “Thin capitalisation” rules.
Conclusion
Compliance with the conditions of absence of activities and income sources in Hong Kong allows companies to claim full exemption of their profits from tax. In other cases, when the company does business in Hong Kong or with Hong Kong, local income sources are present (or simply if the opposite is not confirmed), the company’s profit will be subject to taxation.
Taxation may also arise if the company has passive income from foreign (non-Hong Kong) sources, such as dividends, interest, or royalties. Exemption from tax is possible if the company meets the economic substance requirements in Hong Kong or other conditions (depending on the type of income). This innovation represents an exception to the territorial principle of taxation; however, overall, this principle continues to apply.