Hong Kong (a Special Administrative Region of China) has long established itself as one of the world’s leading business hubs. It offers a strategic location, a transparent legal system, favourable tax conditions, and stable, well-developed company laws. For these reasons and more, setting up a company in Hong Kong is an excellent choice for starting and running your business in the Asia-Pacific region.
Doing Business in Hong Kong: Key Features of the Jurisdiction
For your convenience, the table below shows the most important features of this jurisdiction. These points are essential for anyone planning to set up a company in Hong Kong as part of their international business structure.
| Category | Description |
|---|---|
| Status of Jurisdiction | Hong Kong is not an offshore jurisdiction, as it applies corporate tax, requires mandatory audits of financial statements, and participates in international tax cooperation. |
| Taxation Features | Corporate taxes in Hong Kong range from low to moderate. For more details on specific tax features, see the section below. |
| Controlled Foreign Company (CFC) Rules | None |
| Currency Control | None |
| Economic Substance Requirements | An economic substance test is applied only for tax purposes, determining whether a company meets the conditions for preferential tax regimes or exemptions it claims. |
| Tax Treaties | Hong Kong has concluded over 50 double taxation treaties, including one with mainland China. Hong Kong also participates in the international exchange of financial account information under the CRS standard. This means information about Hong Kong accounts held by non-residents is shared with participating countries. |
| Corporate Law Features | The most common legal form for Hong Kong companies is a private limited company. Other available structures include:
Hong Kong companies must appoint a company secretary, usually a licensed local corporate service provider. The secretary handles interactions with the Companies Registry and Inland Revenue Department, ensures timely filing of documents, and carries out other administrative duties. |
| Access to Information | General information about Hong Kong companies (such as company name and current status) is publicly available on the Companies Registry website. For an additional fee, you can obtain details about:
Companies must maintain a register of beneficial owners (“significant controllers”). However, this register is not publicly accessible. |
Corporate Taxes in Hong Kong
Corporate taxes in Hong Kong include:
- Profits tax
- Withholding tax
- Social security contributions
- Property rental income tax
- Stamp duty
Hong Kong does not impose Value Added Tax (VAT) or any similar taxes.
Let us take a closer look at the key features of profits tax and withholding tax, as these form the main tax burden for companies.
| Tax | Calculation and Collection Features |
|---|---|
| Profits Tax | Hong Kong applies a territorial taxation principle. Generally, profits tax is charged only on income generated within Hong Kong or derived from Hong Kong sources. For tax periods starting on or after 1 January 2018, a two-tiered profits tax rate applies based on the amount of profit:
|
| Withholding Tax | Hong Kong companies do not deduct withholding tax when paying dividends or interest to either residents or non-residents. No withholding tax is deducted when paying royalties to Hong Kong residents. However, withholding tax must be deducted when royalties are paid to non-residents if the intellectual property is used in Hong Kong or if the royalty payment reduces the taxable income of the paying company. In this case, 30% of the total royalty payment is taxable. The effective withholding tax rate is 2.475% (for amounts up to HKD 2 million) or 4.95% (for amounts exceeding HKD 2 million). |
Hong Kong Companies: Exemption from Profits Tax
Hong Kong companies that operate exclusively outside Hong Kong and earn profits solely from overseas (“offshore profits”) can benefit from a tax-free regime.
This exemption is not granted automatically. Instead, the company must submit an offshore tax claim to the Inland Revenue Department (IRD), requesting exemption of overseas profits (or part of them) from taxation. The company must be prepared to provide documents proving that it has no business activities or income sources in Hong Kong, in particular:
- No physical presence (offices or other premises) or employees in Hong Kong.
- No suppliers, business partners, or customers in Hong Kong.
- Contracts signed and performed entirely outside Hong Kong.
- No sales of goods or services within Hong Kong.
The IRD will examine these and other factors when deciding whether to grant the offshore tax exemption. This review process can take six months or longer. If the decision is positive, the company receives a confirmation letter granting exemption from profits tax on offshore income. This exemption can remain valid for several years. If the decision is negative, the company must pay profits tax regardless of whether it actually carries out business activities in Hong Kong.
Deviation from Hong Kong’s Territorial Taxation Principle for Certain Companies
Following legislative changes introduced in Hong Kong in 2023, certain types of income received by Hong Kong companies from foreign sources are now considered as arising or derived in Hong Kong. As a result, these incomes must be taxed in Hong Kong upon receipt.
This new taxation regime for foreign income does not apply to all Hong Kong companies. It applies only to companies that are members of multinational enterprise (MNE) groups. An “MNE group” is defined as a group of companies that includes at least one entity or permanent establishment located or established outside the jurisdiction of the group’s parent company. The size of the group’s assets or income level does not matter.
Foreign-sourced income subject to these new rules includes:
- Interest
- Dividends
- Income from the disposal of shares and other assets
- Income from intellectual property (IP)
These passive incomes, if received by an MNE group entity, will be treated as Hong Kong-sourced income and subject to profits tax unless specific conditions for tax exemption apply.
Conditions for Exempting Foreign-Sourced Income from Taxation in Hong Kong
To continue benefiting from the exemption of these foreign-sourced incomes from taxation in Hong Kong, companies must meet certain conditions. These conditions vary slightly depending on the type of income:
| Type of Income | Condition for Exemption |
|---|---|
| Interest income and income from disposal of non-IP assets | Meeting economic substance requirements in Hong Kong |
| Dividend income and income from disposal of equity interests | Meeting economic substance requirements in Hong Kong or satisfying participation exemption conditions |
| Income from intellectual property (IP) | Meeting the nexus requirement between IP income and related expenditure incurred |
Therefore, to benefit from tax exemption, it is important to understand these three types of conditions:
- Economic substance requirements
- Participation exemption conditions
- Nexus requirement
Economic Substance Requirement
Economic substance requirements differ depending on whether the company is a “pure equity-holding entity” (a company whose sole activity is holding and managing equity interests in other companies) or carries out other economic activities.
| Type of Company | Economic Substance Requirements |
|---|---|
| Company carrying out only pure equity-holding activities |
|
| Company not classified as a “pure equity-holding entity” |
|
It is important to note that the “adequacy” and “proportionality” of the criteria listed above, required to meet economic substance rules, depend on the company’s industry and other factors. These are assessed individually by the Inland Revenue Department (IRD).
Participation Exemption Conditions
If a company cannot meet economic substance requirements in Hong Kong, it may still qualify for tax exemption on certain types of income by meeting participation exemption conditions.
A qualifying participation exists if the company receiving the income:
- Is a Hong Kong tax resident or has a permanent establishment in Hong Kong; and
- Has held at least 5% of the shares in the company paying dividends (or whose shares are being disposed of) for at least 12 months immediately before receiving the income.
Exemption under participation conditions is subject to anti-avoidance rules. This includes a general anti-abuse rule targeting arrangements whose main purpose, or one of the main purposes, is obtaining a tax benefit.
Nexus Requirement for Intellectual Property (IP) Income
The nexus requirement is based on the OECD standard for countering harmful tax practices that lead to base erosion and profit shifting (the BEPS Action Plan).
This approach ensures that only income from qualifying IP assets is eligible for tax exemption. The exact amount of exempt income is calculated using a specific formula, reflecting the taxpayer’s actual contribution to creating the IP asset.
Financial Reporting and Audit for Hong Kong Companies
Hong Kong companies must maintain accounting records and prepare financial statements for each financial year.
Small private companies may prepare simplified financial statements according to the SME Financial Reporting Framework and Standard (SME FRF & FRS), issued by the Hong Kong Institute of Certified Public Accountants (HKICPA).
A company is considered “small” if it meets at least two of the following criteria in a financial year:
- Total annual revenue does not exceed HKD 100 million.
- Total assets do not exceed HKD 100 million.
- Total number of employees does not exceed 100.
Financial statements of Hong Kong companies must be audited by a local certified auditor.
Conclusion
Hong Kong’s tax system remains balanced, offering moderate tax obligations. The territorial principle of taxation allows companies operating outside Hong Kong to claim tax exemptions.
However, recent changes have been introduced for certain types of income earned by companies belonging to multinational groups. These changes align Hong Kong’s tax system more closely with international standards.
Hong Kong companies, with certain exceptions, must maintain accounting records, prepare financial statements, and undergo an annual audit.