Hong Kong (a special administrative region of China) is one of the most sought-after jurisdictions in East Asia, and many entrepreneurs choose to set up a company in Hong Kong when building an international business structure. Hong Kong companies, however, face fairly strict compliance obligations. The law requires corporate taxation, audited financial statements and various disclosure duties. These reporting requirements for Hong Kong companies are the key feature that sets the jurisdiction apart from offshore zones.
- Hong Kong companies must maintain detailed accounting records, retain them for 7 years, and prepare audited financial statements giving a true and fair view.
- Profits tax is territorial, with a two-tiered rate system and potential offshore profits exemption, but strict evidence is required to prove no Hong Kong business activity.
- Since 2023, MNE entities face profits tax on certain foreign passive income unless they meet economic substance, qualifying equity holding or nexus requirements.
Doing Business in Hong Kong: Key Features of the Jurisdiction
Before turning to specific obligations, it helps to set out the features of the jurisdiction that bear directly on the reporting and taxation of Hong Kong companies.
| Category | Description |
|---|---|
| Status of the jurisdiction | Hong Kong is not an offshore zone: it imposes corporate taxation, mandatory audit of financial statements and participates in international cooperation on tax matters. |
| Taxation | Taxes for companies in Hong Kong range from low to moderate; their types and rates are covered in the sections below. |
| Controlled foreign company (CFC) rules | None. |
| Exchange controls | None. |
| Economic substance | The substance test applies only for tax purposes — to check eligibility for preferential regimes and tax exemptions. |
| Tax treaties | Hong Kong has concluded more than 50 double taxation agreements, including with mainland China. It also takes part in the automatic exchange of financial account information (CRS): data on non-residents’ accounts is reported to participating countries. |
The most common legal form is the private company limited by shares; it is also possible to register public companies, partnerships, sole proprietorships, and branches or representative offices of foreign companies. Most Hong Kong companies must appoint a company secretary — usually a licensed local firm that handles dealings with the Companies Registry and the Inland Revenue Department and ensures the timely filing of documents.
General information about a company (its name and current status) is available from the Companies Registry, while details of directors, the secretary, the address and the capital structure can be obtained for an additional fee. Sensitive personal data, such as residential addresses and identity numbers, is hidden or shown only in part. Companies must keep a register of controlling persons (beneficial owners), which is not open to the public.
Main Types of Reporting for Hong Kong Companies
Setting up a company in Hong Kong brings an obligation to comply with local corporate and tax law, including:
- keeping company information up to date and filing annual returns with the Companies Registry;
- keeping accounting records and preparing, auditing and filing financial statements;
- filing tax returns.
Annual Return and Updating Company Information
Companies must file an Annual Return (form NAR1) with the Hong Kong Companies Registry. This is a corporate, non-financial return that contains details of:
- the address of the company’s registered office;
- the share capital (classes, number, and the amount of shares issued and paid up);
- the secretary, directors and members of the company;
- the address where corporate records are kept (if different from the registered office).
The return must be filed no later than 42 days after the date on which one year elapses from the company’s incorporation (or re-domiciliation), and annually thereafter.
Failure to file the Annual Return is an offence. The company and its responsible officers may face a penalty of up to HKD 50,000 (about USD 6,400) and, for a continuing offence, a further HKD 1,000 (about USD 130) for each day the default continues.
In addition to the Annual Return, the company must notify the Companies Registry of any change to its registered office address, any change of director or secretary, and any change to the particulars of a director or secretary. These notifications must be filed within 15 days of the date on which the change took place.
The company must also report changes to its share capital, with details of the classes and number of shares and the persons to whom they were allotted. This return is filed within one month of the date of allotment.
Accounting Records in Hong Kong
Hong Kong companies must keep accounting records. The accounting records must:
- show and explain all of the company’s transactions (recording all sums received and spent by the company with the relevant supporting detail);
- accurately disclose the company’s financial position and financial performance;
- reflect data on its assets and liabilities;
- enable the directors to prepare financial statements.
Accounting records may be kept at the company’s registered office or at another place the directors decide. If the records are kept outside Hong Kong, the statements prepared from them must be sent to Hong Kong and kept there.
The company must keep its accounting records and financial statements for 7 years after the end of the financial year to which the latest entry or statement relates.
Directors face significant penalties for failing to keep accounting records or for breaching the rules on retaining them. For example, a director who breaches the rules or time limits for keeping accounting records and statements faces a fine of HKD 300,000, and, where the director wilfully fails to take steps to secure compliance, also imprisonment for up to 12 months.
Financial Statements of Hong Kong Companies
The annual financial statements of a Hong Kong company must give a true and fair view of the company’s financial position at the end of its financial year and of its financial performance for the year. The company’s directors are responsible for preparing the financial statements.
A Hong Kong company’s financial year corresponds to its accounting reference period. The first accounting reference period begins on the date of incorporation and ends on the accounting reference date. The first accounting reference date is normally the last day of the month in which the first anniversary of incorporation falls. The next reference date falls one year later, and so on.
A company may change the end date of its financial year, so that it is no longer tied to the anniversary of incorporation. The end of the first financial year, however, cannot be later than 18 months from the date of incorporation.
Companies file audited financial statements with the Hong Kong Inland Revenue Department (IRD) together with the tax return. Financial statements are not filed with the Companies Registry (except by public companies).
Reporting by Small Hong Kong Companies
For companies that meet certain criteria, the law allows a simplified reporting regime. Such a company may prepare its financial statements under the SME Financial Reporting Framework and Financial Reporting Standard (SME FRF & FRS) issued by the Hong Kong Institute of Certified Public Accountants (HKICPA).
The simplified regime is available first of all to small private companies, as well as to holding companies of a group of small companies. To qualify as “small”, a company must satisfy at least two of the following conditions in the financial year:
| Measure | Threshold for qualifying as a small company |
|---|---|
| Total revenue | No more than HKD 100 million |
| Total assets | No more than HKD 100 million |
| Total number of employees | No more than 100 |
Audit of Financial Statements of Hong Kong Companies
The obligation to audit financial statements applies to all companies, including small companies and those preparing simplified statements. The financial statements for each financial year are subject to audit.
The audit must be carried out by a local (Hong Kong) audit firm. Only accounting or audit firms registered with the Hong Kong Institute of Certified Public Accountants (HKICPA), or practising accountants holding a valid certificate issued by that Institute, are entitled to provide audit services.
Audit Exemption for Dormant Companies
Only inactive, or “dormant”, companies are exempt from audit. These are companies that carry out no significant accounting transactions — that is, transactions that must be recorded in the accounting records. Significant transactions include any receipts, payments, purchases and sales of the company, other than the payment of government fees, fines, or for shares on the company’s formation.
To obtain dormant status formally, the company must pass a special resolution declaring that it is dormant and deliver it to the Companies Registry. The company then has dormant status for reporting and audit purposes from the date the Registry receives the resolution, or from a later date stated in it.
A dormant company is exempt from preparing and auditing financial statements, but it still has to notify corporate changes, pay the annual registration fee and file a tax return (if the IRD requests one).
Taxation of Profits of Hong Kong Companies
Besides profits tax, companies in Hong Kong may also be subject to withholding tax on certain payments, social insurance contributions, property (rental income) tax and stamp duty.
Hong Kong taxes profits from a trade, profession or business carried on in Hong Kong (income from Hong Kong sources).
Hong Kong applies a territorial principle of taxation. This means that the income of Hong Kong companies is taxed in Hong Kong only where it arises from sources within Hong Kong.
Profits tax rates. A two-tiered system of tax rates applies to profits arising from Hong Kong sources.
| Amount of profit | Tax rate |
|---|---|
| First HKD 2,000,000 (about USD 255,000) | 8.25% |
| Amount exceeding HKD 2,000,000 | 16.5% |
Expenses incurred in producing chargeable profits are generally deductible from the tax base. Losses may be carried forward to future periods.
Dividends received by a Hong Kong company from a foreign company are foreign-source income and are not taxed.
Dividends and interest paid by a Hong Kong company, to residents and non-residents of Hong Kong alike, are not subject to withholding tax.
No withholding tax arises on royalties paid to residents of Hong Kong. However, withholding tax must be deducted on royalties paid to a non-resident whose profits are not otherwise chargeable. The tax is withheld and paid to the IRD where the royalties are for the use of (or the right to use) intellectual property in Hong Kong, or where the royalties reduce the tax base of the paying company. Tax is charged on 30% of the gross royalties paid. The effective tax rate is therefore 2.475% (on amounts up to HKD 2 million) or 4.95% (on the excess).
Hong Kong does not levy VAT or any equivalent (sales tax, etc.).
Profits Tax Exemption in Hong Kong
Where all of a company’s income arises abroad (offshore profits) and no activity is carried on in Hong Kong, the company may claim an exemption from taxation in Hong Kong.
Whether income has a Hong Kong source is established by examining the company’s activity and where it is carried out. The general principle developed by the courts, which the Inland Revenue Department applies, is to determine what the taxpayer did to earn the profit in question and where the taxpayer did it.
Conditions for the Exemption in Hong Kong
The presence of activity in Hong Kong is the key factor in whether a company becomes liable to tax. “Activity” is interpreted broadly. In practice, to qualify for the exemption a company should meet the following criteria:
- the company has no fixed place of business in Hong Kong, such as an office, shop or workplace;
- the goods sold are not produced in Hong Kong;
- there are no employees working in Hong Kong;
- contracts are concluded and performed outside Hong Kong;
- there are no suppliers or counterparties located in Hong Kong;
- goods are transported between ports located outside Hong Kong.
How to Claim the Offshore Profits Exemption
The right to the exemption is not automatic or unconditional; it is claimed on application (an offshore claim). The claim is filed together with the tax return. Documentary evidence that no activity is carried on in Hong Kong may also be required.
The extent of the documents and further questions is at the Inland Revenue Department’s discretion. After an offshore claim is filed, the IRD is likely to request detailed information from the company, for example:
- the company’s organisational structure and details of its presence in Hong Kong and/or abroad (the location and size of any office, the number of employees, their names, positions, duties and salaries);
- a description of the company’s actions in earning the profit, naming the officer involved and the place where the transaction took place (contacting the buyer or supplier, setting the price, preparing and signing sale contracts, storing and delivering goods). This may include minutes of meetings, travel documents, correspondence and the like;
- how customers settle payments;
- copies of contracts with each counterparty, together with their names and addresses;
- invoices, bank statements and so on.
After a review, which can take a long time, the IRD issues a letter either confirming the right to exempt the foreign profits or concluding that a tax liability exists. Where the claim is approved, the company may be able to rely on the exemption for several years.
The company should be ready for regular IRD checks that the conditions for the exemption are still met. The need for, and frequency of, such checks is entirely at the IRD’s discretion. If a company does not make an offshore claim, all of its income will, by default, be taxable in Hong Kong regardless of source.
Taxation of Foreign Passive Income
Since 2023, the exemption of foreign profits has had an important exception. Under the 2023 changes to Hong Kong law, certain categories of a Hong Kong company’s passive income are treated as arising from Hong Kong sources and are subject to profits tax, even if they are received abroad.
The new rules apply not to all companies, but only to those that form part of a multinational enterprise group (an MNE entity). A “multinational group” is a group that includes at least one company or permanent establishment located or established outside the jurisdiction of the group’s parent company. The size of the group’s assets and the level of its income are irrelevant.
The income covered by the new rules includes:
- interest;
- dividends;
- gains from the disposal of equity interests and other assets;
- income from intellectual property (IP), including royalties.
Such passive income, when received by a member of a multinational group, is treated as arising from Hong Kong sources and is subject to profits tax, unless the conditions for an exemption are met.
Conditions for Exempting Foreign Passive Income
To keep these forms of income exempt from tax in Hong Kong, the company must meet conditions that differ depending on the type of income:
| Type of income | Condition for exemption |
|---|---|
| Interest income and gains from the disposal of non-IP assets | Meeting the economic substance requirements in Hong Kong |
| Dividend income and gains from the disposal of equity interests | Meeting the economic substance requirements, or satisfying the qualifying equity holding conditions |
| IP income | A proper connection (nexus) between the income from the IP asset and the expenditure incurred on it |
Three kinds of condition therefore matter: the economic substance requirements, the qualifying equity holding requirements, and the nexus requirement.
Economic Substance Requirement
The economic substance requirements differ depending on whether the company is a pure equity-holding entity — that is, one that only holds and manages equity interests in other companies — or carries on other economic activity.
| Type of company | Economic substance requirements |
|---|---|
| The company carries on holding activity only | complying with all statutory registration and filing requirements;carrying on the holding activity in Hong Kong;having adequate staff and premises for the holding activity. |
| The company is not a pure equity-holding entity | carrying on the relevant economic activities in Hong Kong;having an adequate number of qualified employees engaged in those activities in Hong Kong;incurring an adequate amount of expenditure on those activities in Hong Kong. |
The relevant economic activities mean making strategic decisions on the assets the company acquires, disposes of or holds, and bearing the principal risks associated with those assets.
Whether these measures are “adequate” depends on the company’s industry and other factors, and is assessed by the Inland Revenue Department on a case-by-case basis.
Qualifying Equity Holding Requirement
Where a company cannot meet the economic substance requirements in Hong Kong, the relevant income may still be exempt if the qualifying equity holding conditions are satisfied.
A qualifying equity holding arises where the company receiving the income:
- is a Hong Kong resident or has a permanent establishment in Hong Kong; and
- has held at least 5% of the equity interests in the company paying the dividend, or whose interests are being disposed of, for at least 12 months immediately before the income is received.
The exemption for a qualifying equity holding applies subject to anti-avoidance rules, including a general rule against arrangements whose main purpose is to obtain a tax benefit.
The Nexus Requirement
The nexus requirement is based on the OECD standard against harmful tax practices that lead to base erosion and tax avoidance (the BEPS Action Plan).
The aim of this approach is to tax only the income from qualifying IP assets. The amount of that income is determined using a specific formula that reflects the taxpayer’s actual contribution to creating the IP asset.
Tax Reporting by Hong Kong Companies
As a general rule, companies file the following with the Inland Revenue Department (IRD):
- the Profits Tax Return;
- audited financial statements;
- where applicable, a claim for the exemption of foreign profits.
The year of assessment in Hong Kong runs from 1 April to 31 March of the following year. The tax is computed on the company’s profit per its financial statements for the financial year ending within the relevant year of assessment.
As a general rule, the IRD issues the tax return to the company, usually on the first working day of April of the following year of assessment, and the company must file it no later than one month from the date the IRD issues it.
| Financial year ending: | Normal filing deadline / deadline for tax representatives |
|---|---|
| 1 April to 30 November | 2 May |
| 1 December to 31 December | 2 May / 15 August |
| 1 January to 31 March | 2 May / 15 November |
An extension of the filing deadline is possible only in exceptional circumstances, on a written application stating the reasons why the return cannot be filed on time. Late filing of tax returns leads to serious penalties.
How Profits Tax Is Paid in Hong Kong
Provisional tax is paid first, calculated on the figures for the previous period. It is paid before the tax return is filed and the final assessment is issued.
Once the final assessment for the period reported on is issued, the taxpayer pays the difference between the final assessment and the provisional tax already paid (the provisional tax is set off). If the provisional tax paid exceeds the final assessment, the difference reduces the provisional tax payable for the following year.
The payment date is stated in the tax demand note (usually between November of the year the return is filed and April of the following year).
Depending on the circumstances — in particular, the financial year-end date, the use of the offshore profits exemption, the level of IRD scrutiny and the time it takes to carry out its checks — the “tax calendar” can differ from one company to another.
Conclusion
Flexible tax rules that tie income to its territorial source, combined with strict reporting and disclosure requirements, make Hong Kong an excellent choice among non-offshore jurisdictions for structuring an international business.
At the same time, since 2023, members of multinational groups have been subject to additional rules on the taxation of certain passive income, bringing Hong Kong’s tax system closer to international standards.
To stay compliant and avoid penalties, it is advisable to prepare and file all forms of corporate, financial and tax reporting required of Hong Kong companies on time, working with local secretaries and auditors.
Tags: Hong Kong
