Taxation of business in Hong Kong

Every company operating in Hong Kong is subject to profits tax on its locally sourced profits. The two-tiered profits tax regime taxes the first HKD 2 million of assessable profits at 8.25%, while profits above that threshold are taxed at 16.5%. This regime does not apply to companies that are part of a group where another entity in the group is already benefiting from the two-tiered system or if the company enjoys a concessionary tax rate for other reasons.

Branches and subsidiaries have similar tax positions, starting with the audited profit and loss statement adjusted for Hong Kong tax rules. A company must both carry on business in Hong Kong and earn profits sourced in Hong Kong to be subject to profits tax.

To determine the source of profits, the key principle is to assess the activities conducted to earn the profit and where these activities took place. Profits are taxable in Hong Kong if the profit-generating activities are conducted there, regardless of where the profits are received. Different tests apply for different types of income to determine their source.

Effective from January 1, 2023, under the refined FSIE regime, certain types of offshore income—interest, dividends, disposal gains from equity interests, and IP income—are deemed to be Hong Kong sourced and taxable if received in Hong Kong by a multinational enterprise (MNE) operating in Hong Kong, unless a relevant exception applies. From January 1, 2024, the scope expands to include disposal gains on other types of assets. Exceptions from this deeming provision include:

• Interest and non-IP disposal gains: Economic substance requirement.
• Dividends and equity interest disposal gains: Economic substance requirement or participation requirement.
• IP income and IP disposal gains: Nexus requirement.
• Disposal gains (both IP and non-IP): Intra-group transfer relief available from January 1, 2024.

For trading transactions, profits are primarily considered to arise where the taxpayer’s contracts of purchase and sale are “effected,” a term broadly interpreted by tax authorities to include all steps leading to the contracts’ existence.

Service income is generally deemed to arise where the income-generating activities are performed. If these activities occur outside Hong Kong, the income is typically not subject to Hong Kong profits tax.

Hong Kong does not tax accumulated earnings and profits, does not require dividends to be paid, and does not impose withholding taxes on dividends and interest payments. There is no capital gains tax, VAT, or sales tax. Certain foreign-sourced incomes, if received in Hong Kong by an MNE, are deemed Hong Kong sourced and taxable unless exceptions apply. Losses can be carried forward indefinitely, but there are no provisions for transferring tax losses between entities. Additionally, Hong Kong imposes salaries tax and property tax, which may affect companies doing business in the region.