Persons Subject to Tax in Hong Kong
Persons, including corporations, partnerships, trustees and bodies of persons carrying on any trade, profession or business in Hong Kong, are subject to tax on all profits (excluding profits arising from the sale of capital assets). If a person sells his flat or any property as part of a profit-making scheme, it will be regarded as a business and he must pay tax on any profit made. The assessable profits (or adjusted loss) are the net profits, or loss–other than profits (or loss) arising from the sale of capital assets–for the basis period, arising in or derived from Hong Kong.
Source of Income
Income is considered sourced where the operation that generates it takes place. Thus all profits arising in or deriving from Hong Kong are taxable, except (1) offshore income from operations that are substantially conducted outside Hong Kong, (2) dividend receipts and (3) capital gains. In 1996 Hong Kong formally exempted overseas mutual funds, unit trusts and collective investment schemes from Hong Kong tax on profits from trading and interest, extending an exemption already enjoyed by domestic investment vehicles. Interest accruing to a corporation conducting business in Hong Kong is taxable unless the credit is made available to the borrower outside Hong Kong.
Income Tax for Special Industries
Special formulae apply to computing taxable profits for the airline, shipping and insurance businesses. For example, profits of life insurance companies are assumed to be 5% of the premiums received from Hong Kong, unless the insurance company makes the (irreversible) choice to be assessed based on actuarial reports. The Inland Revenue (Amendment) Bill approved in April 1998 granted a 50% profits tax concession for the offshore business of reinsurance companies.
Other Incomes Subject to Tax in Hong Kong
In addition to the above criteria, income from the following activities is subject to profits tax: (1) fees from the exhibition or use in Hong Kong of cinema, television, film or tape, or any sound recording; (2) sums received for the transfer of certain rights to receive income from property; (3) grants, subsidies or similar financial assistance connected with a business conducted in Hong Kong; (4) fees received for rental of movable property in Hong Kong; (5) Hong Kong-sourced profits from the sale of or on the redemption of a certificate of deposit or bill of exchange; and (6) royalties from the use of or right to use certain types of intellectual property in Hong Kong.
Foreign Sourced Income
Income claimed to have a foreign source remains a subject of considerable debate. There is confusion about the source of profit for trading firms known as “re-invoicing” companies, which take a passive role in executing transactions but are sometimes held liable for Hong Kong tax. Tax authorities consider income taxable if the Hong Kong company or branch makes either purchase or sales contracts for goods. But the High Court rejected that test in a 1996 case, CIR v Magna Industrial Company; it said instead that these trading firms needed to be examined on a case-by-case basis, leaving the issue unclear.
Tax on Banks and deposit-taking Companies
Banks and deposit-taking companies are taxed on interest income from offshore lending activities if the interest arises from conducting the business in Hong Kong without the substantial intervention of a branch located elsewhere.
Tax on non-resident’s Local Agent
A non-resident’s local agent in Hong Kong may be assessed for profits of the non-resident, whether or not the agent has the receipt of the profits. Resident consignees must furnish quarterly returns to the Inland Revenue Department showing the gross proceeds from sales on behalf of their non-resident consignors and pay a sum equal to 1% of such proceeds, or a lower agreed sum, usually 0.5%. When a non-resident conducts business with a resident that results in less than-expected ordinary profits, the business may be treated as conducted in Hong Kong by the non-resident through the resident as agent. If the accounts of a non-resident firm do not disclose the true profits of the firm’s branch in Hong Kong, the branch’s profits will be taken as a proportion of total profits equal to the proportion of the branch’s turnover to total turnover. Furthermore, if the true profits of a business conducted by a non-resident in Hong Kong cannot be readily ascertained, the profits may be computed as a reasonable percentage of turnover.
Tax on Partnerships
Partnerships are treated as taxable entities in Hong Kong, and shares distributed to partners are not taxable. Joint ventures are generally treated as a partnership by the Inland Revenue Department.
Expenses incurred while earning income are allowed as deductions. Deductible items include interest on borrowed funds that meets certain criteria, rent for buildings or land occupied, bad and doubtful debts incurred, depreciation (subject to certain limits), repairs to plant and premises, costs of implements used to produce taxable profits, fees to register trademarks or patents, costs to purchase patent or trademark rights, scientific research expenditures, payments for technical education (subject to certain rules), contributions to employee retirement schemes (limited to 15% of an employee’s compensation during the relevant tax period) and approved charitable donations (limited to 10% of assessable profits). The deduction for foreign withholding tax on interest income subject to Hong Kong profits tax was extended in 1997 to overseas companies operating a branch in Hong Kong.
Tax losses may be carried forward indefinitely. A corporation conducting more than one trade may use losses in one to offset profits in another. If a company participates in a partnership of fewer than 20 individuals that earns a tax loss, the company may deduct its share of the loss from its own taxable profits.
Income Tax Returns
Tax returns are due annually on March 31st (the end of Hong Kong’s tax year), reporting income in the company’s latest completed fiscal year. With the return, companies must pay a provisional profits tax at a 17.5% rate of the previous fiscal year’s profits. This payment is credited against the final profits tax, which is payable during the following fiscal year on assessment by the authorities. Any excess payment is applied to the provisional profits tax payable for the following year.
If the provisional tax charged is deemed excessive, an application may be made no later than 28 days before the due date or no later than 14 days after the date of the issue of the assessment, whichever is later, to have all or part of the tax collection held over.