Definitive Guide to Hong Kong Corporate Taxes in 2019

At Moola Financial Group we focus on helping borderless company entrepreneurs discover the best tax jurisdictions for their global offshore companies. Today we explore Hong Kong as a jurisdiction that meets the needs of many business looking for a home base for their company. Hong Kong has a stable government, a pro-business climate, low taxes and many tax incentive programs to help attract business of all sizes into the region. These are some of the reasons why entrepreneurs from Canada, countries around Europe, Australia, UK and the US open up companies in Hong Kong. 


Hong Kong taxes

Many entrepreneurs consider Hong Kong for their offshore company for an assortment of reasons. Hong Kong is an ideal jurisdiction for a wide array of businesses including Intellectual Property (IP) holding companies, import / export companies, real estate investment companies, asset holding companies, service centers, procurement companies or any company with strong ties to the digital economy that primarily sells products or services online. 

Hong Kong currently has a GDP of around $484 billion dollars (ranked at 43rd in the world). However, Hong Kong has one of the highest GDP per capita rankings in the world (17th) with a GDP per capita of $64,794. Hong Kong ins also ranked as the region with the highest level of economic freedom in the world by The Economic Freedom of the World Index.

It should be mentioned that Hong Kong isn’t a country. Hong Kong is a Special Administrative Region (SAR) of the People’s Republic of China (PRC). It’s a jurisdiction that is serious about attracting as much international business as possible into the region. A feature that a lot of start up entrepreneurs love about Hong Kong, is that is has a fairly low barrier to entry in terms of startup capital and business registration requirements, which makes it an ideal jurisdiction for many small and medium enterprises or (SMEs).

Similarly, as we’ll discuss in more detail soon, Hong Kong offers the operational infrastructure required to run active companies. Hong Kong provides much better small business operational infrastructure, compared to other offshore jurisdictions such as Belize, The British Virgin Islands, the Cayman Islands, Bermuda or Panama.

Hong Kong also has a very clean international reputation from business and banking standpoint, and it’s a very well respected jurisdiction internationally. Many countries burdened by massive amounts of national debt (although they often refer to Hong Kong as a tax haven), look up to Hong Kong because Hong Kong manages to maintain a budget surplus year after year and carries virtually no public debt. Hong Kong a region that has reputation for managing its money very well.

Many other governments are struggling under the burden of massive state debt. Hong Kong on the other hand has the opposite problem. This might seem slightly comedic to those from countries who struggle to balance their country’s budget and fight off national debt, but Hong Kong suffers from backlash of another sort. Hong Kong residents often complain when the budget surplus projections are higher than expected. Many criticize Hong Kong for poor planning when it generates more in revenue than it expects to, because many believe that if Hong Kong could properly predict its massive surpluses, it could better strategically plan for investment opportunities within Hong Kong, such as planning investments for hospitals or affordable housing.

Overall however, Hong Kong captures the imagination of many as a region that manages to succeed as a global business leader, focused on supporting SMEs, and doing so while working with a straightforward and fairly simple tax code, maintaining low taxes and even managing for years on end to generate a budget surplus.

Now let’s begin by talking about the pros and cons of a Hong Kong company registration.

Hong Kong corporate taxes

Benefits of Opening a Business in Hong Kong

Reputation: First and foremost, as we’ve mentioned, Hong Kong is a reputable international business jurisdiction. It tends to raise less suspicion than, for example, having your business registered in a tiny Caribbean island. If you ever need to justify your company’s existence with any local tax authority outside of Hong Kong, it’s much easier to substantiate your decision to move to Hong Kong than it is to substantiate your decision to move your company to a jurisdiction that has few benefits beyond tax benefit. .

Hong Kong offers access to the Asian markets, which are some of the fastest growing economies in the world. Hong Kong also grants entrepreneurs access to a world class talent pool, access to some of the best global payment technology, and Hong Kong offers tier one banking solutions. These jurisdictional strengths, can make It easier to defend your decision to move to Hong Kong. It’s much more challenging to defend your decision to register a company in a Caribbean island with a shallow talent pool, weak access to modern technology and an incredibly weak banking system.

Tax & Territorial taxation: In Hong Kong there are no capitals gains taxes, no withholding taxes on dividends or interest, no VAT or GST tax and no estate duty taxes.

Best of all, Hong Kong uses a territorial taxation system to tax companies. Profits that originate within Hong Kong are taxed (at the highest rate) at 16.5%, but profits that originate outside of Hong Kong are not taxed at all. The Inland Revenue Department of Hong Kong (IRD) states on their website that “Hong Kong adopts a territorial basis for taxing profits derived from a trade, profession, or business carried on in Hong Kong. Profits Tax is only charged on profits which arise in or are derived from Hong Kong. In simple terms this means that a person who carries on a business in Hong Kong but derives profits from another place is not required to pay tax in Hong Kong on those profits.” 

Therefore, although Hong Kong is not a zero tax region, companies are only taxed on profits that originate within Hong Kong. If you don’t sell great quantities of products or services within Hong Kong then you will generally find yourself with a very low amount of corporate tax owing (or no corporate taxes owning in some cases) at the end of the year. 

Efficient and fast: Company setup is fast and easy. Company creation generally takes less than 24 hours. 

Low barrier to entry:  There are minimal capital investment requirements ($1 HKD). 

Language: English is the official business language, meaning all of your business documents and bank statements will be in English.

Foreigners can own companies: You do not need to be a Hong Kong resident in order to have a company in Hong Kong.

One director: You only need a minimum of one director (that could be any nationality). 

One shareholder: You only need a minimum of one shareholder (that could be any nationality). 

Affordable: Affordable government business registration fee of around $320. 

Downsides of Opening a Business in Hong Kong

Now let’s discuss some of the major cons of setting up a business in Hong Kong.

Reporting and auditing: Unlike other popular offshore jurisdictions, you’ll be accountable for accurate and timely financial reporting. We don’t personally, see this as a downside, because this is part of the reason why Hong Kong has managed to maintain a Sterling reputation internationally as both a banking and business jurisdiction. The reporting requirements are not really any different from other developed nations. You need to keep track of invoices and receipts, and you’ll need to ensure you have well managed book keeping. 

High yearly fees: Another area where people face some friction with their Hong Kong company, is that although the government renewal fees are affordable, accounting and auditing fees can add up. The price is about $1600 – $1700 / year for your accounting and auditing requirements.

You’ll notice time and time again, this fee is not often very prominently posted (if at all) on any company registration site trying to sell you a cheap $99 Hong Kong registration. While business registration may be cheap, it’s a little bit more expensive to maintain a Hong Kong company after its first year, than it is to maintain an IBC in a smaller, less developed jurisdiction such as Belize for example.

That said, there is also a plus side to this. Onshore governments are increasingly looking at your offshore expenses to help to help validate offshore substance. Therefore, if you’re paying a local Hong Kong firm for your accounting needs, this can end up benefiting you because you’re helping to create economic substance within the jurisdiction.

Local secretary requirement: Similarly, to have a Hong Kong company you need to have a local secretary. most registration companies will provide this for you at a cost of around $225 / year.

Singapore company registration

Territorial System of Taxation & Foreign Earned Income

A Territorial tax system is a tax system that doesn’t tax foreign earned income. Hong Kong isn’t unique in its decision to adopt a territorial taxation system. Other countries such as the British Virgin Islands, Belize, Costa Rica, Georgia, Malaysia, Panama and many other countries have adopted this taxation system. 

Territorial taxation is a tax concept that is treated differently in different jurisdictions. Every country has different rules in determining the eligibility of a tax exemption for foreign earned income. Hong Kong will analyze income from different industries in different ways. For example, they will look at income earned from service companies differently than they will look at income earned from manufacturing companies. The Inland Revenue Department (IRD) has created an easy to understand guide on determining the eligibility for tax exemptions on international profits here

Corporate Tax Rate & Two Tiered Tax System

Previously Hong Kong had a sing-tier taxation system. However, in The Inland Revenue Department (IRD) amended their tax code (Amendment) (No. 3) Ordinance 2018, which was enacted on March 29th, 2018. This tax amendment provides additional tax incentives for Small to Medium Sized Enterprises (SMEs). This change lowers the corporate tax rate on the first $2 million (roughly $250,000 USD) earned locally by the corporation from 16.5% to 8.25%.

The Hong Kong government enacted this tax change to help attract more SMEs to the region. This tax change allows SMEs to reinvest tax savings back into their companies to improve their global competitiveness. SMEs can do this by reinvesting money into hardware, software, IP investments, R&D, employee training and product development. Companies can also use the tax savings and invest into company growth by providing more employment opportunities. 

A two tiered tax system also allows Hong Kong to better compete with other wealthy jurisdictions such as Singapore, who offer similar tax incentives to help attract SMEs to the region. 

Operations 

One of the most important, yet overlooked, features of Hong Kong is its ability to facilitate day to day business operations. Many low or no tax regions are simply incompatible with the day to day operational needs of most global entrepreneurs. For example, many low tax jurisdictions don’t have banking systems that integrate with popular merchant accounts and payment aggregators such as Stripe, BrainTree, PayPal or Authorize.net. Many global entrepreneurs are highly dependent on access to online payment technology. Hong Kong (and Singapore for that matter) are compatible with many popular online payment processors. This means entrepreneurs don’t need to worry about finding alternative payment methods. 

Similarly, world class banking gives you access to online banking and globally accepted credit cards and debit cards. We cover this topic in much greater detail in our 6 hour offshore tax planning course

Hong Kong For Offshore / International Company?

Hong Kong is one of the best offshore jurisdictions from a corporate tax savings standpoint. A low corporate tax rate, a favorable two tier taxation system, a stable government, an open economy, low levels of corruption, a respected legal system and a thriving economy, help Hong Kong stand out as a winning choice for those looking for a reputable jurisdiction for their offshore company.

If you’d like to learn more about international business model optimization and corporate tax planning, then consider enrolling in our comprehensive 6 hour offshore tax planning course.

 

Access Our FREE Quick Start Offshore Tax Planning & Training

(*Learn how to dramatically reduce your corporate taxes by using the various restructuring blueprints that we’ll provide you in our FREE offshore tax planning and training mini-course.)

Access Our FREE Quick Start Offshore Tax Planning & Training

(*Learn how to dramatically reduce your corporate taxes by using the various restructuring blueprints that we’ll provide you in our FREE offshore tax planning and training mini-course.)

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