Are you looking for some professional firms who can claim exemption of Hong Kong profits tax for your offshore business ? Or you are intending to register a Hong Kong company but now you want to search some information about the tax issues of Hong Kong ?
What is a profits tax ? Who is required to pay profits tax ? I am doing offshore business, do I need to pay profits tax ? I am doing Hong Kong business, but using offshore companies, do I need to pay tax ? All the questions, even more, you can find the answers from below.
Hong kong Profits tax Issues
Profit tax is governed under S.14 of Hong Kong Inland Revenue Ordinance. In its rule, it says “individuals, corporations, partnerships and all unincorporated business ventures carrying on a trade, professional or business in Hong Kong are subject to profits tax on profits which are generated from sources within the territory.”
Basically it lays down three conditions to charge tax:
- It charges only on profits not losses. If the company made loss, it is not required to pay tax, or if the tax had been paid, it will get refunded.
- It charges on individuals, corporations, partnerships and all unincorporated business ventures, it doesn’t mentions whether they are local companies or overseas companies; so under this rule, overseas companies will also be subject to profits tax if other conditions are also met;
- Profits of trade, profession or business are subject to profits tax; if income from property, or from employment, they are subject to other tax, at least not profits tax;
- Profits which are generated within the territory of Hong Kong are subject to Hong Kong profits tax; if the profits which generated outside the territory of Hong Kong, they are not subject to profits tax. It is a source issue.
It is the issues most overseas investors want to know whether my offshore business is subject to Hong Kong profits tax ? How to determine an offshore business ? If so, how can I claim ?
Are offshore profits exempt from Hong Kong profits tax ?
Now you know the answer, as least from the board principle. As Hong Kong tax system is using local tax concept, and in tax law, the profits tax only charges on profits if the profits are generated or arise in Hong Kong or are derived from Hong Kong. Therefore, offshore profits are not subject to Hong Kong profits tax.
Now you will meet some scenarios.
First, you have registered a Hong Kong company, and you do business in Hong Kong. Are you required to pay Hong Kong tax ? Yes, you are required to pay Hong Kong tax, as your sources are in Hong Kong.
Second, you have registered a Hong Kong company, and you do business outside Hong Kong such as you buy goods from China and sell to USA. Are you required to pay Hong Kong tax ? No, you are not required to pay Hong Kong tax, as your sources are outside Hong Kong.
Third, you have registered an overseas company, and you do business in Hong Kong. Are you required to pay Hong Kong tax ? Yes, you are required to pay Hong Kong tax, as your sources are in Hong Kong.
Fourth, you have registered an overseas company, and you do business outside Hong Kong. Are you required to pay Hong Kong tax ? No, you are not required to pay Hong Kong tax, as you sources are outside Hong Kong.
FINAL, you have not registered Hong Kong company, nor overseas company, and you do business in Hong Kong, are you required to pay Hong Kong tax ? Yes, you are required to pay Hong Kong tax, as your sources are in Hong Kong. You haven’t registered a company is another issue.
From the above scenarios, you will know whether your business is subject to Hong Kong tax or not ?
However, what if the following issues arise ?
You registered a Hong Kong company and you do business in Hong Kong, but the supporting services such as shipping, accounting, and administrative works are outside Hong Kong, even the payment settlements are made outside Hong Kong.
You registered a Hong Kong company, you do overseas trading business such as you buy from India and sell to UK. But you open a bank in Hong Kong, all the settlements are made through Hong Kong bank accounts, even the supporting services such as issuing invoices, accounting, and records keeping are done in Hong Kong.
In fact, the source issues are very complicated, so much work must refer back to cases and IRD guiding notes.
The leading cases to determine the source of profit are:
A) The Privy Council in CIR v Hang Seng Bank Ltd (1990) 1 HKRC 90-044 – in this case, the taxpayer carried out trading of investment products outside Hong Kong. However, the taxpayer carried on all business and made investment decisions in Hong Kong. The Privy Council said that it looks to see what the taxpayer had one to earn the profit. In this case, as the selling and buying investment products were carried out outside Hong Kong, the profits are offshore source and so are not subject to Hong Kong profits tax.
B) The Privy Council in CIR v HK-TVB International Ltd (1992) 1 HKRC 90-064- in this case, the taxpayer carried out major business in Hong Kong and sold the copyrights of Chinese firms outside Hong Kong. They operated wholly outside Hong Kong. They sent the representatives abroad to solicit business and negotiate the terms and sign up the contracts. However, the contracts were in Hong Kong, and the payments were settled in Hong Kong. The Privy Council said again that it must to see what were the operations which produced the profits and where those operations took place. The Privy Council emphasized the importance of considering the specific operations of the taxpayer which produced the relevant profits, rather than all of the operations of the taxpayer. As the provision of intellectual property rights was rendered outside Hong Kong, which are the profit-making activity, the profits are offshore source and so are not subject to Hong Kong profits tax.
C) Wardley Investment Services (Hong Kong) Ltd v CIR (1993) 1 HKRC 90-068 – the Court of Appeal emphasized again the importance of the profit-producing activities of the taxpayer, as opposed to considering overall operations of the business of the taxpayer, and applied the rulings of Hang Seng Bank Ltd and HK-TVB cases. The taxpayer was a Hong Kong investment adviser and carried out management of customers’ investment portfolios under management contracts. The management contracts did include employment of overseas stockbrokers. The huge commissions received from overseas brokers became a dispute issue of Hong Kong sources. At last, it ruled out at Hong Kong sources because it was the management contracts which generated income.
D) The High Court in CIR v Euro Tech (Far East) Limited (1995) 1 HKRC 90-074 – the taxpayer only proceed orders and collected and made payments, the business activities in Hong Kong are minimal. However, the Court determined it is Hong Kong source.
E) The Court of Appeal in CIR v Magna Industrial Co ltd (1997) HKRC 90-082 – in this case, it overruled Euro Tech. In this case, the networks of selling and buying activities were done outside Hong Kong, even if certain activities took place in Hong Kong such as invoicing, shipping, collecting payment, etc. they were ancillary and so not the true Hong Kong source.
In fact, the above cases are the major ones only, there are in fact numerous. This is always a dispute between Hong Kong IRD and the taxpayers. Therefore, Hong Kong IRD has issued some guidelines. It lays out six basic principles in Departmental Interpretation and Practice No 21: Locality of Profits:
a) The question of locality of profits is a hard, practical matter of fact. No universal rule will cover every case. Whether profits arise in or are derived form Hong Kong depends on the nature of the profits and the transactions giving rise to them;
b) The broad guiding principle is that one looks to see what the taxpayer had done to earn the profits in question and where he has done it. In other words, the proper approach is to ascertain what the operations were which produced the relevant profits and where those operations took place;
c) The distinction between Hong Kong profits and offshore profits is made by reference to gross profits arising from individual transactions. In other words, it determines from individual selling and buying activity;
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