Among all tax havens, Hong Kong has long been considered a premier offshore destination for companies looking to minimize their tax liabilities.
However, with recent global tax reforms and the introduction of anti-abuse measures, such as the Foreign-Sourced Income Exemption (FSIE) rules, businesses must carefully evaluate their tax strategies to maintain low taxation here.
Although Hong Kong remains attractive due to its territorial tax system, holding companies and certain businesses may face challenges with newer regulations. This article covers how companies can benefit from Hong Kong’s tax system with expert guidance from TaxMove.
Hong Kong’s Territorial Tax System
Hong Kong operates on a territorial tax system, meaning that taxes are only levied on income sourced within the country.
Income generated from foreign sources is typically exempt from taxes, making Hong Kong a prime location for businesses with offshore activities. However, Hong Kong, unlike other territorial tax regimes such as Panama or Costa Rica, when a taxpayer conducts a trade, profession, or business in Hong Kong, taxes are applied to profits that arise in or are derived from that business within Hong Kong.
Companies that derive their revenue from international operations can often enjoy zero taxes on their profits if those profits are not brought into Hong Kong and no trade, profession, or business is conducted there.
Key Corporate Tax Rates in Hong Kong
For companies operating within Hong Kong, the corporate income tax rate is among the lowest globally, standing at 16.5% for profits sourced in Hong Kong.
For small and medium enterprises, there is an even more attractive rate of 8.25% on the first HKD 2 million (circa USD 256,000) in profits.
The absence of VAT, withholding taxes on dividends, and capital gains taxes further contributes to Hong Kong’s reputation as a tax-friendly jurisdiction.
New Regulations and FSIE Rules: What Companies Should Know
Starting January 1, 2023, Foreign-Sourced Income Exemption (FSIE) rules were implemented to prevent double non-taxation.
In this regard, foreign-sourced passive income including interest, dividends, capital gains and royalties will be subject to profits tax in Hong Kong unless one of the below exemptions is applicable.
These rules even apply if the income is not sourced within Hong Kong, provided it is received by a Hong Kong entity that is part of a multinational group or by the Hong Kong permanent establishment of a multinational enterprise. This update ensures compliance with Hong Kong’s territorial tax system while addressing tax avoidance.
The exemptions are the following:
Economic substance requirement: For interest, dividends, and disposal gains in Hong Kong, the income must be linked to identifiable operations conducted within the region. Entities, excluding pure equity holding entities, must demonstrate they have sufficient resources, assets, and expenditures in Hong Kong that align with the income generated.
Participation requirement: For dividends and disposal gains, exemptions apply if the MNE entity has owned at least 5% of a company’s equity for a continuous 12-month period before receiving the dividend or gain. Full exemption is only granted if the profits from the underlying operations that funded the dividend or gain were taxed in another jurisdiction at a minimum rate of 15%, or partially taxed at this rate in progressive tax systems.
The nexus requirement: It applies to royalties related to qualifying intellectual properties, such as patents, patent applications, and software copyrights. Exemptions cover the portion of royalties tied to research and development (R&D) expenses incurred by the MNE entity. In some cases, R&D costs outsourced to third parties for developing these intellectual properties may also qualify for the exemption, promoting innovation while ensuring compliance with tax regulations.
In light of the above, it is worth noting that pure holding companies are generally not taxed, even with these FSIE rules. This makes Hong Kong an excellent location for establishing a holding company for international investments and operations.
Double Tax Treaties and Anti-Avoidance Rules
Hong Kong has entered into Double Tax Treaties (DTTs) with over 40 jurisdictions.
These agreements help businesses avoid being taxed twice on the same income in two different countries.
While Hong Kong lacks Controlled Foreign Corporation (CFC) and exit tax regulations commonly found in other countries, companies must still comply with global tax regulations that prevent tax avoidance and evasion.
Why Establish a Company in Hong Kong?
Establishing a company in Hong Kong provides several advantages:
Free-Tax Benefits: The territorial tax system allows businesses to conduct global operations without being subject to taxes on offshore income.
Business-Friendly Environment: Hong Kong boasts a highly efficient regulatory framework, making it easy to set up and run a company with minimal administrative burdens.
Strategic Location: Located in the heart of Asia, Hong Kong provides businesses access to one of the world’s most dynamic economic regions, allowing companies to expand their operations quickly.
Low Taxation: Companies benefit from Hong Kong’s low tax rates, minimal capital gains taxes, and no withholding tax on dividends, which is especially advantageous for multinational corporations.
Tax Haven Status: Hong Kong is often perceived as a tax haven due to its favorable tax policies, making it an attractive destination for businesses looking to optimize their tax strategy.
Tax Residency: Establishing tax residency in Hong Kong is relatively straightforward, making it easier for businesses to benefit from the country’s territorial tax system.
Types of Companies that Benefit Most
International Trading Companies: Since Hong Kong only taxes profits derived from within the country, companies engaged in cross-border trading can enjoy zero taxes on profits earned abroad.
Service Providers: Companies offering consulting, IT, and professional services can benefit from the low-tax regime while maintaining global operations.
Holding Companies: As mentioned earlier, pure holding companies enjoy significant tax benefits in Hong Kong, even with the new FSIE rules in place.
Startups and SMEs: Smaller businesses benefit from the reduced tax rate of 8.25% on their first HKD 2 million (circa USD 256,000) of profits, which encourages entrepreneurship and growth.
Visa and Passport Options for Foreign Entrepreneurs
Foreign entrepreneurs looking to establish companies in Hong Kong also benefit from its friendly visa policies. The Entrepreneur Visa allows business owners to reside in Hong Kong and manage their companies.
While Hong Kong is not known for offering citizenship, individuals can obtain a passport through other residency programs after maintaining their business presence in the region for several years.
Taxes For Individuals In Hong Kong
Personal Income Tax in Hong Kong is also based on the territorial tax system meaning that only income generated within the region is taxed.
In Hong Kong, there is no Value Added Tax (VAT), Capital Gains Tax, Dividend Tax, Wealth Tax, Gift or Inheritance Tax, Exit Tax, or Controlled Foreign Corporation (CFC) rules.
Additionally, personal income tax (for income generated within the country) operates on a progressive system with low rates, ranging from 2% to 17%.
Is Hong Kong Losing Its Tax Appeal?
While Hong Kong’s tax system remains attractive, recent changes to global tax policies have made other countries, like the UAE, Malta, Cyprus, and Panama, more appealing to businesses looking for tax efficiency. These jurisdictions have implemented favorable corporate tax policies and provide tax incentives that rival Hong Kong’s offerings.
The introduction of FSIE rules in Hong Kong is part of a broader effort to align with global tax standards, but it also means businesses need to be more cautious about tax planning. As more countries implement anti-avoidance measures, businesses may consider alternative locations with less stringent regulations.
How Can We Help You?
To deal with the complexities of Hong Kong’s tax system requires expert guidance. At TaxMove, we help companies establish a strong presence in Hong Kong while optimizing their tax strategy.
Our team of tax specialists can assist with company formation, tax planning, and compliance, ensuring that you fully benefit from Hong Kong’s territorial tax system.
At TaxMove, we provide custom solutions to help your business succeed in one of the world’s most dynamic tax environments.
Submit the form to get tailored advice from our experts
What taxes does a company pay in Hong Kong?
Companies in Hong Kong are taxed only on income derived from within the country. Foreign-sourced income is typically exempt, and there is no VAT, withholding tax on dividends, or capital gains tax.
What are the key corporate tax rates in Hong Kong?
What is the cost of a company in Hong Kong?
Setting up a business in Hong Kong typically involves costs ranging from €2,000 to €3,500.
For annual maintenance, expenses generally fall between €1,500 and €3,000. This covers various administrative fees, accounting services, necessary audits, and license renewal costs.
How does the territorial tax system work in Hong Kong?
Hong Kong’s territorial tax system taxes only income sourced within the region. Foreign income is generally exempt from taxes if it is not brought into Hong Kong or if no trade or business is conducted there.
What do the FSIE rules entail in Hong Kong?
The Foreign-Sourced Income Exemption (FSIE) rules, effective from January 1, 2023, require that foreign-sourced passive income such as interest, dividends, capital gains, and royalties be subject to tax in Hong Kong unless specific exemptions are met. These rules aim to prevent double non-taxation and ensure compliance with global tax standards.
