Good to Know: Hong-Kong Territorial Tax System

Good to Know: Hong-Kong Territorial Tax System

Hong Kong has for many years been ranked by World Bank, Heritage Foundation, Wall Street and other institutions as one of the freest economies in the globe. This means that it has edged well ahead of other top economies including the United States, Singapore, Switzerland, and The UK. The index rating given by these institutions stresses on the simplified and highly efficient tax system. This means that doing business in Hong Kong is very easy. Hong Kong uses a territorial tax system that makes it easy to understand and implement at all levels. Here is a closer look at Hong-Kong territorial tax system and its key advantages.

The Hong-Kong territorial tax system principle  

Hong-Kong uses the territorial tax source principle of taxation that emphasizes only the profits sourced in Hong Kong are taxable. In a way, it will be essential to get an investment visa to do some business in Hong-Kong. If the profits are earned from another place, they are not subjected to taxation in Hong Kong. This principle is very clear though it becomes contentious in some situations. The IRD looks at the totality of facts including the flow of services/goods, papers, and flow of money to establish whether the profits were made outside its jurisdiction.

Under the territorial tax model, the highest tax rate is 16.5%. This means that people and businesses are allowed to keep the bulk of the profits they make in Hong Kong. The Hong-Kong territorial tax system model of tax application has three special benefits;

  1. Dividends, capital gains, and interests are not taxable.
  2. Any type of distribution effected by a Hong Kong LTD company to shareholders outside the jurisdiction is free of withholding tax.
  3. In 2006, Hong Kong abolished the estate duty.

Things that can make your company profits taxable

If you have a company operating form Hong Kong, the following factors will make the profits taxable in its jurisdictions.

  1. When the contracts of purchase are drawn in Hong Kong
  2. If the sale of the product, even when the contract is drawn elsewhere, is effected in Hong Kong.
  3. When you sell a product to a Hong Kong client.
  4. When the implementation of a sale contract or purchase does not involve traveling outside Hong Kong (this means that the transaction is done via phone, email, the internet, fact, or other electronic models).

Why Hong Kong is the best jurisdiction for international business  

As a business economy, Hong Kong looks for all ways and methods of attracting businesses. By having an attractive tax regime and administration supporting businesses to grow rapidly, no enterprise wants to be left behind in entering the Hong Kong market. Recently, the Hong Kong administration passed a resolution to waive income tax for companies with an annual turnover of less than $2 million. But this is not all. Under its Double Tax Agreements (DTAs), Hong Kong negotiates for lower taxes on dividends and royalties among other considerations for its companies.

The Hong-Kong territorial taxsystem is designed to make the jurisdiction more attractive and help to retain more businesses. It is no doubt that though the island lacks land for agriculture and minerals, its tax model has proven highly effective in netting more tax for progressive growth.  

Categories: Finance

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