Hong Kong legal and accounting and tax considerations in 2022
Hong Kong is a law-tax jurisdiction with liberal laws. Many of our Clients appoint Healy Consultants Group PLC as their accounting and tax representative in Hong Kong to assist with i) communicating with the Inland Revenue Department (HKIRD) ii) completing financial statements and corporate tax returns and iii) supervising independent auditors. Find below more specific information about Hong Kong’s accounting and tax obligations.
- Resident Hong Kong companies are subject to a corporate income tax rate of 16.5%. Resident companies are those which are incorporated or managed from Hong Kong. They are taxed only on net profits arising from sales within Hong Kong.
- Hong Kong companies generally benefit from i) exemption on withholding taxes ii) extendable tax filing deadlines and iii) straightforward accounting and tax procedures, mainly because of IFRS standardisation in the country.
- Since 2018, the first US$50,000 of company income is subject to a reduced corporate tax rate of 2%. A two-tiered profits tax regime applies as follows:
Income brackets* Tax rates Companies Up to HK$2 million (US$258,000) 8.25% Over HK$2 million (US$258,000) 16.5% Unincorporated Businesses Up to HK$2 million (US$258,000) 7.5% Over HK$2 million (US$258,000) 15%
The income bracket conversion from HK$ to US$ is accurate as on the date of the last update in May 2021.
- If properly structured, non-resident Hong Kong companies are legally exempt from Hong Kong corporate income tax provided the business has i) no active director nor staff in Hong Kong ii) no Hong Kong customers or investors iii) no Hong Kong shareholders or UBOs and iv) no income derived or remitted to Hong Kong. Hong Kong’s tax system is territory-based. Foreign-sourced income is outside the scope of Hong Kong profits tax.
- However, as a precautionary measure, the authorities might send out a notice to some companies if they are not satisfied with their tax reporting. This usually happens when the Hong Kong IRD wants to verify a company’s claim of not having any business activities in Hong Kong.
- Due to the above, in 2021, the European Union announced that Hong Kong will be included in their watchlist on tax co-operation. The issue is that businesses with no substance in Hong Kong are not subject to tax on certain offshore income, and this may lead to double non-taxation in certain situations.
- Generally, investment income and capital gains are not subject to tax in Hong Kong. However, income from property (land and buildings) located in Hong Kong is subject to property tax.
- Stamp duty on the transfer of shares in Hong Kong is 0.2% of their value, which is shared equally between the two parties involved. Property tax is levied at a fixed 15% on the value of the property.
- Assignments of residential immovable property are subject to a flat rate of stamp duty at 15% of the consideration or market value of the property (whichever is higher). The tax imposed on rental income of owners of land and buildings in Hong Kong is 15% on the assessable value of the rent and an allowance for repairs and outgoings equal to 20% of the rental income, after deducting rates paid by the owner.
- Hong Kong does not levy any import or export duties. Excise duty is levied on hydrocarbon oils, spirits, tobacco, cigarettes, and methyl alcohol.
- There is no Value Added Tax, GST or any other sales tax in Hong Kong.
- There is no taxation on dividends in Hong Kong.
- Hong Kong does not impose profits tax on the sale of capital assets.
- There are no inheritance and gift taxes in Hong Kong.
- Personal income tax is also only applicable for income arising in or derived from Hong Kong. There are 4 different brackets for tax rates, as shown in the table below:
Net chargeable income Rate Tax First HK$50,000 (US$6,450) 2% HK$1,000 (US$130) Next HK$50,000 (US$6,450) 6% HK$3,000 (US$385) HK$100,000 (US$12,870) HK$4,000 (US$515) Next HK$50,000 (US$6,450) 10% HK$5,000 (US$645) HK$150,000 (US$19,300) HK$9,000(US$1,160) Next HK$50,000 (US$6,450) 14% HK$7,000 (US$900) HK$200,000 (USD25,750) HK$16,000 (US$2,060) Remainder 17%
The income bracket conversion from HK$ to US$ is accurate as on the date of the last update in May 2021.
- A Hong Kong company should submit its annual return in Form NAR1 to the Companies Registry for registration within 42 days of the anniversary date provided by the Companies Registry. Example: If the anniversary date is 05-12-2021, then the company should file annual return on or before 16.01.2022.
- Penalties for late filing of tax returns
If annual return is submitted HK$ More than 42 days after but within 3 months after the company's return date HK$870 More than 3 months after but within 6 months after the company's return date HK$1,740 More than 6 months after but within 9 months after the company's return date HK$2,610 More than 9 months after the company's return date HK$3,480
Profit tax returns filing
- Annual corporate income tax returns must be filed with Inland Revenue Department on 1 April every year. There is a risk of penalties if the deadline is missed.Profits Tax Return
Normal Issue Date For accounting year end between Normal filing date for unrepresented cases Due date for tax payment First working day in April of the following year of assessment
- 1 April - 30 Nov
- 1 Dec - 31 Dec
- 1 Jan - 31 March
- 2 May
- 2 May - 15 Aug
- 2 May – 15 Nov
As stipulated in the notice of assessment, generally between November of the year in which the returns are issued to April of the following year
- As per Companies Ordinance (section 405), all Hong Kong companies are required to have their financial statements audited and submitted to the government annually. Accounting records and books must be maintained reflecting the accurate solvency of the company. Our Accounting and Tax team can assist our Clients to complete their annual accounting, tax obligations and annual compliance requirements.
- The above requirements do not apply to a dormant company. A dormant company ceases to be dormant if i) a special resolution declaring that the company intends to enter into an accounting transaction is delivered to the Hong Kong Registrar of Companies for registration or ii) there is an accounting transaction in relation to the company.
- Choosing Financial Year End (FYE) for a Hong Kong company: business owners are free to choose FYE date. The most common date is 31 December. Other choices are 31 March, 30 June, and 30 September.
- Company’s Profit tax return due dates: a Hong Kong company’s annual profit tax return due date will be determined by company’s FYE. A company will receive its first Profit Tax Return (PTR) from the IRD 18 months after incorporation. The company is required to file within three months from the form being issued.
- Consequences of late filing: The court may impose a fine up to HK$10,000 and a fine of three times the amount of tax undercharged.
Salaries tax return filingSalaries Tax Return
Normal Issue Date Normal Filing Date for unrepresented/ represented cases Due date for tax payment First working day in May of the following year assessment 2 June/ 2 July (1 July is Hong Kong public holiday) As stipulated on the notice of assessment, generally between January and April
of the year following the year in which the return is issued.
Property tax return filingProperty Tax Return
Normal Issue Date Normal Filing Date Due date for tax payment First working day in April of the following year assessment 2 May As stipulated on the notice of assessment, generally on or after
November of the year in which the return is issued.
Employer’s return of remuneration and pensionsEmployer's return of remuneration and pensions
Normal Issue Date Normal Filing Date First working day in April of the following year assessment 2 May
- Annual corporate income tax returns must be filed with Inland Revenue Department on 1 April every year. There is a risk of penalties if the deadline is missed.
- Active Hong Kong companies are required to prepare an audited financial statement.
- The financial statement must give a true and fair view of the financial position and financial performance of the company, unless it falls under reporting exemption.
- The above does not apply to dormant entities.
- An entity will cease to be dormant if an accounting transaction occurs in relation to the company and a special resolution is delivered to the Company Registrar declaring that the company intends to become active by entering into an accounting transaction.
Government tax auditStarting from 2021,it is more common for profitable Hong Kong offshore companies to suffer a tax audit from the Hong Kong IRD. As always, our In-house Accounting and Tax Department assists our multi-national Clients’ to timely and accurately complete this statutory audit; the entity remaining as legally tax exempt.
Miscellaneous tax information
- Unlike many jurisdictions, business losses can be carried forward indefinitely in Hong Kong. Losses cannot be carried back.
- A Hong Kong business benefits from the city’s 43 DTAs, which provide double taxation relief when dealing with countries like Germany, Singapore, UK, USA, etc.
- In compliance with the OECD’s Inclusive Framework against BEPS, all Hong Kong registered entities and tax schemes are subject to automatic exchange of financial information from January 1, 2020.
- In 2019 Hong Kong signed the 5th protocol for the avoidance of double taxation with China. This provides all qualified HK and China teachers and researchers relief from paying of their income taxes if they are employed by a qualified education institution in one jurisdiction and engaging in teaching or research activities in the other jurisdiction. This is in respect of the remuneration derived from the above activities for a period of three years.
- Hong Kong does not impose controls on foreign exchange. There are no restrictions on foreign investments. Foreign investors can invest into, or repatriate profits and dividends derived from direct investment.
- Our in-house accounting and legal experts can assist our Clients to clarify their annual reporting obligations so that they can comply with all the personal and corporate tax obligations of their country of residence.
A Hong Kong Company Accounting and Tax Obligations in 2021
Our multi-national Client’s Hong Kong LLC was incorporated in Hong Kong in 2016. The principal activities of the company are engaged in food provision and logistic support services to the US government. The main Hong Kong LLC services include tailored solutions for a) food and water provision, b) hotel accommodation and c) general logistic support.
During 2021, Healy Consultants Group PLC in-house Accounting and Tax Department was required to timely accurately and completely discharge our Client’s annual legal, accounting and tax obligations.
Accounting and Tax Obligations
- Once we received the retainer fee payment from our Client, we sent a detailed email including an overview of the project plan and requesting for the documents required to complete the accounting and tax obligations;
- After the Client supply us all the required documents such as trial balance, bank statements and sales invoices during the accounting period, Healy Consultants Group PLC in-house Accounting and Tax Department prepared draft financial statements for our Client review and approval. Immediately thereafter, we submitted the same for independent statutory annual audit;
- In the meantime, Healy Consultants accounting team will complete the i) renewal of Business Registration Certificate and ii) annual return filing for the financial year end;
- Healy Consultants accounting team obtained Client’s approval and signature on the audited financial statements;
- Healy Consultants accounting team completed the Profit Tax Return filing once IRD Hong Kong issue the PTR form for the year of assessment.
- Once the above was completed, Healy Consultants accounting team sent a summary of obligation to the Client, attached with i) Signed audit report, ii) Annual return form and iii) Tax return form for their acknowledgment;
- Simultaneously, we asked our Client for an online professional reference.
Hong Kong has the reputation of being fully compliant with Financial Action Task Force’s cause to combat for anti-money laundering and counter-terrorist financing regime. Thereby, ranking as the 1st jurisdiction in the APAC region to achieve an overall compliant result.
- As of 2018, a Hong Kong business is required to have at least one director who is a natural person. A corporate director can no longer be the sole director of a company. If required, Healy Consultants Group PLC will be pleased to provide your firm with a professional nominee director;
- All Hong Kong companies are required to have a local registered office and a resident company secretary. Most of our Clients request Healy Consultants Group PLC to provide these services for their Hong Kong companies;
- After company incorporation, company information, such as capital structure and director/shareholder details are publicly available through the Companies Registry. This means less privacy for shareholders but increases the transparency of doing business in the city.
- Recruitment of foreign employees requires the employer to justify that the locals have not been denied the work opportunity. Furthermore, the foreign employee is expected to prove that he/she possesses the credentials relevant to the position;
- Residents of mainland China, Taiwan and Macau will require additional documents when applying for an employment visa, such as copies of identity cards and copies of the applicant’s household registration;
- When employing local or foreign workers, employers must comply with the Employment (Amendment) (No.2) Ordinance 2018. These laws resemble the English system of labor laws, in terms of employer responsibility;
- With effect from 1 May 2017, the Statutory Minimum Wage rate was raised from $32.5 per hour to $34.5 per hour;
- All employees must contribute to their employee’s social security fund. The contributions are divided equally among employees earning above US$916 (5%) and employers (5%).
Licensing in Hong Kong
- All Hong Kong companies must apply for the business license corresponding to their core activity, during the month following incorporation;
- Details of all the necessary licenses, and the application procedures are listed on the Trade and Industry Department’s website.
- Every year, our Client will face the following recurring costs for their active companies: i) business registration renewal ii) annual return filing and iii) audited financial statements;
- Our renewal team also provides our Clients with company de-registration service in Hong Kong. Please note that the process takes a minimum of 6 months.