Profits tax is charged on Hong Kong sourced income derived from a trade, business or profession carried on in Hong Kong. It applies to both corporate and individual taxpayers. The source of profits is generally determined by the location where the operations are performed which give rise to the profit.
The term "carrying on a trade or business in Hong Kong" is not specifically defined in the IRO. A company with a branch, management, other place of business or agency with general authority to conclude contracts in Hong Kong is considered a permanent establishment in Hong Kong and is treated as "carrying on business" in Hong Kong.
The profits tax rate since 1994/95 year of assessment is 16.5%. This tax rate applies to companies, branches of overseas companies, and corporate partners of a partnership. Individual partners are taxed at 15% on the share of partnership income.
Mutual fund corporations and authorized unit trusts are not subject to tax on most investment income.
There is no withholding tax on interest, dividends or service charges paid to companies outside Hong Kong.
A tax liability does arise in respect of certain royalties paid to non-residents, such as payments for the use of trademarks or intellectual property in Hong Kong. The tax is imposed on the payer of the royalty on behalf of the non resident. The effective tax rate is 1.65% in the royalties paid, or 16.5% if the asset was previously owned by a person carrying on business in Hong Kong.
An agent selling goods on consignment on behalf of a non resident is required to withhold tax from the proceeds, generally at a tax rate of 1% on the proceeds.
Non-resident companies trading in Hong Kong such as in the form of a branch, the profits is determined by the accounts prepared or by applying a fair percentage on the turnover of the company or by the ratio of its Hong Kong turnover to worldwide turnover on the worldwide profit.
Capital gains are not subject to tax. However, gains from the sale of trading assets are treated as ordinary income and subject to tax. No tax liability arises on the sale or disposal of capital assets. Determination of taxability is based on the relevant facts and circumstances.
Expenses are generally deductible to the extent they are incurred in the year of assessment in earning the taxable profits. Expenses which relate to both taxable and non-taxable income would be apportioned accordingly.
Deduction is not allowed for expenditure of a capital nature.
Depreciation allowances are granted on certain capital expenditures incurred. The depreciation rate varies depending on the nature of the capital expenditure. There are three types of capital expenditure ranking for depreciation allowances:
Plant and Machinery
Non-deductible expenses include domestic or private expenses, disbursements not expended for the purpose of producing taxable profits, expenditure of a capital nature, sums recoverable under insurance, rent or expenses relating to premises not used for producing taxable profits, and tax paid under the IRO, apart from Salaries Tax on employees' remuneration.
NET OPERATING LOSSES
Tax losses may be carried forward indefinitely to offset future taxable profits. However, losses cannot be used to offset profits of a parent, subsidiary or brother/sister company.
The right to carry forward tax losses is generally not affected by the change in ownership or nature of trade. However, tax losses may be disallowed if the change in ownership was for the sole or dominant purpose of utilizing the losses.
Profits tax returns are due one month after the date of issue. However, returns registered under the tax agent lodgment program are due according to a date set by the Inland Revenue Department usually not earlier than 5 months after the closing date of the accounts.
Consolidated returns are not permitted in Hong Kong.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
For further information contact Yvonne Chan on tel: +852 2852 0315, fax: +852 2541 2936, or e-mail directly to Yvonne.S.Chan@arthurandersen.com or enter a text search 'Arthur Andersen' and 'Business Monitor'.
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