It is always the policy of the Hong Kong government to maintain Hong Kong as a low tax jurisdiction with a rather simplified administration regime.
Hong Kong operates a territorial system of taxation whereby, for a person to be chargeable to Hong Kong profits tax, the following three conditions must be satisfied:
1. The person must carry on a business in Hong Kong;
2. The profits must be from such business; and
3. The profits must be arising in or derived from Hong Kong, i.e. having a source in Hong Kong.
Excluded from the charge to tax are profits from the sale of capital assets. The current rate of profits tax is 16.5%.
As a result of the above, the place of incorporation of a company does not have any impact on its chargeability to Hong Kong profits tax. This depends on whether the company is carrying on a business in Hong Kong and whether it has profits arising in or derived from Hong Kong from that business.
It is possible for a Hong Kong incorporated company to be carrying on a business but not be subject to Hong Kong profits tax because its profits are derived from outside Hong Kong e.g. a company earning income from services rendered wholly outside Hong Kong.
In this situation, the company may make an “offshore claim” when filing its tax return with the IRD. The factor that determines the locality of profits from gain on disposal of goods and commodities is generally the place where the contracts for purchase and sale are effected. “Effected” does not limit to the signing of the contract but also includes the negotiation, conclusion and signing of the contracts. Where the contracts of purchase and sale are effected in Hong Kong, the profits will be taxable in Hong Kong and vice versa.
In relation to the source of profits for a manufacturing business which involves a party in China, the profits of the sale of the goods concerned may be eligible for a 50% discounting concession subject to the satisfaction of the rules set out in DIPN No. 21.