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Ernst & Young Tax Services Limited +852 2846-9888
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Principal Tax Contacts
Nonfinancial Services
Fax: +852 2868-4432 (Tax)
Wilson Cheng, +852 2846-9066, +852 2629-3195 Tax Leader, Hong Kong
Email: wilson.cheng@hk.ey.com and Macau
Financial Services
Paul Ho
+852 2849-9564
Email: paul.ho@hk.ey.com
International Tax and Transaction Services – International Corporate Tax Advisory
Financial Services
Stuart Cioccarelli
Cindy Li
Sophie Lindsay
Nonfinancial Services
Ivan Chan
Carol Liu
+852 2675-2896
Email: stuart.cioccarelli@hk.ey.com
+852 2629-3608
Email: cindy.jy.li@hk.ey.com
+852 3189-4589
Email: sophie.lindsay@hk.ey.com
+852 2629-3828
Email: ivan.chan@hk.ey.com
+852 2629-3788
Email: carol.liu@hk.ey.com
Jo An Yee, International Tax and +852 2846-9710 Transaction Services Leader,
Email: jo-an.yee@hk.ey.com Hong Kong; Tax Technology Sector Leader, APAC
International Tax and Transaction Services – Transaction Tax Advisory
Nonfinancial Services
Jane Hui
+852 2629-3836
Email: jane.hui@hk.ey.com
International Tax and Transaction Services – Global Tax Desk Network
Jeremy F. Litton, United States
+852 3471-2783 and Head of Global Tax Desk
Email: jeremy.litton@hk.ey.com Network, APAC
Lilian L. Liu, United States
+852 2629-3896
Email: lilian.l.liu@hk.ey.com
Helen L. Rice, Global Incentives, +852 2629-1910
Innovation and Location Services
Email: helen.l.rice@hk.ey.com (GILS) Co-Leader, APAC
Bas Sijmons, Netherlands
Patricio Andres Velasco, LATAM
+852 2846-9704
Email: bas.sijmons1@hk.ey.com
+852 2232-6594
Email: patricio.a.velasco@hk.ey.com
International Tax and Transaction Services – Operating Model Effectiveness
Shubhendu Misra
Edvard Rinck
+852 2232-6578
Email: shubhendu.misra@hk.ey.com
+852 2675-2834
Email: edvard.rinck@hk.ey.com
International Tax and Transaction Services – Transfer Pricing
Financial Services
Ka Lok Chu
Justin Kyte
Nonfinancial Services
Sangeeth Aiyappa
Martin Richter
Kenny Wei
Business Tax Services
Financial Services
Paul Ho
Nonfinancial Services
Wilson Cheng
Sam Fan
Tracy Ho
Ada Ma
Karina Wong
Tax Controversy
Wilson Cheng
Tax Technology and Transformation
Agnes Fok
Albert Lee, Tax
Technology and Transformation,
Global and APAC Leader
Robert Hardesty
Global Compliance and Reporting
Financial Services
Camelia Ho
Ming Lam
Sunny Liu
Helen Mok
Michael Stenske
+852 2629-3044
Email: ka.lok.chu@hk.ey.com
+852 2629-3880
Email: justin.kyte@hk.ey.com
+852 2629-3989
Email: sangeeth.aiyappa@hk.ey.com
+852 2629-3938
Email: martin.richter@hk.ey.com
+852 2629-3941
Email: kenny.wei@hk.ey.com
+852 2849-9564
Email: paul.ho@hk.ey.com
+852 2846-9066
Email: wilson.cheng@hk.ey.com
+852 2849-9278
Email: sam.fan@hk.ey.com
+852 2846-9065
Email: tracy.ho@hk.ey.com
+852 2849-9391
Email: ada.ma@hk.ey.com
+852 2849-9175
Email: karina.wong@hk.ey.com
+852 2846-9066
Email: wilson.cheng@hk.ey.com
+852 2629-3709
Email: agnes.fok@hk.ey.com
+852 2629-3318
Email: albert.lee@hk.ey.com
+852 2629-3291
Email: robert.hardesty@hk.ey.com
+852 2849-9150
Email: camelia.ho@hk.ey.com
+852 2849-9265
Email: ming.lam@hk.ey.com
+852 2846-9883
Email: sunny.liu@hk.ey.com
+852 2849-9279
Email: helen.mok@hk.ey.com
+852 2629-3058
Email: michael.stenske@hk.ey.com
Nonfinancial Services
Jennifer Kam
May Leung
Ricky Tam
Grace Tang
Leo Wong
People Advisory Services
Paul Wen
Indirect Tax
Tracey Kuuskoski
+852 2846-9755
Email: jennifer.kam@hk.ey.com
+852 2629-3089
Email: may.leung@hk.ey.com
+852 2629-3752
Email: ricky.tam@hk.ey.com
+852 2846-9889
Email: grace.tang@hk.ey.com
+852 2849-9165
Email: leo.wong@hk.ey.com
+852 2629-3876
Email: paul.wen@hk.ey.com
+852 2675-2842
Email: tracey.kuuskoski@hk.ey.com
This chapter relates to the tax jurisdiction of the Hong Kong Special Administrative Region (SAR) of China.
A. At a glance
(a) See Section B for the two-tier profits tax rates regime.
(b) If the nonresident corporation is eligible for the two-tier profits tax rates regime referred to in Section B, the withholding tax rate is 2.475% (for the first HKD2 million of its royalty income) and 4.95% (for the remainder of its royalty income). However, if a recipient of payments is an associate of the payer and if the intellectual property rights were previously owned by a Hong Kong taxpayer, a withholding tax rate of 16.5% applies (subject to the application of the two-tier profits tax rates regime referred to in Section B). If the nonresident is an individual eligible for the two-tier profits tax rates regime referred to in Section B, the withholding tax rate is 2.25% (for the first HKD2 million of his or her royalty income) and 4.5% (for the remainder of his or her royalty income). However, if a recipient of payments is an associate of the payer and if the intellectual property rights were previously owned by a Hong Kong taxpayer, a withholding tax rate of 15% applies (subject to the application of the two-tier profits tax rates regime referred to in Section B).
B. Taxes on corporate income and gains
Profits tax. Companies carrying on a trade, profession or business in Hong Kong are subject to profits tax on profits arising in or derived from Hong Kong. However, certain royalties received from a Hong Kong payer by a foreign entity that does not otherwise carry on a trade, profession or business in Hong Kong are liable to a withholding tax in Hong Kong (see Section A).
if both conditions for participation exemption are satisfied. The following are the conditions:
• The MNE is a Hong Kong resident person, or if it is a nonHong Kong resident person, it has a permanent establishment in Hong Kong to which the foreign-sourced dividend or disposal gain on equity interests is attributable.
• The MNE has continuously held not less than 5% of equity interests in the investee entity concerned for a period of not less than 12 months immediately before the foreign-sourced dividend or disposal gain on equity interests accrues.
Certain anti-abuse rules are in place to disallow the participation exemption, namely the switchover rule (subject to tax condition), anti-hybrid mismatch rule and the main purpose rule.
Under the switchover rule, if the specified foreign-sourced income is a disposal gain on equity interests, the participation exemption only applies if the disposal gain on equity interests is subject to a qualifying similar tax in a jurisdiction outside Hong Kong of substantially the same nature as profits tax in Hong Kong at an applicable rate of at least 15%. If the specified foreign-sourced income is dividends, the participation exemption only applies if the dividends, or the underlying profits out of which the dividend is paid, is subject to a qualifying similar tax in a foreign jurisdiction of substantially the same nature as profits tax in Hong Kong at an applicable rate of at least 15%. In this context, the applicable rate refers to the headline corporate tax rate of the jurisdiction concerned, even if the income is taxed in the jurisdiction at a lower rate under certain conditions.
Under the anti-hybrid mismatch rule, if the specified foreignsourced income is a dividend and if tax is charged on the underlying profits of the dividend in a jurisdiction outside Hong Kong, the participation exemption does not apply to the extent that the dividend is allowable for deduction when computing the amount of tax of the investee entity.
Under the main purpose rule, if the Commissioner of Inland Revenue is of the opinion that the main purpose, or one of the main purposes, of entering into an arrangement is to obtain a tax benefit in relation to a liability to pay profits tax, the participation exemption does not apply.
While onshore-sourced disposal gains that are capital in nature are not chargeable to tax in Hong Kong, foreign-sourced disposal gains, regardless of whether they are capital or revenue in nature, are subject to tax under the FSIE regime if the taxpayer cannot satisfy either the ESR in Hong Kong or the conditions for the participation exemption.
The exemption of foreign-sourced IP income and disposal gain on IP assets under the FSIE regime applies if the nexus requirements are met. The nexus requirements are defined to be essentially the same as that defined under the Action 5 – 2015 Final Report of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project.
If the specified foreign-sourced income is subject to tax in Hong Kong under the FSIE regime, overseas taxes paid are creditable against the tax payable in Hong Kong with respect to the same
income either under a bilateral tax treaty or a unilateral tax credit. For foreign-sourced dividends, the overseas taxes paid include the withholding taxes on the dividends and the underlying corporate income taxes paid with respect to the underlying profits, traceable up to five tiers of investee companies in a vertical chain of ownership, out of which the dividends are paid.
The determination of the source of profits or income can be extremely complicated and often involves uncertainty. It requires case-by-case consideration. To obtain certainty concerning this and other tax issues, taxpayers may apply to the Inland Revenue for advance rulings on the tax implications of a transaction, subject to payment of certain fees and compliance with other procedures.
Rates of profits tax. The normal profits tax rates applicable to corporations and non-corporate entities are 16.5% and 15%, respectively. If a taxpayer is eligible for the two-tier profits tax rates regime, profits tax rates for the first HKD2 million of profits are reduced by 50% to 8.25% or 7.5%. The remainder of the profits continue to be taxed at the normal profits tax rates of 16.5% or 15%.
However, each group of “connected entities” can only elect one entity in the group to benefit from the two-tier regime for a given fiscal year. In general, two entities are regarded as “connected entities” if one entity has control over the other or both are under the control of a third entity. “Control” generally refers to one entity holding directly or indirectly more than 50% of the issued share capital, voting rights, capital or profits of another entity.
Hong Kong intends to implement the Global Anti-base Erosion rules (GloBE rules) and the Hong Kong minimum top-up tax (HKMTT), effective from 1 January 2025. The HKMTT to be charged at an effective tax rate of 15% is intended to qualify as a Qualified Domestic Minimum Top-up Tax Safe Harbor such that the top-up tax under the GloBE rules would then be deemed to be zero.
Tax incentives. The following tax incentives and enhanced deductions are available in Hong Kong:
• Interest income and trading profits derived by corporations from qualifying debt instruments (QDIs) issued prior to 1 April 2018 with a maturity period of less than seven years are taxed at a rate of 8.25% (50% of the normal profits tax rate), while interest income and trading profits derived from those QDIs with a maturity period of seven years or longer are exempt from tax. Interest income and trading profits derived from QDIs issued on or after 1 April 2018 of any duration are exempt from tax.
• Income derived from the business of reinsurance by professional reinsurers that have made an irrevocable election is taxed at a rate of 8.25%.
• Income derived from the business of insurance by authorized captive insurers that have made an irrevocable election is taxed at a rate of 8.25%.
• Profits derived by authorized and certain bona fide widely held mutual funds, collective-investment schemes and unit trusts are exempt from tax.
• Profits derived from qualifying corporate treasury activities by qualifying corporate treasury centers that have made an irrevocable election are taxed at a rate of 8.25%.
• Profits of qualifying aircraft lessors and qualifying aircraft leasing managers that have made an irrevocable election are taxed at the concessionary tax rate of 8.25%. For previously acquired aircraft, effective from the 2023-24 year of assessment, taxpayers are able to choose to either being taxed on a notional tax base (in lieu of depreciation allowances on the aircraft) or being granted a one-off tax deduction based on the residual value of the aircraft at the time. For aircraft acquired thereafter, taxpayers will be able to claim a one-off tax deduction of the expenditure incurred for the acquisition of the aircraft.
• Profits derived from a qualifying ship leasing activity, regarding both an operating lease and a finance lease, including a sale and leaseback arrangement, derived by a qualifying ship lessor that has made an irrevocable election, are taxed at 0%. The tax base of such a ship owner-cum-lessor (a taxpayer that is both an owner and lessor of the ship) is 20% of its gross rentals, less deductible expenses, excluding book depreciation charges or tax depreciation allowances pertaining to a ship.
• Profits derived from a qualifying ship leasing management activity by a qualifying ship leasing manager that has made an irrevocable election and received from a non-associated qualifying ship lessor are taxed at the concessionary tax rate of 8.25%. The tax rate is reduced to 0% if the qualifying ship lessor is an associated corporation.
• Profits derived by a qualifying shipping commercial principal (that is, a qualifying ship agent, qualifying ship manager or qualifying ship broker) from carrying out a qualifying activity (that is, a qualifying ship agency activity, qualifying ship management activity or qualifying ship broking activity) in Hong Kong is generally taxed at a concessionary tax rate at 8.25%. If qualifying profits are derived by a qualifying shipping commercial principal from carrying out a qualifying activity for an associated ship lessor, ship leasing manager, ship operator or ship owner (that is, a shipping enterprise) who is entitled to tax concession or exemption under the tax code of Hong Kong, the qualifying profits so derived are subject to the same tax concession or exemption as that applicable to the associated shipping enterprise concerned.
• Profits derived from general insurance, other than profits from certain local demand-driven insurance business, and general reinsurance business, by a specified insurer that has made an irrevocable election are taxed at a rate of 8.25%. In addition, profits of a licensed insurance broker that has made an irrevocable election and relate to a contract of insurance effected by a professional reinsurer or a specified insurer in the course of the insurer carrying on a business that is eligible for the concessionary tax rate are taxed at a rate of 8.25%.
• Eligible carried interest received by, or accrued to, a qualifying person from the provision of investment management services in Hong Kong to a qualifying payer is, subject to certain conditions, taxed at 0%. Such conditions include the eligible carried interest arising from profits earned from in-scope transactions of the qualifying payer and the qualifying payer meeting the substantial activities requirements in Hong Kong.
For FSIE income chargeable to tax in Hong Kong, in addition to a bilateral tax credit under a tax treaty, a unilateral tax credit is also available for the set-off of foreign taxes paid against the tax payable in Hong Kong with respect to the same income.
C. Determination of assessable profits
General. The assessment is based on accounts prepared on generally accepted accounting principles, subject to certain statutory tax adjustments.
In general, interest income earned on deposits with financial institutions is exempt from profits tax. However, this exemption does not apply if the recipient of the interest is a financial institution or if the deposits are used as security for borrowings and the interest expense with respect to the borrowings is claimed as a tax deduction.
Expenses must be incurred in the production of chargeable profits. Certain specified expenses are not allowed, including domestic and private expenses, capital expenditures, the cost of improvements, sums recoverable under insurance and tax payments. The deductibility of interest is subject to restrictions (see Section D).
Inventories. Stock is normally valued at the lower of cost and net realizable value. Cost must be determined using the first-in, firstout (FIFO) method or an average cost, standard cost or adjusted selling price basis. The last-in, first-out (LIFO) method is not acceptable. However, this may not apply to shares and securities held for trading purposes.
Capital allowances
Industrial buildings or structures. An initial allowance of 20% is granted on new industrial buildings in the year in which the expenditure is incurred, and annual depreciation allowances are 4% of qualifying capital expenditure for 25 years beginning in the year the building is first put into use. No initial allowance is granted on the purchase of used buildings, but annual depreciation allowances may be available. Subject to certain exceptions, buildings used for the purposes of a qualifying trade are industrial buildings.
Commercial buildings or structures. An annual allowance (4% of qualifying capital expenditure each year for 25 years beginning in the year the building is first put into use) is available on commercial buildings. Buildings that do not qualify as industrial buildings are commercial buildings. Refurbishment costs for premises, other than those used as domestic dwellings, may be deducted in equal amounts over a five-year period.
As announced in the 2024-25 budget, with effect from the 202425 year of assessment, the current time limit for secondhand owners to claim capital allowances with respect to industrial or commercial buildings or structures (25 years beginning in the year the building is first put into use) will be removed, subject to factors such as the construction costs of the buildings or structures and the balancing charge of the previous owner.
The transfer-pricing guidelines of the Organisation for Economic Co-operation and Development (OECD) provide guidance on how the TP law should be interpreted.
TP documentation requirements. The TP law also adopts the three-tier documentation approach as recommended by the OECD for related-party transactions, which is comprised of the following:
• Local File
• Master File
• CbC Reporting
A Hong Kong entity of a group is required to prepare and retain the entity’s Local File and a Master File of its group with respect to an accounting period unless either of the following circumstances exists:
• Any two of the following conditions are satisfied:
— The total amount of the entity’s revenue for the accounting period does not exceed HKD400 million.
— The total value of the entity’s assets at the end of the accounting period does not exceed HKD300 million.
— The average number of the entity’s employees during the accounting period does not exceed 100.
• All the following conditions are satisfied with respect to the following categories of transactions between connected persons (excluding specified domestic transactions) undertaken by the entity in an accounting period:
— The total amount of transfers of properties (excluding financial assets and intangibles) does not exceed HKD220 million.
— The total amount of transactions with respect to financial assets does not exceed HKD110 million.
— The total amount of transfers of intangibles does not exceed HKD110 million.
— The total amount of other transactions does not exceed HKD44 million.
If all of the conditions stated in the second bullet above are not satisfied, the entity is required to prepare a Local File with respect to the particular category or categories of transactions that exceeded the threshold(s) specified above. In addition, the entity is not exempt from preparing the Master File.
Unless exempted, effective from the accounting period beginning on or after 1 April 2018, the Master File and Local File must be prepared within nine months after the end of the relevant accounting period. Although the Master File and Local File are not required to be submitted together with the annual tax return, they must be produced for examination on request and retained for a period of not less than seven years after the end of the accounting period.
Country-by-Country Reporting. The CbC Report filing threshold is set in accordance with the OECD recommendation; that is, consolidated turnover exceeding EUR750 million (HKD6.8 billion) in the preceding year.
The primary obligation for CbC Report filing falls on the Ultimate Parent Entities (UPEs) of multinational groups that are resident in
(a) The withholding rates in Hong Kong applicable to individuals and corporations are 4.5% and 4.95%, respectively (subject to the application of the two-tier profits tax rates regime referred to in Section B above). These rates are lower than those specified in the relevant tax treaties, and consequently, the Hong Kong domestic rates apply.
(b) The 0% rate applies if the beneficial owner of the royalties is a company (other than a partnership). In all other cases, the 3% rate applies.
(c) The 3% rate applies to payments for the use of, or the right to use, aircraft. The 4.95% rate applies in all other cases.
(d) This treaty is pending ratification.