Understanding the tax incentives in Hong Kong for foreign businesses

In Hong Kong, tax incentives and low taxes are just some of the reasons why the city has been recognized as the world’s freest economy for the past 25 years. This dynamic and supportive business environment fosters growth and innovation, making it a highly sought-after destination for businesses looking to thrive.

This article outlines the various tax incentives in Hong Kong for setting up a business. Additionally, it also highlights the reasons why investors need to set up their businesses in the city. 

Tax incentives for setting up a business in Hong Kong

Hong Kong offers various incentives to foreign businesses, including tax cuts, low corporate taxes, tax holidays, exemptions, and credits. 

1. Corporate tax cut

Hong Kong’s corporate tax cut, known as the two-tiered profit tax rate, reduces the statutory rate of corporate tax from 16.5% to 8.25% for eligible companies.

Eligibility: 

Companies with profits of up to HK$2 million are eligible for this tax cut in Hong Kong. This tax cut is available to both local and foreign businesses.

2. Tax deduction for capital expenditure

Businesses in Hong Kong can deduct capital expenditure on machinery from their profits tax. This helps to reduce their tax liability. The deduction is up to 60% of the cost of the machinery and can be claimed over a period of 2 years. 

For example, if a company spends HK$500,000 on new machinery, it can deduct up to HK$300,000 from its taxable income. This results in tax savings of up to HK$49,500. 

Eligibility:  Any business that purchases machinery for the purpose of producing assessable profits is eligible to claim a deduction for capital expenditure on machinery. Assessable profits refer to the profits earned by a business that is subject to taxation. 

3. Tax Holiday for businesses in Hong Kong

The tax holiday is available to companies registered for more than five years. This incentive provides tax relief for small and medium-sized enterprises (SMEs). 

Eligible businesses can enjoy a 100% profits tax exemption on the first HKD 2 million of their assessable profits. This exemption is a recurring benefit that a company can enjoy for each of its first five years of assessment, as long as it continues to meet the eligibility requirements. 

Eligibility: 

To be eligible for this tax incentive in Hong Kong, a company must satisfy certain conditions. 

• The company must have been incorporated and carrying a business in Hong Kong for at least two years before the year of assessment.
• The company must not be a subsidiary of another company.

If a company meets these conditions, it can apply for the tax holiday. It can apply by submitting a Profits Tax Return (Form BIR51) to the Inland Revenue Department.

Emerhub helps make the business set-up process smoother and less stressful in Hong Kong. With our expertise in the business set-up, Emerhub guides you through the process, ensures that you understand the legal regulations involved, and takes care of the registration on your behalf. 

4. No value-added tax (VAT)

Hong Kong doesn’t have a VAT system, which means businesses aren’t subject to additional taxes on goods and services provided. In many other countries, VAT is as high as 20%, which significantly increases the cost of doing business.

5. Double taxation treaties 

Double taxation treaties are agreements between two countries. Their aim is to avoid double taxation of income earned by individuals or businesses in both countries. These treaties provide a framework for determining which country has the primary right to tax specific types of income. They also provide relief in the form of tax credits or exemptions to prevent the same income from being taxed twice.

One of the benefits of setting up a company in Hong Kong is that Hong Kong has signed double taxation treaties with 56 countries, including many major trading partners and investment destinations such as the United States, China, Australia, Canada, the United Kingdom, Japan, and Singapore. These treaties cover a wide range of income, including business profits, dividends, interest, royalties, and capital gains.

If a US company has a subsidiary in Hong Kong that earns profits, both Hong Kong and the US can tax the profits without a double taxation treaty. This results in double taxation and reduces the subsidiary’s profitability.

Fortunately, the United States and Hong Kong have a double taxation treaty that offers a clear framework for determining which country has the primary right to tax the subsidiary’s profits. The treaty may specify that the profits are taxable only in Hong Kong, preventing the United States from imposing taxes on the same profits again.

Alternatively, if the profits are taxable in both Hong Kong and the United States, the treaty may provide relief in the form of a tax credit or exemption. The subsidiary may be able to claim a tax credit in the United States for the taxes paid in Hong Kong, or the United States may exempt a portion of the subsidiary’s profits from taxation.

6. Free trade agreements

Hong Kong has signed free trade agreements (FTAs) with various countries and regions. These include mainland China, the ASEAN countries, Australia, New Zealand, Chile, and the European Free Trade Association (EFTA). These FTAs help to eliminate or reduce tariffs on goods and services. Additionally, these also improve market access and provide other trade-related benefits for businesses.

Under the ASEAN-Hong Kong FTA, Hong Kong and the ASEAN countries eliminate tariffs on goods for import and export. Additionally, it also provides greater market access for services. This helps businesses to lower their costs and increase their competitiveness, in industries such as manufacturing, logistics, and professional services.

Set up your business in Hong Kong with Emerhub

Emerhub provides comprehensive help in setting up a business in Hong Kong. It helps in company registration and obtaining necessary licenses and permits. Additionally, it also assists in registering for taxation purposes.

• Company registration: Emerhub registers companies with the Companies Registry in Hong Kong. This includes preparing and filing the necessary documents. These include the memorandum and articles of association. Additionally, it also includes the company’s business plan and the names of the directors.
• Business registration certificate: Emerhub files the necessary documents to obtain its business certificate. These include the company’s business plan and the names of the directors. Additionally, it also includes the company’s financial statements.
• Trading license: Emerhub files the necessary documents for the business to obtain its trading license. These include the company’s business plan and the names of the directors.
• Tax registration: Emerhub helps foreign companies register for taxation purposes in Hong Kong. This involves filing the necessary documents with the Inland Revenue Department. This includes the company’s business plan and the names of the directors. Additionally, it also includes providing the necessary financial information and records.

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