Tax Benefits of a Hong Kong Company

Hong Kong has a unique tax system where tax is only levied on profits derived from a trade, profession, or business carried on within Hong Kong.
This means that if a company does business in Hong Kong but makes profits from outside, it is not required to pay tax on those profits in Hong Kong.
Other countries, however, tax a business’s worldwide profits, including earnings from offshore sources.

Hong Kong-sourced income is taxed at 8.75% on the first HK$2 million profits and 16.5% on profits over HKD2 million.
It is worth noting that no tax is levied on capital gains, dividends, and interest earned in Hong Kong.

The principle of Hong Kong income tax

The principle of Hong Kong income tax is that it is an income tax with its source in Hong Kong rather than a tax based on residence.
Income sourced elsewhere, even remitted to Hong Kong, is not subject to Hong Kong profits tax.
Consequently, if a Hong Kong company’s trading or business activities are based outside Hong Kong, say in Europe, no taxation will be levied.
This makes Hong Kong a highly cost-effective tax-planning vehicle for trading.

The factor determining the locality of profits from trading in goods and commodities is generally where the contracts for purchase and sale are effected. “Effected” does not only mean that the contracts are legally executed. It also covers the negotiation, conclusion, and execution of the terms of the contracts. Suppose a business earns a commission by securing buyers for products or suppliers of products required by customers. In that case, the activity which gives rise to the commission income is the business arrangement to be transacted between the principals.

The source of the income is the place where the activities of the commission agent are performed.
If such activities are performed through an office in Hong Kong, the income has a source in Hong Kong. However, corporate tax liability may exist in countries where you ‘establish a place of business’ and control the company.

IRD Inland Revenue Department

A Simple Guide on The Territorial Source Principle of Taxation
Hong Kong adopts a territorial source principle of taxation. Only profits which have a source in Hong Kong are taxable here.
Profits sourced elsewhere are not subject to Hong Kong Profits Tax. The principle is obvious, but its application in particular cases can be contentious.
To clarify the principle’s operation, we have prepared this simple guide on the territorial source principle of taxation. It briefly explains how the principle operates and provides simple examples of the tests applied to different types of businesses for illustrative purposes.
If you wish to explore the subject in greater depth, we recommend consulting your professional advisers.