Hong Kong SAR

Hong Kong SAR adopts a territorial basis of taxation. Profits tax is payable by every person (defined to include corporation, partnership, and sole proprietorship) carrying on a trade, profession, or business in Hong Kong SAR on profits arising in or derived from Hong Kong SAR from that trade, profession, or business. In general, the tax residence of a person is irrelevant, and there is no distinction between residents and non-residents when it comes to liability to profits tax, except in a tax treaty context. Non-residents carrying on a trade, profession, or business in Hong Kong SAR are chargeable to tax on profits arising in or derived from Hong Kong SAR unless they are from jurisdictions with which Hong Kong SAR has a tax treaty and are protected by the treaty.

Gains and receipts that are capital in nature are generally not subject to tax. Dividends from local companies chargeable to tax are exempt, whereas dividends from overseas companies are generally offshore in nature and not subject to tax in Hong Kong SAR. However, offshore disposal gains derived from the sale of assets and offshore dividends may be deemed taxable under the refined foreign-sourced income exemption (FSIE) regime, as elaborated below. The tax treatments of public and private companies are the same.

Certain income that would not otherwise be subject to Hong Kong profits tax is deemed to arise in or be derived from Hong Kong SAR from a trade, profession, or business carried on in Hong Kong SAR and thus becomes taxable in Hong Kong SAR. This includes royalties received by a non-resident for the use of or right to use a patent, design, trademark, copyright material, layout-design of an integrated circuit, performer’s right, plant variety right, secret process or formula, or other property of a similar nature in Hong Kong SAR, or for the use of or right to use such intellectual property (IP) outside Hong Kong SAR, but the royalties paid can be claimed as a deduction by a person for Hong Kong profits tax purposes.

Effective from 1 January 2023, under the refined FSIE regime, four types of offshore income, namely (i) interest, (ii) dividends, (iii) disposal gains from the sale of equity interests (equity interest disposal gains), and (iv) IP income (collectively, ‘specified foreign-sourced income’), are deemed to be sourced from Hong Kong SAR and chargeable to profits tax if the income is received in Hong Kong SAR by a multinational enterprise (MNE) entity carrying on a trade, profession, or business in Hong Kong SAR (irrespective of its revenue or asset size) and the recipient entity fails to meet a relevant exception from the deeming provision. With effect from 1 January 2024, the scope of ‘specified foreign-sourced income’ is expanded to include disposal gains on other types of assets (in addition to equity interests). The exceptions from the deeming provision are:

• For interest and non-IP disposal gains: Economic substance requirement.
• For dividends and equity interest disposal gains: Economic substance requirement or participation requirement.
• For IP income and IP disposal gains: Nexus requirement.
• For disposal gains (both IP disposal gains and non-IP disposal gains): Effective from 1 January 2024, an intra-group transfer relief is available to defer any tax that may be chargeable on any type of disposal gain if the asset concerned is transferred between associated entities.

Effective from the year of assessment 2018/19, there is a two-tiered profits tax rates regime in Hong Kong SAR. The following table shows the applicable tax rates for corporations and unincorporated businesses:

* As an anti-avoidance measure, a ‘group of connected entities’ can only nominate one entity within the group to enjoy the two-tiered tax rates for a given year of assessment.

There are special rules for determining the tax liabilities of certain industries, such as shipping, air services, and financial services. There is also a special tax framework for Islamic bonds (i.e. sukuk) that provides for the same tax treatments for sukuk vis-à-vis their conventional counterparts.

Incomes from certain qualifying debt instruments (QDIs) issued before 1 April 2018 are either tax exempt or subject to a concessionary tax rate (i.e. 50% of the regular profits tax rate) depending on the date of issue and maturity period of the QDIs. Incomes from QDIs issued on or after 1 April 2018 are tax exempt regardless of the maturity period, subject to the fulfilment of certain conditions. However, there is a specific anti-avoidance provision under which the concessionary tax rate / tax exemption does not apply to incomes derived from QDIs by a person who is an associate of the issuer of the QDIs.

Publicly offered funds that are regulated by the Securities and Futures Commission (SFC) of Hong Kong SAR and other similar bona fide widely held investment schemes that comply with the requirements of a supervisory authority within an acceptable regulatory regime are exempt from Hong Kong profits tax. Effective from 1 April 2019, both onshore and offshore privately offered funds are exempt from Hong Kong profits tax on profits derived from certain specified transactions provided that the specified transactions are carried out or arranged by ‘specified persons’ (i.e. SFC licensed fund managers) or the funds are a ‘qualified investment fund’ as defined. There are also specific anti-avoidance provisions in the Inland Revenue Ordinance (IRO) deeming certain resident persons to be subject to profits tax on their share of the non-resident person’s tax-exempt profits.

Profits derived from the business of reinsurance of onshore and offshore risks and qualifying onshore and offshore captive insurance business are subject to profits tax at a concessionary tax rate of 8.25% (i.e. 50% of the regular profits tax rate). Profits derived from (i) general reinsurance business of direct insurers, (ii) certain types of general insurance business of direct insurers, and (iii) certain types of insurance brokerage business of licensed insurance brokers are also subject to profits tax at a concessionary tax rate of 8.25% (i.e. 50% of regular profits tax rate) effective from 19 March 2021.

Qualifying profits derived by a qualifying corporate treasury centre are subject to profits tax at a concessionary tax rate of 8.25% (i.e. 50% of the regular profits tax rate) under specified conditions.

Qualifying profits derived from qualifying aircraft leasing activities and qualifying aircraft leasing management activities carried out in Hong Kong SAR are subject to profits tax at a concessionary tax rate of 8.25% (i.e. 50% of the regular profits tax rate) under specified conditions.

Effective from 1 April 2019, qualifying profits derived from qualifying ship leasing activities carried out in Hong Kong SAR are subject to profits tax at concessionary tax rate of 0% whereas qualifying profits derived from qualifying ship leasing management activities carried out in Hong Kong SAR are subject to profits tax at concessionary tax rate of 0% (for activities carried out for associated corporations) or 8.25% (for activities carried out for non-associated corporations), subject to specified conditions.

Effective from 1 April 2022, qualifying profits derived from qualifying shipping-related activities, namely ship agency, ship management, or ship broking activities, carried out in Hong Kong SAR are eligible for tax exemption or a concessionary profits tax rate of 0% or 8.25%, subject to specified conditions.

Carried interest received by or accrued to a qualifying recipient on or after 1 April 2020 from the provision of investment management services in Hong Kong SAR for a certified investment fund may be eligible for a concessionary profits tax rate of 0%, subject to specified conditions.

Effective from the year of assessment 2023/24, qualifying income from certain IP is eligible for a concessionary tax rate of 5% under the patent box regime. The ‘nexus approach’ endorsed by the Organisation for Economic Co-operation and Development (OECD) in its Base Erosion and Profit Shifting (BEPS) Action 5 Report will apply to determine the extent of eligible IP income that can qualify for the preferential tax treatment.

For an eligible family-owned investment holding vehicle (FIHV) managed by an eligible single-family office (ESF Office) in Hong Kong SAR, its assessable profits earned from qualifying transactions and incidental transactions (the latter being subject to a 5% threshold) on or after 1 April 2022 are subject to profits tax at a concessionary tax rate of 0% under specified conditions.

The concessionary tax treatments under the following special tax regimes will be available only if the taxpayer has substantial activities in Hong Kong SAR in terms of the number of qualified employees and amount of operating expenditure, which must be adequate in the opinion of the Commissioner of Inland Revenue (CIR) and, in any event, not lower than the minimum thresholds as set out further below:

• Corporate treasury centres.
• Reinsurance business.
• Captive insurance business.
• Certain types of general insurance business.
• Certain types of insurance brokerage business.
• Aircraft lessors and aircraft leasing managers.
• Ship lessors and ship leasing managers.
• Shipping operations.
• Certain shipping-related activities.
• Carried interest for provisions of qualified investment management services.
• FIHVs.

For the concessionary tax regimes on ship leasing and certain shipping-related activities, the minimum threshold requirements during the basis period for a year of assessment are as follows:

For the concessionary tax regimes on aircraft leasing, the minimum threshold requirements during the basis period for a year of assessment are as follows:

For the insurance business concessionary tax regimes, the minimum threshold requirements during the basis period for a year of assessment are as follows:

For the carried interest tax concession for the provision of qualified investment management services, the minimum threshold requirements during the basis period for a year of assessment within the applicable period (i.e. from the day on which the qualifying recipients began to perform investment management services to the fund to the day on which the carried interest was received by, or accrued to, the qualifying recipients) are as follows:

For the FIHV concessionary tax regime, the minimum threshold requirements during the basis period for a year of assessment are as follows:

The threshold requirements for other concessionary tax regimes have yet to be specified by the CIR by a notice published in the Gazette.