Hong Kong Tax System: What Fund Managers Need to Know

One of the critical factors in maintaining the country’s thriving economy is its Hong Kong tax. The tax in Hong Kong is a  territorial basis tax system, under which both individuals and corporate entities will be taxed for the generated profit or income within the country. Under this principle, any profits earned outside the territory, will not be subject to Hong Kong taxes.

If you are a fund manager thinking of opening a fund in Hong Kong, read this guide to get the lowdown on Hong Kong taxes.

The History of Hong Kong Taxes 

In the past, Hong Kong was known for being a tax-free port. The free trade market attracted a vast number of merchants and bankers. The country’s first taxation system came into being during World War II, this system was created as a temporary wartime fundraising measure.

In 1947, the Inland Revenue Ordinance was established, and the temporary wartime system was solidified. This initial system was modelled from the tax system of Britain and its colonies. The 1940s tax system remained largely unchanged until 1998 when a series of concessions was introduced.

The concessions were proposed on the profit tax in Hong Kong in order to increase the competitiveness of the business environment in the country. For the most part, the 1947 taxation policy remains unchanged. To date, the Inland Revenue Department (IRD) is responsible for collecting duties and taxes in Hong Kong.

Advantages of the Hong Kong Tax System

As a fund manager outside Hong Kong, you might be familiar with different taxes imposed on your assets. But because you might be interested in fund management in Hong Kong, you should know that there is a list of taxes that the country does not impose:

• No sales tax or VAT
• No withholding tax on dividends and interest
• No capital gains tax
• No tax on dividends
• No estate tax

You can also check out our blog on the top 5 places in Asia with favourable conditions to incorporate in if you would like to learn about other countries that have business-friendly tax incentives.

What are the Three Direct Taxes in Hong Kong?

So what are the three direct Hong Kong taxes that fund managers must know if they want to work in the country? Though the Inland Revenue Department (IRD) levies taxes on income originating from the country, there is no general income tax in Hong Kong (SAR). For income to be taxed, it would have to fall within the three main categories of taxes under the Inland Revenue Ordinance (IRO), which are profits tax, salaries tax and property tax.

Income earned through trade, profession or business in Hong Kong is subject to a tax in Hong Kong called the Profits tax. Foreign companies doing business in the country are subject to Profits tax, in this aspect, they are treated just like other domestic enterprises.

Another tax in Hong Kong is the Salaries Tax. This type of tax is charged upon any person obtaining Hong Kong source employment income. Property Tax on the other hand is imposed on rental Income from properties located in the country.

Corporate Income Tax / Profits Tax

This is imposed on corporations, partnerships, trustees and bodies of persons carrying on trade in the country. Income Tax / Profits Tax will then be charged on the profits generated within or derived from Hong Kong. Corporate income tax in Hong Kong has two options in Profits Tax Rates.

Under the traditional Single-Tier Corporate Tax System, corporations are taxed at 16.5% on assessable profits and unincorporated businesses are taxed at 15%. The second one is the Two-Tier Profits Tax Rates Regime which was introduced in 2018 to promote economic development with a competitive taxation system.

Under this Hong Kong tax system are the rates indicated in the table below.

To avoid the abuse of the Two-Tier Profits Tax Rates Regime, any group of connected entities must nominate only one entity to be the beneficiary of the reduced rates.

Personal Income Tax / Salaries Tax

Incomes acquired from work, employment and pension are subject to Salaries Tax in Hong Kong. Individuals are charged progressive rates based on their net chargeable income.

Net Chargeable Income = Income – Deductions – Allowances

See the chart below for the rates for 2021/2022:

For the full list of allowable deductions and allowances please refer to this.

Property Tax

Owners of land or properties in Hong Kong are subject to Property Tax. This tax in Hong Kong is computed at the standard rate of 15% chargeable to the net assessable value of the property. The net assessable value of the property is the amount of actual income less allowances/deductions.

Corporate Tax Filing Deadlines

To be successful in fund management in Hong Kong, you have to make sure to get your calendars in order. Generally, the year of assessment (YOA) in Hong Kong runs from 1 April to 31 March of the following year.

As per standard practice on the first business day of April, the IRD issues profits tax returns. Companies must report the required information from the recently ended YOA and be supported by audited financial statements should it be needed. The tax return must be filed within one month from the date of issuance. For any delays in tax filing, penalties will be imposed.

Double Taxation Relief

In order to minimise the exposure to double taxation of Hong Kong businesses and overseas companies doing business in the country, the government has signed a Double Tax Agreement (DTA) with its trading partners. This tax in Hong Kong is another item that fund managers in Hong Kong must know about.

DTA is a bilateral agreement between two countries to bypass getting taxed on income and property in both countries. This agreement also reduces the chances of tax evasion and avoidance while fully explaining both parties’ taxing rights or jurisdiction. The DTA also has the purpose of fostering cooperation between Hong Kong and its trading partners, by providing additional incentives to overseas businesses to conduct business in Hong Kong and vice versa.

Methods of Double Taxation Relief

• Tax Exemption on Foreign Source Income
  Depending on the circumstances, the IRD may not subject tax on the income one earns over conducting business outside the country or entering a contract with foreign customers.
• Foreign Tax Credits
  This is available when one is subject to foreign taxes applied to income earned from a jurisdiction with a DTA and the same income is subject to Hong Kong taxes. A taxpayer may request a claim for the tax credit with the IRD subject to approval.
• Reduced Tax Rate
  Depending on the rate agreed upon by the foreign countries with the government of Hong Kong, a tax resident may be levied at a lower rate on the income earned through dividends, interest, royalties and technical fees. For the full list of the rates, please refer here.
  
  

Hong Kong Offshore Profits Tax Exemption

Hong Kong-incorporated companies with offshore activities can qualify for tax exemption. This is not automatic since offshore status must be applied in Hong Kong. A fund manager’s company may qualify for an exemption provided that the following conditions are met:

• The company is being operated by the employees or its owner from an overseas address.
• There are no employees based in Hong Kong, and the company’s owner or any overseas employees must almost never visit the country.
• All company transactions, negotiations and contract signings with its customers and suppliers must be done outside of Hong Kong SAR jurisdiction.
• The company must have no customer based in Hong Kong and they cannot receive any payments from a customer’s Hong Kong bank account.
• Any company product must not enter Hong Kong.
• The company must not provide any services in Hong Kong SAR.
• Like its customers, the company must not have any suppliers located in Hong Kong and they cannot make any payment to suppliers with Hong Kong bank accounts.

Despite the restrictions indicated above, the company may engage and make payments to professional firms located in Hong Kong including accountants, lawyers and business or corporate service providers. These payments will be considered for support services provided to the company and not a settlement for any business activity undertaken by the company.

Tax Incentives in Hong Kong

Hong Kong corporate tax exemptions/incentives for eligible onshore and offshore funds operating companies include the following:

• As of April 2017, income earned by a qualifying aircraft lessor/manager is entitled to half of the corporate profits tax rate;
• As of April 2018, enterprises are able to acquire profit tax deduction based on the capital expenditure incurred in the purchase of intellectual rights;
• As of April 2019, profits tax exemption on transactions done by funds operating businesses based in Hong Kong though subject to specified assets and certain conditions;
• Qualifying mutual funds and trusts are subject to tax concessions;
• Capital expenditure incurred in the renovation or refurbishment of business premises can acquire a five-year write-off period;
• Interest earned from any deposit accrued on or after June 22, 1998, may claim tax exemption provided, the interest came from an authorised institution (not applicable to financial enterprises) based in Hong Kong;
• A business may apply for a write-off on expenses acquired in the purchase of new machinery, computer equipment and a plant related to manufacturing under the condition that the above items must be fully owned by the business;
• The tax deduction is available for the capital disbursements over the acquisition of environmentally friendly machinery and vehicles;
  
  

Taxes on Fund Management Companies in Hong Kong

Are there specific taxes that fund managers in Hong Kong have to know? One example is the tax for carried interest. Previously, the IRD viewed carried interest derived from Hong Kong to be chargeable under the Profits Tax and Salaries Tax. The department interpreted carried interest to be profits earned through the fund management and advisory services provided by fund managers based in Hong Kong SAR.

Regardless of the type of fund, the carried interest was seen as a fee earned by the IRD and is subject to tax. But thanks to the Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Bill 2021 (Carried Interest Tax Concession Bill), carried interest was finally taxed at 0% for qualified persons in Hong Kong.

Want more information about these qualifications? One of our fund formation representatives can give you more details on these exemptions and the taxation regime in general.

Contact us for any inquiries on fund administration, KYC, and AML.