Spotlight: tax residence and fiscal domicile in Hong Kong

All questions

Introduction

With a maximum corporate tax rate of 16.5 per cent, and no tax on sales, dividends or capital gains, Hong Kong is one of the most tax-friendly economies in the world. Foreign investments are not subject to any specific approval process, and the Hong Kong tax regime does not differentiate between foreign and domestic investors, except in relation to the acquisition of residential property. Hong Kong also promotes shariah investment, with the Hong Kong Monetary Authority indicating its aspiration for Hong Kong to be an Islamic finance hub.² Since 2014, a number of banks have begun offering shariah-compliant funds. Coupled with its close proximity to and connection with mainland China, Hong Kong is a popular gateway for inward investment into mainland China by multinational corporations.

Although not an Organisation for Economic Co-operation and Development (OECD) member, Hong Kong is committed to supporting international efforts on base erosion and profit shifting (BEPS) and the Common Reporting Standard (CRS). Most recently, Hong Kong has committed to actively participate in and implement the BEPS 2.0 package put forward by the OECD, including Pillar Two of the package on a global minimum effective rate of 15 per cent. While the exact impact of BEPS 2.0 on Hong Kong’s tax system remains unclear, the Hong Kong government has stressed that it will strive to ‘maintain the strengths of Hong Kong’s tax system and endeavour to minimise the compliance burden of . . . large MNE [multinational enterprise] groups’.³

In recent years, Hong Kong has also been actively negotiating tax treaties with its trading partners to improve its treaty network. Mostly notably, Hong Kong’s tax treaty with Macao came into effect in 2020.

The principal tax legislation in Hong Kong is the Inland Revenue Ordinance (IRO).⁴

Common forms of business organisation and their tax treatment

The most common business entities used in Hong Kong are companies, partnerships and trusts.

i Companies

A company incorporated under Hong Kong law may be limited by shares, limited by guarantee or unlimited, with a company limited by shares being the most common corporate form. If a company is limited by shares, the liability of the shareholders is limited to the amount unpaid on their shares. A company limited by shares may either be a public or a private company. Public and private companies mainly differ in their ability to offer their shares to the public for subscription. Private companies must also cap the number of shareholders at 50. Both types of company are required to appoint a company secretary who is a Hong Kong resident individual, or a company with a registered office or place of business in Hong Kong. However, a private company only needs to have one director, and at least one director must be an individual. Public companies, on the other hand, need at least two directors.

Taxation

Profits tax is charged on every person carrying on a trade, profession or business in Hong Kong. A ‘person’ under the IRO is defined to include individuals, corporations, partnerships and bodies of persons. Profits tax would be charged on the assessable profits that arose in or…