How Do Taxes Work In Hong Kong?

A top question I’m asked when a client is opening a Hong Kong company –

“How do taxes work? I can get 0% right?”

Such a short and simple question, but will be a full post in today’s guide.

Full disclaimer, please consult a Hong Kong certified CPA for professional advice. I do not have a CPA license and am writing this as a third party to help educate and give readers the basic definitions and way things work.

We Are Only Discussing Corporate Taxes

So today, to be clear, is only for business tax. That means, we’re not talking about personal tax, property tax, or any other tax, in Hong Kong or outside.

So, your company taxes, as a Hong Kong business.

For your personal taxes, if you’re a resident in Hong Kong you need to file and pay. If you’re a resident elsewhere, you need to pay there. If you’re American and a resident elsewhere, you need to pay in both places. But let’s not go deeper into this today!

Hong Kong has an Already Low 16.5% Corporate Tax

First off, the taxes in Hong Kong are already low. Compare this to most “first world” nations that are in the 30% and up range, Hong Kong isn’t too shabby right out of the box.

But I know you guys, you’re sitting in Thailand sipping on coconuts not wanting to even get the 16.5% HK corporate tax on your earnings taxed.

Can File for Foreign Earnings Exclusion

In the profit tax return, there is a line item for foreign earnings. By putting a number here, you can deduct that from your earnings liability.

In addition to putting the number on the form, you also need to have your HK auditor specify on the financial statements where the foreign earnings are, and where the domestic earnings are.

Once you got those two points covered, you are good to go.

So how much does this cost? Yes, I know you want to know that. And I really do hate to say it, but “it depends”. It isn’t as black and white as you may think. The auditor will need to review your financials and also try to be the “gatekeeper” before passing this on to the HK IRD (internal revenue department).

Keep in mind, the CPA has a license from the Hong Kong tax bureau. If they are not careful with how they work with clients, they are subject to losing this license. So while they of course want your business as a client, and they would love to help you get out of taxes, they also can get in trouble with their own license as well.

Some friends have said bigger CPA firms have turned them away because they are too low turnover. The CPA has to evaluate if they want to take the risk to do your taxes. If a scandal comes out (think of Enron) then not only the business gets in trouble, but the auditor CPA.

While you could get the horrible outcome of having to pay the taxes and maybe now penalties, the CPA may lose their license. Which is worse? If this CPA has a big firm and a lot of clients, I’d say they are taking a bigger risk than you are. Wouldn’t you agree?

So maybe this is a reason why CPAs want to say “we’ll send you a quote after you send us your documents”. They need to see how straightforward it is, and also if they are at risk of “getting in trouble” by the IRD.

For some examples, I have had some CPAs turn down doing audits because they feel the books are too complicated or too messy. They’ll ask you to go back to your old CPA. Maybe this is because they don’t want to trouble and the risk having you as a client.

May Have To Answer Questions Later

So once you file the foreign earnings exclusion item on the profit tax return, it’s not all done. While it could be smooth and work without question, there are times when the tax department asks for more information.

This is when the process could just be answering some questions, or pulling out more and more information.

Here is why a CPA may not want the headache. You may do a lot of back and forth with the tax authorities to prove how you filed your financial statements, show which invoices were offshore and which weren’t. It can get pretty deep.

This is when you better hope you did a good job keeping your books in order. Provide any details and information that you can. Prove that you didn’t get the project within HK borders, didn’t use HK hosting, didn’t work with a local company on the sale, etc.

Can File For Offshore Claim Status

So a more advanced procedure is the offshore claim. In addition to the foreign earnings line item on the profit tax return, you can request that you get this passed forward for future years and filings.

It will last for up to 3 years without questions. After three year you will need to reiterate you’re doing the same business or if things have changed. If stay the same, then just keep renewing it and things are smooth.

It can be prepared before the profit tax return, but filed at the same time everything is turned in.

We can work with you and our CPA network on offshore claim filing. Make sure it is as smooth as possible, though tax forms and auditing is always a bit hairy.

After the first filing for offshore, you can rest assured on your business model and know much more clearly you are doing things correct to remain as a foreign earnings business.

Don’t Want To Wait For First Year Filing? Advance Ruling

Now here is where it gets deep and complicated. Some clients have stated they don’t want to “risk” waiting until almost 2 years after they set up the company to know if their business model and transactions will qualify for offshore.

They don’t want to keep the funds around for the 16.5% liability. And also want to even potentially move their business to another jurisdiction if they know the HK tax office will not consider their business offshore.

So what can a business owner do in this case? They can go for an advance ruling. This is a very complex and rather involved process where you work with the IRD and prepare quite a lot of documents and details of your business transactions. There are high government fees as well as a tax consultant’s fees to do this.

But if it is worth knowing in advance, that is what this “advance ruling” is all about.

Or Maybe Just Pay Some Taxes?

So I hope today’s article helped you. So many people want the dream to get out of paying taxes, everywhere in the world. But on a personal and a business level, governments expect you to pay taxes SOMEWHERE. Many times these governments don’t want you to pay DOUBLE tax so they give you a tax break if you are paying taxes elsewhere.

The tax game is a complex one. Many recommend just focusing on your business and paying your taxes. Trying to get out of paying your current taxes may be more of a distraction than actually the earnings you could make if you focused on operating your business.

Then again, it also depends on how big your company is. If you’re a massive conglomerate, a few percentage points is millions of dollars. But if you’re running your business from your laptop and barely getting enough to pay the monthly bills, trying to hire expensive tax accountants and pay for advance rulings may not make any sense.