Hong Kong Tax Guide For Small Businesses:
An Executive Summary
This is an introductory guide for Small-Business Owners,
linking in to our full Hong Kong Fact-File. If you'd rather
dive right in to the Fact-File, you can use the navigation
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Kong home page.
Business Formation: The government has a
fairly light touch in terms of statutory requirements. You
don't need anyone's permission to start a business, and if
you are trading
on your own you won't have to register the business except
for tax; but to form a company or a partnership
you will have to register
your business and licenses
are required across a wide range of activities. Limited companies
do have to report annually, but smaller companies don't have
to be audited. And remembering that the only two certainties
in life are death and taxes, inevitably you'll have to make
annual
tax returns, whether you're a limited company or not.
Smaller businesses don't have to submit much in the way of
accounting
information with their tax returns, but as you get bigger,
it gets more arduous. One particularly good thing about Hong
Kong is that there aren't any sales taxes or VAT. Of course
if you take on staff,
life becomes more complicated!
Domestic Taxation: The only really important
decision for an independent business-person is whether to
be taxed as an individual
trader or as a company,
and due to the territorial
basis of taxation in Hong Kong the differences are often
quite small. Individuals pay 16.5% on employment income, while
the self-employed pay 15% profits tax, as do incorporated
companies. But allowances
and deductions may make a big difference, so you should
study your situation carefully in advance. Broadly, if you
are building an investment-heavy business, a company may be
best, while if you are in a simple cash in/cash out sort of
business, being an individual trader may be better. Husbands
and wives can't play too many games: if you employ your
spouse, it's not deductible for profits tax. Longer term,
the holy grail is to turn income into capital, since mostly
there isn't
any capital gains tax in Hong Kong. But with tax rates
so low, it's not much of an issue. Residence doesn't much
affect taxation: with territorial
taxation, what matters more is if you have a permanent
establishment (fixed place of business). If there's one
aspect of your business on which you should consider taking
paid-for advice, it's probably the tax structure. It's so
important to get it right at the beginning!
International Taxation: A small business
usually has a static location, and you'll trade from there.
If that's in Hong Kong, you may have created a permanent establishment,
and you'll pay
local tax, although with rates so low it may not seem
to matter too much. But there is a whole range of activities
which don't attract Hong Kong taxation even if your office
is there, and increasingly there are opportunities to trade
with Mainland China. For instance, if you're selling goods
produced outside Hong Kong to a customer also outside Hong
Kong, you may well be able to escape taxation of the profits.
But if you're selling services to corporates it can be more
complicated because the foreign country may take a bite out
of your returns, called withholding
tax. Then you have to turn to double
tax treaties to try to get the money back, and Hong Kong
doesn't have many of them. It's all a bit of a jungle. Luckily
there is no sales tax or VAT. If you set up a branch in a
foreign country, you need to try to avoid the 'permanent
establishment' trap, and you may get bogged down in local
VAT. If you send staff - or yourself - to work in foreign
countries you need to think hard about their tax situation
in advance, both in respect of local income taxation and perhaps
because of withholding
tax. E-commerce companies have special opportunities and
special problems.
Tax-Efficient Structures: With very low
corporate
and individual
tax rates, there appears to be not much need for exotic structures
to minimize tax. But if you think that 15% is still too much
tax to pay then there is a case to be made for locating businesses
in an out-and-out low-tax, 'offshore'
jurisdiction, especially if you are eventually planning
to retire
somewhere out of Hong Kong. As yet, there are no 'CFC'
rules in Hong Kong, so that profits made in such places can
stay there. Hong Kong has its own trusts
legislation, but offshore structures are often useful
for asset
protection reasons as well, and anti-avoidance law has
not gone nearly so far in Hong Kong as in, for example, the
UK. Non-resident small businesses meaning to trade in Hong
Kong can also use offshore structures, as long as they avoid
the 'permanent
establishment' trap.
Business Incentives: Hong Kong is extremely
welcoming to new
and incoming businesses, unlike most other jurisdictions,
and there are a number of support
schemes operated by various levels of government, offering
loans, direct grants and assistance. Some of the schemes are
particularly useful for start-up businesses and technology
companies. It is well worth investigating what's on offer,
particularly for SMEs. However, the saying: 'He who sups with
the devil needs a long spoon' comes to mind. The schemes are
well-intentioned, no doubt, but they can be intensely bureaucratic,
with very intrusive qualification procedures, and a long 'tail'
of reporting requirements.
Employing People: Many businesspeople will
just tell you: 'Don't do it'. 'Marry in haste; repent at leisure',
they say, and it was never so true than when it comes to employment.
Don't kid yourself that employees will feel that they owe
you anything. Today's workers, encouraged by a slew of anti-business
legislation, and the general nannying attitude of government,
often feel that the world owes them a living, although it
must be said that Hong Kong is far better than most countries
in this respect. Many employers of course bring problems on
themselves by treating employees as little better than slaves.
At all events, try as hard as you can to use contractors (ie
self-employed
people) rather than employees. The tax authority has plenty
to say about that, of course, so if you are left with no choice,
realize that you will have to provide
details of your employees to the tax authority, operate
the Mandatory
Provident Fund scheme, and conform with local employment
law, albeit that is much more liberal than elsewhere in the
world. Of course, there are plenty of exceptions to these
rather sweeping generalizations. Lucky you if you find some!
Welfare And Lifestyle: Meaning, for the
business person herself. Hong Kong is much less prescriptive
in this respect than most countries. There are no
social security contributions as such, and the Mandatory
Provident Fund rules apply only to employees, and even
then not if you employ your spouse. Most business-people will
therefore want to make provision for health
benefits, and almost all will want to find tax-efficient
ways of making provision for their pensions.
It's important to separate these from your business itself,
in case of failure. If you have it in mind to retire to somewhere
warmer and less highly taxed, then the time to start is now,
in terms of building
up a pension away from the grasp of the tax authorities,
although individual
tax rates in Hong Kong are not very high.
International Aspects: Perhaps you plan
to live out your life as a respected and contented member
of your local community. The salt of the earth, one might
say, if that's not patronising. But some people will find
themselves drawn intentionally or otherwise to an international
existence, doing business and/or living in other countries.
There are many challenges: apart from the difficulty of arranging
your tax affairs satisfactorily, there are the problems that
go along with property
ownership, education
of your children, international removals, health
care and pension
provision, just to take some of the more obvious issues. Of
course no one can predict the future with any certainty, but
there are all too many stories of people who have trapped
themselves in the wrong investment in the wrong currency in
the wrong place, with multiple taxmen on their backs. Most
such problems are avoidable, with forethought.
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