6. Special Cases
Certain types of business in Hong Kong are regulated by specific legislation and are subject to the supervision and control of various regulatory authorities. Specific advice should be obtained before establishing operations in each of these areas of business. There follows a non-exhaustive list of such types of business:
- Banking and the taking of deposits
- Insurance business
- Investment management and advice
- Dealing in foreign exchange, derivatives, securities and commodities
- Textiles import-export business
- Employment and travel agencies
- Food and liquor business
- Money changing business
- Media business (including cinema, newspapers, theatres, telecommunications and television)
- Shipping, aviation and transport services
- Professions (including lawyers and accountants)
7. Taxation Aspects Of Subsidiaries And Branches In Hong Kong
This section is intended to give a brief outline of the main tax consequences of setting up a Subsidiary or a Branch in Hong Kong.
The Hong Kong system of taxation is based on the principle of territoriality. There are no payroll, turnover, sales, value added, gift or capital gains taxes in Hong Kong. There is no tax on dividends paid by Hong Kong companies. The main Hong Kong tax likely to be payable by either the Subsidiary or the Branch is Profits Tax. They are treated in much the same way under the legislation.
7.2 Profits Tax
Profits Tax is charged on every person carrying on a trade, profession or business in Hong Kong in respect of assessable profits which arise in or are derived from Hong Kong from such trade, profession or business. In certain circumstances, profits tax may be charged in respect of profits deemed to arisen in or derived from Hong Kong.
The source of the profits is therefore crucial in determining whether they are taxable. The courts determine whether assessable profits of a trade, profession or business have arisen in Hong Kong by looking to see what has been done to earn profits and then seek to establish where that operation or the principal elements of it took place.
The source of profits may not always be obvious and it may be necessary to consider this complex question at greater length. Specific advice should be obtained on this point.
7.3 Determination Of Profits
Profits are determined on normal accounting principles on the basis of the Subsidiary’s books of account or the Branch accounts.
If the Inland Revenue is satisfied that the Branch accounts show the Branch’s true profits, they are adopted and the tax payable is calculated under Profits Tax principles. If not, the Overseas Corporation’s world-wide profits are adjusted to conform with Profits Tax principles and apportioned on the basis of the ratio of Branch turnover to world-wide turnover. If, in the Inland Revenue’s opinion, this would be impracticable or unfair, it has the power to assess what it considers to be a “fair” percentage of the turnover of the Branch to Profits Tax.
7.4 Rates Of Profits Tax And Assessments
Corporations are charged to Profits Tax at the current rate of 16% payable by a system of direct assessment following returns being made to the Inland Revenue by the taxpayer within 4 months after the end of a tax year. In Hong Kong the tax year for corporations ends on 31st March in each year.
In addition there is a system of Provisional Profits Tax under which a provisional assessment for the next tax year is made by reference to the agreed assessable profits of the immediately preceding year of assessment. The provisional assessment is payable in two instalments of 75% in the final quarter of the current tax year, the balance three months later. The amount of Provisional Profits Tax paid is set off against the final tax bill for that year. Any excess of final tax liability for that year over the Provisional Profits Tax paid or vice versa is added to or subtracted from the first instalment of Provisional Profits Tax for the following year.
7.5 Double Taxation
Hong Kong has reached an understanding with the relevant tax authorities in the Central People’s Government, PRC for avoidance of double taxation between the Mainland and Hong Kong. The arrangement covers airline and shipping operations as well as other business activities. In addition, double taxation relief arrangements in shipping and airline income with other countries has also been concluded. The Overseas Corporation should also obtain advice from its tax advisers in its own jurisdiction on this.
7.6 Losses And Deductions
Loss relief may be available to the Branch or Subsidiary which may, of course, be important in its early years. Also, outgoing and expenses, to the extent to which they are incurred in the production of assessable profits, may count as deductible expenditure. Capital expenditure is not deductible but there is a system of capital allowances relating to buildings, plant and machinery.
There is no withholding tax on dividends paid by a Subsidiary to the Overseas Corporation.
7.8 Transfer Pricing
Arrangements by which the Hong Kong operation charges artificially low prices to, or is charged artificially high prices by, closely connected overseas companies are relatively uncommon due to Hong Kong’s rates of taxation being typically lower than elsewhere. In those cases where such arrangements have been made, the legislation contains anti-avoidance provisions. Those provisions also, however, cover arrangements between Hong Kong resident persons and overseas parties which generate profits that are not sourced in Hong Kong. Historically, the Inland Revenue has not exercised these powers frequently, but this practice may be changing.
7.9 Keeping Business Records
All persons carrying on business in Hong Kong are required to keep sufficient records, in English or Chinese, of their income and expenditure to enable their assessable profits to be readily ascertained. There are also statutory requirements to record certain specified details of every transaction. Business records must be retained for at least seven years after the date of the transaction to which they relate.
7.10 Other Taxes
Property Tax is payable on rental income. There is no tax on capital gains or any form of sales tax in Hong Kong but there are special taxes on hotels, entertainment and betting and duties are payable on a number of products, such as alcohol and tobacco. There are also other duties (including stamp duty) and taxes chargeable in Hong Kong (and, in particular, see section 9.2 below).
8. Intellectual Property
The Overseas Corporation must also be satisfied that, in setting up operations in Hong Kong, its (and, as the case may be, the Subsidiary’s) intellectual property rights, such as copyright, patents and trade marks, are protected from infringement by counterfeits and from other abuse.
There follows a brief outline of the main types of intellectual property protection currently available. The intellectual property laws of Hong Kong have gone through a fundamental change in view of the hand-over of sovereignty to China in July 1997.
A Registrar of Patents was established in Hong Kong in July 1997. An application for patent can be made to the Registrar by a proprietor of an invention. An invention is patentable if it is susceptible to industrial application, is new and involves an inventive step (i.e. it is not obvious as part of the state of the art of a person skilled in the art). The proprietor of a “designated patent” (i.e. a patent granted by a designated patent office, normally the UK or China Patent Office) can also apply to the Registrar to record the patent without further examination.
The Subsidiary, or the Overseas Corporation acting through its Branch, may sell goods or offer services by reference to a particular identifying mark. There is a Trade Marks Registry in Hong Kong at which trade marks in respect of goods and services may be registered provided that they satisfy certain requirements. Civil and criminal remedies are available in respect of infringements of a registered trade mark.
The Copyright Ordinance provides for the protection of original literary, dramatic, musical works, artistic works, sound recordings, films, broadcasts, cable programmes and published editions. Copyright works attract copyright protection under the Ordinance automatically upon creation and civil and criminal remedies are available in support of such rights.
8.4 Passing Off
This complex area of the law is based on the English common law. It may be thought of as a form of unfair competition law. It seeks to protect a trader from having his well known goods or services imitated by any person in such a way that it amounts to a misrepresentation to the public thereby causing damage and loss to his business. Provided that all the necessary elements of the alleged passing off are provided, a trader is entitled to civil remedies.
8.5 Registered Designs
The Registrar of Designs has been established in Hong Kong. A person claiming to be the owner of any article or set of articles can apply to register the design in such article or articles to the Registrar.
In order to be registrable, the appearance of the article must not be material. This means that aesthetic considerations are not normally taken into account to a material extent by persons acquiring or using articles of that description, and would not be so taken into account if the design were to be applied to the article. Civil remedies are available in respect of any infringements of the rights of a proprietor of a registered design.