6. SPECIAL PROVISIONS
Depending on the type of business that is being operated, the business may be subject to the operation of other additional legislation and subject to the supervision and control of various regulatory bodies. The following is a non-exhaustive list of business types that are subject to other legislative provisions in Hong Kong:
- 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
- Professionals (including lawyers and accountants)
Specialist advice should be obtained if the intended business falls within these categories.
7. TAXATION ASPECTS OF SUBSIDIARIES AND BRANCHES IN HONG KONG
The Hong Kong system of taxation is based on the principle of territoriality (i.e. only profits which are derived from Hong Kong are taxable in Hong Kong). There are no payroll, turnover, sales, value added, gift or capital gains taxes in Hong Kong. There is also no tax on dividends paid by Hong Kong companies. In Hong Kong, the principal tax likely to be payable by either the Subsidiary or the Branch which has established business operations in Hong Kong is profits tax.
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 arise in or be derived from Hong Kong.41 No distinction is made between residents and non-residents.
The source of profits is therefore crucial in determining whether or not they are taxable. The question of whether a business is carried on in Hong Kong and whether profits are derived from Hong Kong is largely a question of fact. The courts determine whether assessable profits of a trade, profession or business have arisen in Hong Kong by examining what has been done to earn the profits and then seek to establish where these profits were derived.
The source of profits may not be immediately apparent and it may be necessary to consider this question at length. Specialist advice should be sought if necessary.
7.3. Determination of Profits
Tax is charged on the assessable profits for a year of assessment. The assessable profits are the net profits (or loss) arising in or derived from Hong Kong during the year of assessment,42 calculated in accordance with the provisions of the Inland Revenue Ordinance (“IRO”)
The Subsidiary or Branch must include its accounts when submitting profit tax returns issued to it. 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 non-Hong Kong company’s worldwide profits are adjusted to conform with profits tax principles and apportioned on the basis of the ratio of Branch turnover to worldwide 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 profits tax at the current rate of 16.5%. A concession of half the normal profits tax payable is provided for trading profits and interest income received or derived from qualifying debt instruments in Hong Kong. The amount of profits tax payable is assessed on receipt of tax returns submitted to the Inland Revenue by the taxpayer. This tax return must be submitted within 4 months from the end of a tax year (on or before 31 July in each year).43
As the profits of any particular year cannot be ascertained until after the tax year ends, a provisional profits tax is payable at the standard rate by reference to the agreed assessable profits of the year preceding the year of assessment.44 The provisional assessment is payable in two instalments, 75% in the final quarter of the current tax year and the balance within three months of the first instalment. Any provisional profits tax that is not applied to the payment of the actual profits tax payable when a profits tax assessment is made shall be refunded.45 The amount of provisional profits tax payable in the following year shall be adjusted accordingly.
7.5. Double Taxation
Hong Kong has reached an understanding with the relevant tax authorities in the Central People’s Government, PRC for the 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 have also been concluded.46
7.6. Treatment of Losses And Deductions
Loss relief may be available to the Branch or Subsidiary. In general, where a loss is incurred in any year of assessment, the amount of such loss attributable to activities in Hong Kong shall be set off against assessable profits in that year of assessment. Where an amount of loss cannot be wholly set off for the year of assessment in which the loss occurred, the amount not set off shall be carried forward to future years.47 A corporation carrying on more than one trade can have losses in one trade offset against profits of the other trade.
Also, outgoing and expenses, to the extent to which they are incurred in the production of assessable profits during the year of assessment, may be deducted from tax chargeable to the Branch or Subsidiary.48
Capital expenditure is not deductible but there is a system of capital allowances relating to buildings, plant and machinery (i.e. depreciation allowances for industrial and commercial buildings).49
There is no withholding tax on dividends payable by a Subsidiary or Branch.
7.8. Transfer Pricing
Due to Hong Kong’s relatively low tax rates, it is uncommon for corporations to devise transnational arrangements for the purpose of tax avoidance. Nevertheless, the IRO contains anti-avoidance provisions to combat any such arrangements.
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 (see section 9.2 below).
8. INTELLECTUAL PROPERTY
This section outlines the main types of intellectual property protection available to all businesses in Hong Kong. The intellectual property laws of Hong Kong have changed dramatically since the handover of its sovereignty to China in July 1997.
Patents in Hong Kong are regulated by the Patents Registry of the Intellectual Property Department and governed primarily by the Patents Ordinance (“PO”). Under the PO, an application for a patent can be made to the Registrar by a proprietor of an invention.50 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 non-Hong Kong company 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.51 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, drama, musical works, artistic works, sound recordings, films, broadcasts, cable programmes and published editions.52 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
The concept of “passing off” is based on English common law. It may be thought of as a form of unfair competition law and it seeks to protect a established goods or services of traders from being imitated by others, thereby misleading the public and causing damage and loss to the trader’s business. Provided that all the necessary elements of the alleged passing off can be established, a trader is entitled to civil remedies.
8.5. Registered Designs
Any person claiming to be the owner of any article(s) can apply to Registrar of Designs to register the design in such article or articles(s).
In order to obtain a valid registration, the design must be novel, possess individual character and must be industrially applied to manufacture articles. Registering designs however protect only the shape, visual appearance, aesthetic appeal or ornamental characteristics of a new design and protection does not extend to any functional features, which are within the reign of technical patent for invention. Civil remedies are available in respect of any infringements of the rights of a proprietor of a registered design.
41 section 14 and 18 IRO
42 section 18 and 18B IRO
43 The tax year for corporation ends on 31 March each year for corporations.
44 section 63G and section 63H IRO
45 section 63K IRO
47 section 19 IRO
48 section 16(1) IRO
49 section 33A and section 34 IRO
50 section 12 PO
51 section 47 of the Trademarks Ordinance (Cap 559)
52 section 2 Copyright Ordinance