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February 2012
The AFP View of the 2012/13 Hong Kong BudgetINTRODUCTION
The Financial Secretary, Mr. John Tsang Chun-Wah, delivered his fifth, and quite possibly last, budget to the Legislative Council on 1 February 2012, which was somewhat earlier than previous years. The AFP Group provides this commentary with the aim of helping clients understand the effects the budget may have on their personal circumstances and business interests, as well as Hong Kong society in general.
Mr. Tsang stated that the aim of his budget was to provide the financial resources for the implementation of measures to relieve people’s hardship, improve the quality of life and promote social and economic development that were announced by the Chief Executive in his October policy address. He also said that he would devote resources to all major aspects of Hong Kong society, such as education, medical services, social welfare, housing, infrastructure and various livelihood policy areas, whilst at the same time promoting economic development, so that the “investments” resulting from the budget proposals can help future generations face new challenges.
It has to be said that the budget measures announced included nothing innovative or little that was new by comparison to previous years. Rather, it was much of the same and it therefore remains to be seen if the measures meet the stated aims.
Mr. Tsang observed that the overall aspiration of our society, and therefore a major task of the current administration, was to maintain Hong Kong’s steady growth and he implied that this had been achieved despite the challenges faced by the global economy since 2008, from which Hong Kong has not been exempt.
In a somewhat self-congratulatory vein Mr. Tsang noted that despite the worldwide downturn of recent years, Hong Kong had achieved cumulative growth of 19% in real terms in the last five years and that per capita GDP has risen to US$34,200 in 2011, up from US$29,900 in 2007.
Hong Kong’s unemployment rate is now 3.3%, down from a high of 5.5% in mid-2009, and total employment has increased by more than 180,000 from a low point in 2009, which reflects a return to similar levels of unemployment achieved in 2008. Income from employment for lower-income groups has increased by 12.5% over the last year, which equates to 7% in real terms after adjustments for inflation. There has also been an improvement in the livelihoods of “grass roots” in the last year as the monthly median household income rose by 11.1% to HK$20,000, from HK$18,000, a 5.1% increase in real terms.
It is considered that Hong Kong has recovered quickly from the effects of the worldwide downturn of recent years, which was attributed to our flexible economic system and overall competitiveness. Mr. Tsang trumpeted this achievement by citing that Hong Kong had been ranked by the Heritage Foundation as the world’s freest economy for 18 consecutive years, had been rated as the world’s most open market by the International Chamber of Commerce and the World Bank had rated it as the second easiest place to do business. He also referred to a 2011 report by the IMF that concluded that Hong Kong’s policies and strategies to counter financial turmoil contributed to its “vigorous rebound” and to the top triple-A credit rating from Standard & Poor’s.
Despite these self-proclaimed achievements, which have most likely been achieved by Hong Kong’s entrepreneurial business sector despite the government’s bureaucratic meddling in financial and business matters, Mr. Tsang vowed that the government would not “lower its sense of crisis” in the face of continuing turmoil in international financial markets, unresolved economic troubles and the intricate problems of fiscal deficit and debt crisis in Europe and the U.S. as they could have a more serious impact than the 2008 “financial tsunami”.
Mr. Tsang announced that to prepare for potential external economic crisis this year, his budget would propose a series of measures to counter the risk of economic slowdown. The measures would be underpinned by the strategy of “supporting enterprises to preserve employment and promoting economic development to protect people’s livelihood” in order to tide enterprises over difficult times, preserve employment and increase peoples disposable cash at hand. He considered that in addition to cushioning the economy, the measures would help reduce the pressure of inflation on people in need so that our economy would move steadily forward.
For 2011/12 Hong Kong is expected to record a budget surplus of HK$66.7 billion, compared to a forecast HK$3.9 billion. Material underestimates have been a consistent feature of recent years and cast doubts on the government’s ability to manage the economy. For 2012/13 a deficit of $3.45 billion is predicted.
Hong Kong’s 2011 exports of goods rose by 3.6% in real terms, following a significant reduction in demand midyear resulting from slowdowns in the U.S. and Europe, compared to 17.3% growth in 2010. Domestic demand remained resilient and as the employment market continued to improve and incomes increased, private consumption expenditure maintained its growth momentum in all four quarters of 2011 to show an annual growth of 8.4% in real terms.
Inflation gathered pace in 2011 with the underlying rate for the year averaging 5.3%, a significant rise from 1.7% for 2010. In last year’s budget speech Mr. Tsang made much of the threats that inflation and asset-price bubbles would pose to the economy and the measures to be introduced to counter them. For a small economy such as Hong Kong that has a currency pegged to the U.S. dollar and which is largely externally driven, it is probably futile for the government to claim that it can do anything material about such risks!
A potential asset-price bubble showed signs of materialising in the real estate market in 2011. On the back of economic recovery and extremely low interest rates (due to Hong Kong’s pegged currency) coupled with a comparatively tight supply of residential units, the property market showed significant price increases during first half of the year, which tapered off during the second half with reductions showing in some areas. Mr. Tsang considered some of the heat had been taken out of the market and attributed this to measures introduced during 2011 to (1) increase the supply of flats; (2) curb property speculation; (3) prevent expansion in mortgage lending; and (4) ensure transparency in the property market.
All in all, Mr. Tsang’s assessment was that he and the government had done a good job in managing the economy during 2011.
In relation to our economic outlook for 2012 Mr. Tsang cautioned about external shocks and was pessimistic about export growth in the second half of the year. He therefore proposed to introduce measures worth nearly HK$80 billon to prepare for difficult times ahead with the aim of supporting enterprises and people in meeting challenges and to help ease the burden of inflation. Mr. Tsang considers this will help stimulate the economy by 1.5% in 2012.
The average underlying inflation rate for 2012 is predicted to be 4% (2011: 5.3%) and the headline inflation rate is estimated at 3.5% after taking account of the one-off measures proposed.
Hong Kong’s model of taxation and economic operation will continue unchanged. No changes to tax rates were announced, although increased allowances were proposed and a summary of the changes is provided later in this summary.
download PDFFebruary 2011
The AFP View of the 2011/12 Hong Kong BudgetINTRODUCTION
The Financial Secretary, Mr. John Tsang Chun-Wah, delivered his fourth budget to the Legislative Council on 23 February 2011 and the AFP Group provides this commentary with the aim of helping clients understand the effects the budget may have on their personal circumstances and business interests, as well as Hong Kong society in general.
For 2010/11 Hong Kong recorded a budget surplus of $70 billion, compared to a forecast deficit of $25.2 billion and Mr. Tsang is optimistic about Hong Kong’s economy but emphasised the need to contain inflation and asset bubbles. Following the 2009 downturn the economy staged a full recovery in 2010 at a faster pace than expected. This was on the back of strong growth in Mainland China and Asia and resulted in the economy surpassing pre-financial tsunami levels with GDP growing by 6.8% in real terms in 2010.
Hong Kong’s 2010 exports of goods rose by 17.3% in real terms, regaining ground lost in the financial tsunami. As the employment market improved and income increased, private consumption expenditure showed significant growth of 5.8% in 2010, and overall investment registered growth of 8.1% with the benefit of improved business sentiment and the commencement of major infrastructure projects. It is expected that the economy will grow solidly in 2011.
Whilst the outlook is considered to be positive, Mr. Tsang warned that the economy still faces challenges in 2011. Due to the second round of “quantitative easing” in the U.S., the risk of inflation and asset-price bubbles has increased in Asia, and there is still the sovereign debt crisis in Europe that has not been fully resolved.
Mr. Tsang considers that the risk of inflation is mounting in Asia and with the soft U.S. dollar and likely sustained increases in global food and commodity prices, this will put more inflationary pressure on Hong Kong. Also, the continued rise in Mainland China food prices and local rentals are expected to have a more noticeable effect on Hong Kong’s inflation in 2011. It is forecast that the headline and underlying inflation rates will be 4.5% for 2011.
In view of the socio-economic conditions currently affecting Hong Kong Mr. Tsang proposed increased spending on areas related to people’s livelihood, education, health, social welfare and community building. Over $40 billion of handouts were proposed.
Hong Kong’s model of taxation and economic operation will continue unchanged. No changes to tax rates were announced, although increases in some allowances were proposed.
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October 2010
When is Income of a Hong Kong Company Subject to Hong Kong Tax?When is income of a Hong Kong company subject to Hong Kong tax? The relevant section in the Inland Revenue Ordinance is section 14, commonly referred to as the charging section. This section provides that:
“Subject to the provisions of this Ordinance, profits tax shall be charged for each year of assessment at the standard rate on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business (excluding profits arising from the sale of capital assets) as ascertained in accordance with this Part.”
The first point to note is that the place where a company was incorporated is of no relevance when it comes to determining whether a company is liable to profits tax. The initial question in such a determination is whether the person is carrying on a trade, profession or business in Hong Kong. If it is concluded that a person is indeed conducting such an activity in Hong Kong, profits tax is payable only in respect of profits that have a source located in Hong Kong. However, section 14 provides three further criteria that need to be considered:
- the profits in question must be associated with the trade, profession or business that the person is carrying on in Hong Kong;
- the profits in question must be revenue in nature and computed in accordance with the provisions of the Inland Revenue Ordinance, and
- the profits must have been earned in the year of assessment in question.
Only if all these questions can be answered in the affirmative can a profit earned by a person be charged to Hong Kong profits tax.
It is important to appreciate that it is incumbent upon a taxpayer to prepare a computation of the assessable profits in accordance with the provisions of the Inland Revenue Ordinance. Such a computation should include a schedule of those profits that do not fall within the charge to profits tax. As it is the taxpayer who is making a claim for such profits to be excluded from tax, it is important that the taxpayer provide, in detail, the reasons why such profits should be excluded from taxation. Typical claims include profits that are capital in nature and those derived from a source located outside Hong Kong.
This computation must be sent to the Inland Revenue Department together with the annual profits tax return and audited statutory accounts, where appropriate. Failure to do so will constitute an incomplete return and may lead to the Inland Revenue Department raising an estimated assessment.
We strongly recommend that if a taxpayer has profits that fall outside of section 14, he/she should provide a full description of those transactions giving rise to the profits, at the time the first relevant tax computation is filed with the Inland Revenue Department.
We have observed may instances where a taxpayer files a tax return excluding profits from profits, tax without providing an explanation for doing so. This frequently leads to a detailed request for information from the Inland Revenue Department, sometimes several years later, when either the relevant documentation has been lost or filed away in storage, or people with knowledge of the transaction have left the company. All of this makes it difficult and expensive to substantiate the claim.
In later articles on the website, we’ll discuss the concept of carrying on business in Hong Kong, the source of profits etc.
download PDFOctober 2010
The Duties of Directors of Hong Kong Companies The
corporate regime relating to directors in Hong Kong
is contained in statute (the Hong Kong Companies Ordinance (“CO”)) and in common law case law. It is
worthwhile noting that the Hong Kong Companies Registry (being the government
entity with whom Hong Kong companies are to register, similar to the ASIC) has
issued a guide on directors’ duties and the Hong Kong Institute of Directors
has also issued the Guidelines for Directors, though these guidance notes do
not have the force of law. Furthermore, the Hong Kong Financial Services and
Treasury Bureau (“FSTB”)
of the Hong Kong government is currently consulting the public on a re-write of the CO, and a new statutory regime for companies may be submitted to the Hong Kong Legislative Council in the year 2012.
General rules relating to the appointment of directors
Every Hong Kong incorporated private company should have at least one director (section 153A) and currently, such director may be an individual or may be a corporate. There are no requirements for such director to be a resident of Hong Kong. Pursuant to the draft Companies Bill published by the FSTB for public consultation, the law would be changed so that a Hong Kong company would be required to have at least one director who is a natural person. However, there are no plans to require such individual person to reside in Hong Kong.
Alternate Directors
There are no statutory provisions for alternative directors. Typically, the standard articles of a Hong Kong shelf company provide for the appointment of alternative directors. Section 153B of the CO provides that where the articles of a Hong Kong company authorize a director to appoint an alternate in his place, then unless the articles provide otherwise, the alternate director shall be deemed to be the agent of the director who appoints him and that director appointing the alternate will be vicariously liable for any tort committed by the alternate director while acting in the capacity of alternate director.
Powers of Director
The general power of managing the company is usually vested in the directors, and generally, the directors may exercise all powers of the company not specifically required by the CO or the articles to be exercised by the shareholders of the company. Under the CO, certain powers may only be exercised by the shareholders, including alteration of the company’s articles, financial assistance for the purchase of shares, unlisted companies buying back their own shares (whether out of distributable profits or capital), reduction of capital, granting directors’ rights to allot shares, variation of class rights, appointment and removal of auditors and voluntary winding up of the company. Other than these statutory exclusions, most other powers (unless otherwise provided by the articles of the company) may be exercised by the directors.
The articles usually provide that the directors may meet together to dispatch business, adjourn or otherwise regulate their meeting as they think fit. At common law, directors can only exercise their powers collectively by passing resolutions at a properly convened meeting of the board of directors and they have no power to act individually as agents for the company. However, a company’s articles usually empower the board of directors to delegate its power to individual directors. Further, the articles of association usually provide that directors could exercise all the powers they are entitled to exercise by written resolution, and in the case of a sole director, such sole director is empowered to exercise all powers of the board of directors either in a meeting (in which case, such sole director is deemed to constitute a quorum) or by written resolution.
Proceedings at meetings of directors
There is no statutory provision setting out how often directors must hold meetings. However, each year, directors must approve a directors’ report dealing with the profit or loss of the company for that financial year and attached to such directors’ report shall be the balance sheet to be laid before the company in general meeting. As such, directors must have at least one meeting per year.
The articles of association usually provide that any director may summon a meeting of the directors, and that the company secretary must do so on the requisition of any director. The CO does not specify the notice period required for the calling of such meeting. The articles of association usually provide that the quorum necessary for the transaction of the business of the directors may be fixed by the directors themselves, but in the absence of any express decision by the directors, will be two (unless there is only one director). The directors may elect a chairman and decide the period for which he is to hold office. Standard articles of association usually provide that resolutions and questions are to be decided by a majority of votes.
There is no provision requiring directors’ meeting to be physically held in any particular place. One point to note is that the place of directors’ meeting is usually the place (for tax purposes) where the control and management of the company is exercised. The tax implication of this needs to be appreciated as a company (whether incorporated in Hong Kong or elsewhere) which is ‘managed and controlled’ in Hong Kong would, prima facie, be a Hong Kong tax resident and its Hong Kong sourced profits would be assessable to Hong Kong tax. On the other hand, if a company is incorporated in Hong Kong in order to take advantage of Hong Kong’s growing network of double tax treaties, then such company needs to be a Hong Kong tax resident (i.e. managed and controlled from Hong Kong) in order to gain exemptions under such double tax treaties.
Material interests in contracts
Where a director is in any way directly or indirectly interested in a contract or proposed contract with the company, he must declare the nature of his interest (if it is material) at the earlier meeting of the directors at which it is practicable for him to do so. Section 162 CO provides that any director who fails to disclose his material interest is liable to a fine, though it is a defence if such director has no knowledge of the contract and he could not reasonably have been expected to have such knowledge. The articles may contain additional provision as to whether such director is precluded from voting in respect of such contract.
It should be noted that pursuant to the FSTB is currently proposing that the CO be amended to include new provisions to ensure fair dealing by directors. These new provisions deal with particular situations in which a director is perceived to have a conflict of interest. It governs transactions involving directors or their connected entities which require members’ approval (namely loan transactions, long-term service contracts, substantial property transactions and payments for loss of office), and covers disclosure by directors of material interests in transactions, arrangements or contracts. Legal advice should be sought if there are any such proposed transactions.
Documentation of minutes of meeting
Minutes of the proceedings of directors must be kept in a book kept for that purpose (section 119(1) CO). Failure to comply with this requirement would result in the default fine for the company and every office of the company in default.
Responsibilities of Directors
In Hong Kong, the general duties of directors are mainly found in case law, leaving aside certain specific obligations imposed by the Companies Ordinance, and by the memorandum and articles of association of a company. Director’s duties can be classified into two broad categories: fiduciary duties, and duties of skill and care.
Director’s duties are owed only to the company itself, but not to any individual shareholders (Percival v Wright [1902] 2 Ch 421). Generally, only owe a duty to the company itself but not to any individual shareholder of the company, regardless of whether he is a majority shareholder or minority shareholder in the company. However, if the directors have actively made themselves agents of any individual shareholder, in this exceptional circumstance, directors may owe a duty to that particular shareholder.
The fiduciary duties of directors, which are generally based on equitable principles, mainly include:
- duty to act in good faith in the interests of the
- company;
- duty to exercise powers for proper purpose; and
- duty to avoid conflicts of duty and interest.
Duties of skill and care differ from more set fiduciary duties as they require directors to exercise reasonable care and skill in the performance of their functions and the exercise of their powers. These duties are derived from the common law principles of negligence. These existing duties are typically portrayed as relatively lenient, especially when matched against the more onerous and rigorously enforced matrix of fiduciary duties owed by company directors. A traditional laxity of application and a benevolent, sometimes almost indulgent judicial attitude has done nothing to contradict this image.
In Re City Equitable Fire Insurance Co Ltd [1925] Ch 407, Romer J formulated three propositions by which to measure a company director’s skill and care; in doing so, he established the superstructure of the modern law in this sphere:
- A director needs not, in performance of his duties, exhibit a greater degree of skill than may reasonably be expected of a person of his knowledge and experience.
- A director is not bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature to be performed at periodical board meetings and at meetings of any committee of the board upon which he happens to be placed.
- He is not, however, bound to attend all such meetings, though he ought to attend whenever in the circumstances he is reasonably able to do so. In respect of all duties that may properly be left to some other official, having regard to the exigencies of the business and the articles of the company, a director, in the absence of grounds for suspicion, is justified in trusting that official to perform such duties honestly.
In the draft Companies Bill proposed by the FSTB, the common law directors’ duty of care has been codified. Whilst Romer J’s formulation of directors’ duty of care is purely subjective (i.e. a director needs only exhibit a degree of skill reasonable expected of a person of his knowledge and experience), the proposed statutory duty to exercise reasonable care, skill and diligence is both subjective and objective. Under the proposals, the “reasonable care, skill and diligence” which must be exercised by directors is the care, skill and diligence that would be exercised by a reasonably diligent person with (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; and (b) the general knowledge, skill and experience that the director actually has.
Risks and Liabilities of Directors
Where a director is in breach of his duties and the breach has not been disclosed to and ratified by the company, an action may be brought for one or more of the following remedies:
- Rescission: where the directors have failed to disclose their personal interest in a contract which they have entered into on behalf of the company, that contract may be avoided at the option of the company;
- Damages: all directors found to have acted negligently or in breach of their duties are jointly and severally liable in damages to the Company;
- Account of profits: the misapplication of the company’s property renders the directors liable to account to the company in equity on the same basis as governs a misapplication of trust funds by trustees:
- Fines: where the company is in breach of the CO (for example, by failing to file annual returns, failing to file special resolutions of shareholders, failing to produce annual financial statements and audited accounts, failing to hold annual general meetings of shareholders, then the Company and each director/secretary could be subject to a default and daily fine); and
- Personal liabilities in certain cases: there are provisions in the Companies Ordinance which place onerous duties on the directors. For example, if, when a company is wound up, it appears that its business has been carried on with intent to defraud creditors or others the court may decide that the persons (usually the directors) who were knowingly parties to the fraud shall be personally responsible for debts and other liabilities of the company.
Risk management for directors of Hong Kong Companies
To mitigate and manage the risk and potential liabilities of directors and officers of Hong Kong companies, we do recommend that Directors’ and Officers’ Liability insurance be purchased. The purchase and maintenance of D&O insurance is expressly authorized under the draft Companies Bill proposed by the FSTB, which provides that a ‘company may purchase and maintain for the director insurance any liability incurred by the director in defending any proceedings taken against the director for any negligence, default, breach of duty or breach of trust…’, though it should be noted that insurance cannot be purchased against liability arising from fraud of the director.
It is possible for the company to indemnify its directors against the costs incurred by them in defending any proceedings commenced by a third party, civil or criminal, in which judgment is given in their favour or in which they are acquitted. However, any provision contained in the company’s articles or in any contract between a director and the company, which exempts any officer or director from, or indemnifies them against, any liability for negligence, default, breach of duty or breach of trust in relation to the company or a related company is void (s 165 CO).
Execution of documents by HK Companies
Execution of contracts by HK companies
If a contract is in writing, the contract will either be executed under hand by the company's authorised signatory or sealed by an attorney on behalf of the company or the contract can be sealed by the company by applying the company seal (in accordance with the formalities in the company's articles).
Generally, unless a contract is to be entered into in the form of a deed there is no necessity for a contract to be sealed by a company.
As a general rule, there is no legal requirement as to who should sign the contract on behalf of the Company (provided that the signatory is legally competent, e.g. not a minor or insane), nor is there any common law requirement that the person who signs, must sign before an attesting witness (except for statutory requirements). In certain cases, an attesting witness may be desirable for evidential reasons but practice on this varies.
Moreover, the extent to which a company uses its common seal, and the procedures to followed in so going, are (for the most part) matters for the company (acting through its board of directors) to determine. The best practice is for board resolutions to be passed approving a specified transaction, and then authorizing a specific director or two directors or an attorney to sign the documents, including affixing (in the case of deeds) the company seal.
A third party relying on the execution of a contract by an individual or other agent on behalf of a company will therefore be concerned to check whether:
- the signatory has been expressly authorised by the company, i.e. assuming that the entering into of the contract is within the capacity of the directors, that a board meeting has been properly held approving the entering into of the contract and authorising its signature by the signatory; or
- the signing of the contract is within the implied or usual authority of the signatory. For example, a managing director usually has the authority with regard to the management of the ordinary business of a company.
Execution of Deeds by Hong Kong Companies
A deed is an instrument which describes itself as a deed (or otherwise makes it clear on its face that it is intended by the parties to take effect as a deed) and which is validly executed as a deed. Some examples of documents which must be executed as a deed:-
- Contracts which involve the creation, extinguishment or disposition of any legal estate in land.
- Powers of Attorney .
- Contracts not supported by consideration.
A deed which is to be executed by the company itself must be executed under the common seal of a Hong Kong company. The manner of execution must comply with the requirements laid down in the Articles of Association of the company – usually the standard articles of association will provide that the seal of the company shall be affixed by a director and… the company secretary or a second director or an attorney appointed by the directors for that purpose.
As such, there is two possibilities for the execution of deeds by a HK company:
- the company (acting through a director and another director and the company secretary) could sign in the name of the company and affix the company’s seal;
- the company can appoint an attorney (whether an individual or a corporation) to execute a deed on its behalf. Such attorney should sign his own name and affix the company’s seal.
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October 2010
Hong Kong's Tax SystemHong Kong’s system of income tax is outlined in the Inland Revenue Ordinance and its subsidiary legislation, the Inland Revenue Rules. Hong Kong also imposes stamp duty on instruments catering for the transfer of specific property primarily immovable property and Hong Kong stock (the legislation covering this is contained in the Stamp Duty Ordinance). The estates of people who died before February 10, 2006 were also subject to Estate Duty.
The structure of Hong Kong’s tax system has always been based on three simple principles:
- The implementation of a comparatively low level of taxation, which nevertheless produces revenue for the Government.
- It is simple to understand.
- It is inexpensive to administer.
These principles were reinforced in the Basic Law of the Hong Kong Administrative Region of the People’s Republic of China, in which Articles 106 to Article 108 provide that Hong Kong shall administer an independent tax system based on a historically low level of taxation yet strive to maintain a balanced budget.
The legislation is administered by the Inland Revenue Department. The system of assessment and objection is in the first instance the responsibility of the Inland Revenue Department, but at later stages of appeal it is the responsibility of Hong Kong’s court system. To assist taxpayers, the Inland Revenue Department has published a series of Departmental Interpretation and Practice Notes (“DIPN”), covering a variety of subjects, which explain the Inland Revenue Department’s interpretation of Hong Kong’s tax legislation. Each DIPN clearly states the Inland Revenue Department’s practice, whilst stating that this is not binding on the taxpayer and does not prevent a taxpayer from pursuing the appeals procedure.
Hong Kong’s unique tax system has a number of characteristics that have been fundamental to its success:
- All of its types of income tax, namely profits tax, salaries tax and property tax, are assessed independently of each other, notwithstanding the fact that a taxpayer files a composite tax return.
- Spouses are regarded as separate individuals, but in given circumstances they may elect to aggregate their incomes and be assessed as a single person.
- Tax is levied not on the basis of the residence of the person, but rather according to the location of the source of the income earned by the person.
- There is no capital gains tax.
- There is no withholding tax on the payment of dividends and interest, although a form of Hong Kong tax may be withheld from the payment of specific royalties.
BUSINESS TAXATION
PROFITS TAX
Scope of Tax
Profits tax is charged on every person carrying on a trade, profession or business in Hong Kong. It is charged in respect of profits of a revenue nature that arise in or are derived from Hong Kong in the year of assessment.
The determination of whether a given source of income is derived from Hong Kong is a question of fact that has been considered by the courts. It is now well recognised that one looks to see what the taxpayer has done to earn the profit in question and where he/she has done it. DIPN 21, revised in December 2009, considers the general rules for determining the location of numerous sources of income and reflects the Inland Revenue Department’s interpretation of the relevant case decisions. These include but are not limited to:
| Activity | Location of the Source of Profit | |
| Provision of a service | – the place where the service is rendered | |
| Manufacturing | – the place where the manufacturing is carried out | |
| Letting of property | – the place where the property is located | |
| Lending of money | – the place where the borrower is first able to exercise control over the funds | |
| Dealing in commodities and securities | – the place where the contracts of purchase and sale are effected | |
However in practice, the Inland Revenue Department has adopted a more expansive view following Lord Jauncey’s decision in HK-TVBI, in which he stated that “it can only be in rare cases that a taxpayer with a principal place of business in Hong Kong can earn profits which are not chargeable to profits tax under section 14”. This confusion has, to a certain extent, been addressed in the recent decision in ING Baring Securities (Hong Kong) Limited v CIR, where it was stated that the focus must be on establishing the geographical location of the taxpayer’s profit-producing transactions themselves as distinct from activities antecedent or incidental to those transactions.
Permitted Deductions
All expenses of a revenue nature incurred in earning profits chargeable to Hong Kong tax qualify as a deductible expense. Specific legislation applies to the deduction of interest expenses (the provisions are complex and are designed to mitigate the loss of revenue from schemes designed to reduce a person’s assessable profits). The provisions mean that interest on loans payable to connected parties does not qualify as a deductible expense unless the recipient is subject to tax on the interest income. Other specific legislation deals with:
- The deductibility of bad and doubtful debts
- Repairs and renewals
- Intellectual property
- Contributions to retirement schemes
- Research and development expenditure
- Technical education
- Charitable donations
- Prescribed fixed assets
- Environmental protection machinery
Capital Expenditure
Relief in the form of depreciation allowances is available for the cost of capital expenditure on assets used for the purposes of earnings profits chargeable to tax. The relief available depends on the nature of the asset:
| Plant and machinery |
– Year 1, either 72%, 68% or 64% of the capital cost; thereafter 30%, 20% or 10% of the residual value |
|
| Computer equipment | – 100% in year 1 | |
| Industrial buildings |
– Year 1, a total allowance of 24% (20% initial allowance and a 4% annual allowance) of the qualifying capital cost of construction; thereafter 4% of qualifying capital cost of construction |
|
| Commercial buildings | – 4% of qualifying expenditure |
Special provisions apply to assets partly used for business purposes, and assets acquired by hire purchase and leveraged leasing. Depreciation allowances are also claimed back when the asset is sold for a price exceeding the tax written-down value, but are limited to the original cost of the asset. The acquisition cost of plant and machinery not acquired using hire purchase financing or partly used for non-qualifying purposes is pooled into three categories where the annual allowance is either 30%, 20% or 10% of the written-down value. A claw-back of depreciation allowances granted, known as a balancing charge, can only occur where the proceeds of sale (limited to the acquisition cost) exceed the tax written-down value of the pool.
Losses
Agreed tax losses incurred by a person may be carried forward indefinitely, irrespective of the nature of the trade or business conducted by the taxpayer. There are no provisions for the carry back of losses or for group relief. Anti-avoidance provisions are contained in the Inland Revenue Ordinance to prevent the sale of tax-loss companies purely for the benefit of the tax loss.
Debt/Equity Ratio: Thin Capitalisation
No formal rules are contained within the Inland Revenue Ordinance. However, due to the complex provisions denying relief for interest or loans between associated parties, there has been little need to implement such provisions.
Transfer Pricing
The Inland Revenue Ordinance does not contain any provisions under the title of “transfer pricing”, but Hong Kong’s anti-avoidance provisions and conditions for the deductibility of interest serve to mitigate any perceived tax loss through transfer pricing. Hong Kong has so far concluded 14 comprehensive double taxation treaties. Each treaty contains an exchange-of-information clause, so where there is cause for an adjustment due to the adoption of a transfer pricing scheme, the Inland Revenue Department has stated in DIPN Note 46 “Transfer Pricing” that it will adopt OECD principles.
Withholding Taxes
There is no withholding tax on the payment of dividends and interest. However, when a person carrying on business in Hong Kong pays a royalty to a person not subject to Hong Kong tax, the offshore party is deemed to have carried on business in Hong Kong and to be in receipt of Hong Kong-sourced profits. Depending on the circumstances, the deemed profit rate is 30% or 100%, giving a withholding tax rate of 4.95% or 16.5%.
Tax Treaties
Hong Kong has concluded 14 comprehensive double taxation treaties. Hong Kong’s treaties partners are:
| Austria | Indonesia | The Netherlands | |
| Belgium | Ireland | Thailand | |
| Brunei | Kuwait |
The United Kingdom |
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| China | Liechtenstein | Vietnam | |
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Returns, Assessment and Payment of Tax
The Inland Revenue Department normally issues profits tax returns at the beginning of each financial year, i.e. April, with one month being the permitted time to file the completed return. However, a system of automatic extensions is in place such that the following deadlines apply;
Accounting period Filing Deadline
- Ending in December - August 15 of the following calendar year
- Between January 1 and March 31 - November 16 of the same calendar year
- Other dates - One month after receipt of the return
The Inland Revenue Department will raise an assessment based on the return that has been filed, but in the absence of a return an estimated assessment will be raised. If the taxpayer is dissatisfied with the assessment, he/she may raise an objection in writing within one calendar month from the date of the assessment. The taxpayer may also apply for a holdover of the tax payable under an assessment (this must be done within 14 days of the date that the tax is payable).
Hong Kong operates a provisional basis of taxation, meaning that the annual assessment will assess the fiscal profits for the previous year of assessment and assess the provisional profits of the current year. Current-year profits are deemed to be the same as the previous year’s final profits. The effect of this is to assess profits on a current-year basis.
Rate of Tax
The current rate of profits tax is 16.5% (2010 – 2011). There is no small companies rate of tax.
Employment of individuals
An individual is required to apply for and hold a work visa, unless he/she has the right of abode in Hong Kong (effectively, this means an individual who is a Hong Kong national or a person who has resided permanently in Hong Kong for a period of seven consecutive years and holds a Permanent Identity Card).
An employer is required to notify the Inland Revenue Department on the occasion of a person starting or leaving employment. Within three months of a person starting employment, the employer must notify the Inland Revenue Department of the individual’s name and address, the date of commencement and the terms of employment.
When a person ceases employment, the employer must advise the Inland Revenue Department of the individual’s departure at least one month prior to the departure date. If the individual is intending to leave Hong Kong, the employer must not pay the employee any remuneration without the Inland Revenue Department’s consent.
It is mandatory for an employer to establish a retirement scheme in accordance with the Mandatory Provident Fund Scheme Ordinance.
Individuals are subject to Hong Kong salaries tax on their income from employment in respect of their income derived from a Hong Kong contract of employment. If the individual derives income from a non Hong Kong contract of employment the individual will be subject to salaries tax on a time apportionment basis. However, if an individual spends fewer than 60 days a year in Hong Kong, the individual will not be subject to salaries tax on employment income.
Where an employer provides accommodation to the employee or reimburses rent paid by the employee, Hong Kong provides a very beneficial basis of taxation. The amount assessed, the rental value, is equivalent to 10% of the individual’s assessable income from the employment. Where the employer provides the individual with accommodation in a hotel, a reduced percentage applies.
Other tax-free benefits can be provided to the employee, either as a result of being specifically provided for in the Inland Revenue Ordinance or because the liability associated with the provision of the benefit is entirely that of the employer, i.e. there is no assumption by the employer of an employee’s liability.
Each year, the employer is required to make an annual return to the Inland Revenue Department, with details of the names and addresses of all the employees receiving an annual income in excess of HK$100,000. The individual is also required to file an annual salaries tax return within one month of the receipt of the return giving details of his/her assessable income. As with profits tax, Hong Kong operates a provisional salaries tax system that seeks to tax individuals on a current-year basis.
The Inland Revenue Ordinance provides for progressive rates of tax payable on the taxpayer’s assessable income, i.e. his/her total Hong Kong-sourced assessable income less his/hers personal allowances and deduction, which are numerous. However, the total salaries tax payable cannot exceed 15% (2008/09) of the net assessable income before personal allowances.
Income from Property
Corporations in receipt of rental income from property located in Hong Kong will normally be subject to profits tax, however individuals not carrying on a business will be subject to property tax. This is a very simplified basis of taxation that limits deductions from rental income to government rates, bad debts and a statutory deduction of 20% of the assessable value to compensate the taxpayer for repairs and other outgoings.
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download PDF
February 2010
The AFP View of the 2010/11 Hong Kong BudgetIntroduction
AFP Group has long been associated with helping clients understand the effects Hong Kong budgets may have on their personal circumstances, their business interests and Hong Kong society in general. This budget commentary is designed to give a summary of the 2010/11 Hong Kong budget delivered on February 24, 2010, by the Financial Secretary, Mr. John Tsang Chun-wah, and its implications.
Mr. Tsang is cautiously optimistic about Hong Kong’s economic prospects for 2010. Whilst he described the financial tsunami triggered by the US sub-prime mortgage problem as being the most severe since World War II, whose shocks to the global economy were more profound than those experienced during the Asian financial turmoil in 1997 and 1998, Mr. Tsang indicated that the Hong Kong economy has recovered more quickly than during the Asian financial turmoil, despite its increased severity. By the fourth quarter of 2009, the Hong Kong economy resumed positive growth after four consecutive quarters of year-on-year contraction, and Mr. Tsang forecasted GDP growth of four to five per cent in 2010.
Although the Hong Kong economy is in the early stages of its recovery, Mr. Tsang warned that the road ahead may not be smooth. Specifically, he warned that whilst the European and US economies have returned to positive growth, their labour markets have yet to improve and their financial systems are still impaired. It remains uncertain what effects the end of the government stimulus measures will have on the global economy, although Mr. Tsang remains confident that the return to a stronger growth in the Mainland economy may offset the fragile economic recovery in overseas markets. However, in the short term, one of the main challenges facing Hong Kong is the risk of asset-price bubbles in the domestic property market.
Mr. Tsang reiterated the commitment of the Hong Kong Government to the principle of “Big Market, Small Government”. The Hong Kong Government will not deviate from its fundamental belief that market mechanisms are the most effective way to raise the efficiency of the economy, and that it would be inappropriate for the Hong Kong Government to attempt to resolve unemployment and poverty through a large-scale redistribution of wealth. There will be no changes to the Hong Kong model of taxation and economic operation, which is to promote overall economic growth so as to provide opportunities for wealth creation. However, Mr. Tsang emphasized that a government that upholds market principles is by no means a ruthless government. The Hong Kong Government is committed to promoting economic development to benefit the community at large, not just a limited elitist group.
Mr. Tsang delivered his third budget speech to the Legislative Council at a point when Hong Kong could be said to be in the early stages of economic recovery. In his view, there remain significant, but by no means insurmountable, challenges ahead. Firstly, Hong Kong must carefully manage the exit from the exceptional measures put in place in 2008 to stabilise the financial system. Specifically, the application period for the Special Loan Guarantee Scheme, pursuant to which the Hong Kong Government will act as guarantor in respect of loans to Hong Kong enterprises from participating financial institutions, and the full deposit guarantee scheme, will both expire at the end of 2010. Secondly, steps need to be taken in the short term to manage the risk of asset-price bubbles.Traditionally, Hong Kong enjoys positive fiscal reserves with little government borrowing. This has allowed the Government to follow the Keynesian practice of boosting government spending in times of economic decline, notably during the Asian financial crisis of 1997/98 and SARS in 2003. In preparing the 2009/10 budget, Mr. Tsang expected the Government’s revenue to reflect the downslide in the global economy and the highly volatile financial markets. However, from the second quarter of 2009, the Government received better-than-expected revenues due to large inflows of funds into Hong Kong’s property and stock markets. Mr. Tsang confirmed that he expects fiscal reserves to remain robust throughout the foreseeable future, although he estimates a deficit of HK$25.2 billion for the year 2010/2011, equivalent to 1.5 per cent of Hong Kong’s GDP. The deficit is expected to decrease gradually over the next few years, with the expectation of a balanced budget by 2013/2014.
Table of contents- Introduction
- Highlights
- Profits Tax
- Salaries Tax
- Other Taxes, Rates, Duties and Measures - Comments on SMEs download PDF
March 2009
AFP View of the 2009/2010 Hong Kong BudgetIntroduction
AFP Group has long been associated with helping clients understand the effects Hong Kong budgets may have on their personal circumstances, their business interests and Hong Kong society in general. This budget commentary is designed to give a summary of the 2010/11 Hong Kong budget delivered on February 24, 2010, by the Financial Secretary, Mr. John Tsang Chun-wah, and its implications.
Mr. Tsang is cautiously optimistic about Hong Kong’s economic prospects for 2010. Whilst he described the financial tsunami triggered by the US sub-prime mortgage problem as being the most severe since World War II, whose shocks to the global economy were more profound than those experienced during the Asian financial turmoil in 1997 and 1998, Mr. Tsang indicated that the Hong Kong economy has recovered more quickly than during the Asian financial turmoil, despite its increased severity. By the fourth quarter of 2009, the Hong Kong economy resumed positive growth after four consecutive quarters of year-on-year contraction, and Mr. Tsang forecasted GDP growth of four to five per cent in 2010.
Although the Hong Kong economy is in the early stages of its recovery, Mr. Tsang warned that the road ahead may not be smooth. Specifically, he warned that whilst the European and US economies have returned to positive growth, their labour markets have yet to improve and their financial systems are still impaired. It remains uncertain what effects the end of the government stimulus measures will have on the global economy, although Mr. Tsang remains confident that the return to a stronger growth in the Mainland economy may offset the fragile economic recovery in overseas markets. However, in the short term, one of the main challenges facing Hong Kong is the risk of asset-price bubbles in the domestic property market.
Mr. Tsang reiterated the commitment of the Hong Kong Government to the principle of “Big Market, Small Government”. The Hong Kong Government will not deviate from its fundamental belief that market mechanisms are the most effective way to raise the efficiency of the economy, and that it would be inappropriate for the Hong Kong Government to attempt to resolve unemployment and poverty through a large-scale redistribution of wealth. There will be no changes to the Hong Kong model of taxation and economic operation, which is to promote overall economic growth so as to provide opportunities for wealth creation. However, Mr. Tsang emphasized that a government that upholds market principles is by no means a ruthless government. The Hong Kong Government is committed to promoting economic development to benefit the community at large, not just a limited elitist group.
Mr. Tsang delivered his third budget speech to the Legislative Council at a point when Hong Kong could be said to be in the early stages of economic recovery. In his view, there remain significant, but by no means insurmountable, challenges ahead. Firstly, Hong Kong must carefully manage the exit from the exceptional measures put in place in 2008 to stabilise the financial system. Specifically, the application period for the Special Loan Guarantee Scheme, pursuant to which the Hong Kong Government will act as guarantor in respect of loans to Hong Kong enterprises from participating financial institutions, and the full deposit guarantee scheme, will both expire at the end of 2010. Secondly, steps need to be taken in the short term to manage the risk of asset-price bubbles.Traditionally, Hong Kong enjoys positive fiscal reserves with little government borrowing. This has allowed the Government to follow the Keynesian practice of boosting government spending in times of economic decline, notably during the Asian financial crisis of 1997/98 and SARS in 2003. In preparing the 2009/10 budget, Mr. Tsang expected the Government’s revenue to reflect the downslide in the global economy and the highly volatile financial markets. However, from the second quarter of 2009, the Government received better-than-expected revenues due to large inflows of funds into Hong Kong’s property and stock markets. Mr. Tsang confirmed that he expects fiscal reserves to remain robust throughout the foreseeable future, although he estimates a deficit of HK$25.2 billion for the year 2010/2011, equivalent to 1.5 per cent of Hong Kong’s GDP. The deficit is expected to decrease gradually over the next few years, with the expectation of a balanced budget by 2013/2014.
Table of contents- Introduction
- Highlights
- Profits Tax
- Salaries Tax
- Other Taxes, Rates, Duties and Measures - Comments on SMEs download PDF
February 2008
The AFP Group 2008/2009 Hong Kong Budget CommentaryStrong economy, further tax concessions, commitments to long term
improvements and time for a celebratory drink!
With the benefit of strong economic growth in 2007 the Hong Kong government now has a significant surplus to
allocate and the budget announced today by the Financial Secretary, Mr. John Tsang, set out their intentions and
aspirations. Some of the key announcements were:
- Reductions in personal, corporate and property taxes have been announced.
- Major expenditure on infrastructure development and the additional intention to build a new runway at HKIA and a tenth sea container terminal were announced.
- The continued commitment to improving education and a good quality workforce was reflected in increasing state funded education and skills training.
- Plans to increase the land supply and re-site government offices outside the central business district were announced in recognition of the shortage of supply and high prices of commercial and residential accommodation.
- Perhaps the greatest surprise of relevance to our clients is the removal of the requirement for business registration fees, which will make it even more attractive to establish companies in Hong Kong.
- There were also announcements that both the Companies Ordinance and Trustees Ordinance would be reviewed to simplify the rules whilst preserving proper legal and regulatory protection.
- Considerable emphasis was placed on ensuring Hong Kong remains the preferred Asian city for headquarters for operations throughout Asia. The main emphasis is on continuing improvements in the already advantageous tax and trade agreements with mainland China, but also facilitating business with India and Vietnam particularly.
- Visitors to Hong Kong will be delighted to hear that more hotel developments are being encouraged and hotel tax removed.
- Most alcoholic drinks are having duty removed with immediate effect in an effort to stimulate Hong Kong’s development as the Asian centre of the rapidly growing wine trade. Clearly the financial secretary is not a whisky drinker however - spirits are excluded.
- Smaller concessions were made to welfare, environmental and health care improvements. Special emphasis has been placed on reducing air pollution, with tax concessions on green vehicles and machinery. Despite the government showing clear awareness of competition from other territories we are of the opinion that more could have been done for businesses, especially in the financial services sector. We had hoped to see initiatives such as reductions or removal of stamp duty on the transfer of Hong Kong stock, incentives for the capital market, fund management and trust administration sectors, but the budget was silent on these points. Nevertheless, when one considers the situation in Hong Kong relative to London or New York, for example, Hong Kong looks far more attractive as a place to do business, economically, geographically and commercially.