Despite uncertain economic conditions worldwide Hong Kong has continued to thrive with more Hong Kong company incorporations, and steady support from China.
There were few legislative changes to Hong Kong’s simple, territorial tax regime; this makes Hong Kong one of the best regimes for doing business and has caused Hong Kong to be ranked number one in the world in the Competitive Freedom index.
The Hong Kong tax system has a number of commendable features including:
Maximum effective Profits Tax rate of 16.5 per cent. In reality many businesses pay a lower effective tax rate than this, or nil taxes, if an “offshore profits” claim is made to exclude non Hong Kong source profits from taxation in Hong Kong.
Maximum effective Salaries Tax rate of 15 per cent. In reality most individuals pay a lower effective tax rate than this.
Tax-free capital gains.
Tax-free dividend income.
Tax-free offshore source income.
No withholding tax on dividends and interest.
No withholding of tax on salaries.
Minimal capital duty on authorised share capital increases or reorganizations.
No exchange controls.
No arm’s length pricing requirements, although benchmarking for a suitable ‘cost plus’ profit margin is advisable.
Tax-free interest on income for businesses since 22 June 1998, if interest is received from a Hong Kong financial institution and the deposit is not collateral for another loan.
Simple formula for annual tax reporting requirements for businesses and employees.
Advance tax rulings are available to clarify treatment of any uncertain tax areas including offshore taxation or tax-free status claims.
The main developments in the tax related to a number of new Double Tax Agreements (DTAs) being negotiated and concluded.
During 2012, Hong Kong nearly trebled the number of jurisdictions with which it has signed comprehensive DTAs. There are now 27 Hong Kong DTAs signed, although not all are effective yet. A number of these treaties can be viewed on the Hong Kong Inland Revenue website at www.ird.gov.hk.
There are numerous negotiations for further DTAs in place as well, with Bangladesh, Finland, Guernsey, India Korea, Macao, Mauritius, Qatar, Saudi Arabia, South Africa, the UAE and most notably, Australia is not on the list.
The Government has also been put under pressure by the OECDs FATF to enter into standalone Tax Information Exchange Agreements (TIEAs) but has so far not amended the Hong Kong Inland Revenue Ordinance to enable such agreements.
There has been a lot of tax litigation and Hong Kong taxpayers have often been successful against the Government, which is unusual in Asia, and shows the independence of the judiciary here. Indeed the Court of Final Appeal (the replacement for the Privy Council in the UK after the Handover in 1997) is always obliged to include a Supreme Court judge from a Commonwealth country, and this is a healthy tactic.
There have also been a number of changes, or proposed changes, to Hong Kong Company law and the Trustee Ordinance.
The Trust Law (Amendment) Bill 2013, aimed at modernising the trust law in Hong Kong, was gazetted on 8 February 2013. This is only the third set of changes to the Trust Law Gazette since 1934 when the Trustee Ordinance was first enacted.
The gazette changes aims to facilitate effective administration of trusts through enhancing trustees' default powers. The Bill seeks to amend two major ordinances of the trust law regime in Hong Kong, namely the Trustee Ordinance (Cap 29) and the Perpetuities and Accumulations Ordinance (Cap 257), while providing for appropriate checks and balances so that trustees will exercise the new default powers properly.
Hong Kong is a major asset management centre in Asia. As of the end of 2011, the trust industry held assets of an estimated US$2,600 billion, and more than 60 per cent of the asset management business originated from funds from non-Hong Kong investors.
The trust law regime in Hong Kong is mainly based on common law, supplemented principally by the Trustee Ordinance and the Perpetuities and Accumulations Ordinance. These two ordinances have not been substantially reviewed or modified since their enactments in 1934 and 1970 respectively. Some of their provisions are outdated and did not meet the needs of present-day trusts.
Following a review of the Trustee Ordinance and the Perpetuities and Accumulations Ordinance, and having examined the various modernisation proposals put forward by the trust industry and the recent trust law reform of the United Kingdom and Singapore, the Hong Kong Administration conducted public consultations in 2009 and 2012 respectively on the reform proposals.
Respondents were generally in support of the legislative proposals, considering them important for enhancing Hong Kong's status as an international asset management centre.
Debbie Annells, Founder, AzureTax Ltd, Chartered Tax Advisers, Hong Kong