Hong Kong has been a key reference in international taxation and legal tax avoidance for decades.
Although it enjoys autonomy in areas such as politics, economics, and justice, Hong Kong is not an independent country but rather an autonomous region of China.
Even so, Hong Kong has made a name for itself as one of the most competitive economies globally, consistently ranking among the top in the ease of doing business index.
In addition to its pro-business environment and enviable tax system, Hong Kong offers a solid banking infrastructure with highly reputable and stable institutions.
This is complemented by a high level of security and quality of life, making it an ideal place for those who wish to conduct business in an environment that strongly protects private property and economic freedom.
Historically, Hong Kong has been one of the preferred destinations for offshore company incorporation due to its favorable environment and low taxes. However, this situation has changed over time due to modifications in its tax and regulatory systems, making it essential to understand how these entities operate in the current context.
In this article, we will analyze the taxation of this region and discover how it is still possible to take advantage of Hong Kong’s benefits to reduce our tax burden, even down to 0%!
Taxes in Hong Kong
When we talk about Hong Kong, it’s fascinating to analyze its tax system, as it is based on a territorial principle: only income generated within the region is taxed.
The important thing is that if you’re not generating value from Hong Kong -meaning, if you don’t have employees there or the work isn’t being done from the region- you won’t have to pay taxes in Hong Kong on that income.
And that’s not the only interesting part. In addition to this territorial criterion, Hong Kong is notable for the absence of many taxes that are considered standard in other jurisdictions:
- VAT (Value Added Tax): Does not exist.
- Capital Gains Tax: Not applied.
- Dividend Tax: Dividends received are not subject to tax.
- Wealth Tax: None.
- Gift and Inheritance Taxes: Not applied.
- Exit Tax: Does not exist.
- Controlled Foreign Corporation (CFC) Rules: Not applicable.
- Personal Income Tax: Based on a progressive system with low rates, ranging from 2% to 17%.
However, while this scenario sounds highly attractive, establishing our tax residence in Hong Kong is not exactly simple.
As in many Asian countries, the main challenge is not so much taxation but obtaining long-term residence permits.
In the case of Hong Kong, the most accessible route for this is through its investment residency, which has recently been reopened under the name New Capital Investment Entrant Scheme.
This program requires an investment of €3.5 million in assets such as stocks, bonds, or funds, making it accessible only to very select profiles.
Therefore, for most tax nomads, the most attractive aspect of Hong Kong is not so much its tax residency, but the possibility of establishing companies that can potentially be completely tax-free, under the conditions we’ll discuss below.
Corporate Income Tax in Hong Kong
In Hong Kong, the corporate tax is structured into two tiers. The first tier applies a rate of 8.25% on the first approximately €230,000, while any amount exceeding that figure is taxed at 16.5%.
While these rates are not exorbitant, they are also not the most attractive compared to other jurisdictions.
However, what truly sets Hong Kong companies apart is the territorial tax system we mentioned earlier.
Thanks to this system, companies can benefit from a full tax exemption if they can demonstrate that their income is not generated within the region.
To obtain this exemption, a request must be submitted to the Hong Kong tax authorities, providing detailed evidence that all income comes from outside the territory.
This process can be complex and take around six months, in addition to requiring a thorough investigation to confirm that you indeed meet the requirements.
It’s important to note that, to qualify for this exemption, we cannot have employees, offices, or any type of substance in Hong Kong. In fact, it is advisable that, as company directors, we avoid spending time in the region.
Holding Companies in Hong Kong
Since January 2023, Hong Kong has implemented significant changes to its tax regime to adapt to international pressures, especially after being included on the European Union’s list of non-cooperative jurisdictions in 2022.
These changes have primarily affected passive income, such as interest, dividends, capital gains, and profits derived from intellectual property.
The new regulations stipulate that passive income will be subject to corporate tax in Hong Kong if the company does not meet certain requirements.
The most relevant of these is that if your Hong Kong company lacks substance, this income will be taxed. However, there are exceptions to this rule:
The participation exemption allows dividends and capital gains to remain tax-exempt as long as you hold at least a 5% stake in the entity generating that income.
Additionally, if your company acts as a pure holding company, without engaging in active economic activities, passive income can be completely tax-exempt, regardless of the entity’s economic substance.
In summary, although the changes have introduced more complexity, with the right strategy and a clear understanding of the new regulations, it is still possible to take advantage of the tax benefits that Hong Kong offers.
Advantages of a Company in Hong Kong
One of the greatest advantages of setting up a company in Hong Kong is the possibility of operating with 0% taxes, provided the necessary conditions are met.
As mentioned earlier, for companies without substance and with active income generated outside of Hong Kong, full tax exemption can be achieved. This, of course, requires careful and customized planning.
Additionally, Hong Kong is an excellent place to establish a pure holding company. If our company acts solely as a holding and meets the established requirements, passive income may be completely tax-exempt.
Even in cases where we hold shares in other companies, we can benefit from the participation exemption, which would allow for 0% taxes on dividends and capital gains.
This advantage is enhanced by the excellent international reputation of Hong Kong entities, making them more attractive compared to other jurisdictions like Panama or Palau, which are often viewed with suspicion and can harm the business’s image.
Another significant advantage is that there is no value-added tax (VAT) in Hong Kong, so we don’t have to charge VAT to our customers, though this is something achievable with many other entities as well.
Finally, companies in Hong Kong benefit from an extensive network of double taxation treaties, which can be crucial in many tax planning strategies.
However, it’s worth noting that there is no double taxation agreement with the United States, which could limit certain structures.
Disadvantages of a Company in Hong Kong
One of the main limitations for companies in Hong Kong is the need to avoid having substance in the country to avoid taxation there.
In practice, this means that we cannot have offices, employees, or a local director in Hong Kong.
This lack of substance will be a problem if we reside in tax jurisdictions like Spain, the UK, or Germany, where tax rules require companies to have a real presence and could pursue us for considering the company as fictitious.
In this regard, it is crucial to have suitable tax residency that allows us to manage this company without legal issues and also protects us from Controlled Foreign Corporation (CFC) rules.
Another significant disadvantage is the bureaucracy involved in operating in Hong Kong. Companies there are required to conduct annual audits. Additionally, if we want to apply for the 0% territorial tax exemption, we must go through a formal application process with the authorities, which can be lengthy and require substantial documentation to prove that the income is not generated in Hong Kong.
This not only increases complexity but also the costs of maintaining the entity, making it less attractive compared to other simpler and cheaper jurisdictions.
Finally, we need to consider that Hong Kong operates with its own currency, the Hong Kong Dollar (HKD).
This can be a drawback since we will need payment processors like Stripe or others that handle currency conversions, which often involves higher fees and potential losses in exchange rates. Although this is manageable, it is a factor that can influence the overall profitability of the business.
Hong Kong Companies Review
At Tax Nomads, we recognize that Hong Kong’s tax system remains one of the most enviable for both individuals and businesses.
However, it is undeniable that the new regulations have considerably reduced the situations in which we use such structures in our planning.
Despite this, as we have detailed previously, there are still certain benefits that may tilt the balance in favor of Hong Kong in specific cases.
Regarding the investment program for obtaining residency in Hong Kong, although it has very demanding requirements, it may be of interest to certain profiles seeking a plan B on the other side of the world.
Having a second residence in Asia, outside the traditional Western circuits, can be an interesting strategy for those looking to diversify their global presence in a world increasingly divided into blocs.
In summary, although Hong Kong is no longer the preferred option in many tax strategies, often being replaced by destinations like Cyprus, Malta, or Dubai, we still consider it in our planning.
If you want to obtain tax residency, set up a company in Hong Kong or wish to receive a comprehensive analysis of your situation to discover your best options, simply fill out the form below and let us know your case and needs.
Contact us
In Hong Kong, a corporate tax rate of 8.25% applies to the first €230,000, and 16.5% to the remainder. There is no VAT, capital gains tax, dividend tax, or wealth tax.
To achieve 0% taxes, the company must generate its income outside of Hong Kong without having local substance.
Additionally, in the case of holding companies, passive income may be exempt if the entity qualifies for the participation exemption or operates as a pure holding company without operational activity.
Opening a company in Hong Kong typically costs between €2,000 and €3,500.
Regarding annual maintenance, expenses can range from €1,500 to €3,000. This includes mandatory audits, license renewal fees, accounting services, and other administrative costs.
The most accessible option is the investment residency program, which requires an investment of €3.5 million in approved assets.
