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Tutori ACY4401 Advanced Taxation Lecture 2

International aspects of current Hong Kong Taxation law and practice

1. Setting up a Business in HK by a Foreign Company

When a foreign company wishes to set up its own business in HK, it may take the
form of a branch or a subsidiary. As the charge of HK profits tax is on a territorial
basis, so the place of incorporation and the form of establishment in HK are all
irrelevant to its liability to HK profits tax.

The method of calculating profits tax is applied in the same way to a local office or a
local branch of foreign company in HK, or a subsidiary of a foreign company. The only
exception is that if the HK office or branch does not draw up its own P/L and B/S, the
IRD may ascertain the profits tax liability of the HK office or branch by adjusting the
worldwide profits of the overseas company in accordance with the IRO, and
apportion the resultant profits to that part attributable to HK under IRR 5(2).

1.1 Ascertainment of assessable profits of branch [IRR 5(2)]

(a) Adjusted profits based on branch accounts if they show true HK profits.
(b) Otherwise,

AP = Adjusted worldwide profits x HK turnover

Worldwide turnover

or, AP = a fair % of the Hong Kong turnover

1.2 Ascertainment of branch profits of financial institution [IRR 3]

(a) AP based on branch accounts if they show true HK profits.

(b) Otherwise,

AP = Adjusted worldwide profits x HK branch assets

Worldwide assets

or, AP = the profits estimated by Assessor.

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Tutori ACY4401 Advanced Taxation Lecture 2
International aspects of current Hong Kong Taxation law and practice

Apart from a branch, the foreign company may set up a subsidiary in HK. The
differences between a branch and subsidiary are summarized as follows:

Branch Subsidiary

a) Less formal (no capital duty & stamp More formal

duty)

b) Branch and Head Office is same entity Subsidiary is a separate legal entity

c) No limited liability Limited liability

d) Difficult to apply transfer pricing Relatively easy to apply transfer

arrangement with Head Office pricing arrangement with parent
company

e) No tax deferral in home country Tax can be deferred in home country

by payment of dividend later

f) Certified mgt account may be sufficient Audited account is required.

(audited a/c may be required if Head
Office has statutory audit in home
country)

If a HK branch makes a profit in HK, the profit is immediately taxable in the head
office situated in the home country. On the other hand, if the subsidiary incurs a
loss, the loss cannot set off against the profit of the parent company. If it is a HK
branch, the loss can be used to set off the profits of the head office outside HK. So,
if the overseas company expects that the HK entity will make a profit very soon, it is
better to choose a subsidiary as its investment vehicle. If it is expected that the HK
entity will make a loss for the first several years, it is better to set up a branch
because its loss can set off the profit of the head office.

However, there is no difference in applying the s14 charging section and no

difference in applying the standard tax rate @16.5%.
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Tutori ACY4401 Advanced Taxation Lecture 2
International aspects of current Hong Kong Taxation law and practice

2. Non-resident entertainers and sportsmen

'Entertainer or sportsman' means a person, other than a corporation, who gives

performances in his or her character as entertainer or sportsperson in any kind of
entertainment or sport, including any physical activity which the public is permitted
to see or hear. It does not matter whether the activity is live or recorded, or whether
the public is required to pay for admission.

With regard to non-resident entertainers and sportsmen performing in Hong Kong,

the income from the performance is subject to Hong Kong profits tax

3. Withholding obligations on resident persons paying or crediting certain

payments to non-resident persons

S.20B imposes a withholding obligation on a resident person who pays or credits a

non-resident person (not necessarily the one who is chargeable) the following sums:
(a) Sums chargeable under ss.15(1)(a), (b) or (ba);
(b) Sums which are derived from a performance given in Hong Kong by a non-
resident entertainer or sportsman in his or her character as an entertainer or
sportsman on or in connection with a commercial occasion or event including:
(i) Any appearance made in connection with the promotion of a commercial
occasion or event; and
(ii) Any participation in or for sound recording, films, videos, radio, television
or similar transmissions (whether live or recorded).

* In the case of entertainers and sportsmen, the IRD's practice is to allow the payer
to assume that allowable expenses amount to one-third of the payments (DIPN 17
(Revised), para 14). The nonresident person may claim a larger deduction but he or
she must be able to prove that any extra expenses are properly deductible.
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Tutori ACY4401 Advanced Taxation Lecture 2
International aspects of current Hong Kong Taxation law and practice

DIPN 17 (Revised) states that in terms of s.20B(2) the resident person would remain
chargeable to tax on behalf of the non-resident person even if the payment or credit
was made to a non-resident person other than the non-resident person who is
chargeable by virtue of s.20B(1). This applies, for example, where the payment is
made to the manager of a non-resident entertainer who is himself a non-resident
person. S.20B would also be applicable where sums falling within subsection (1) were
paid by a resident person to another resident person for the account of a non-
resident person. In this situation, the other resident person would be chargeable on
behalf of the non-resident person.

4. Double Taxation Relief

As HK adopts the territoriality basis of taxation, HK residents generally do not suffer

from double taxation. However, many countries which tax their residents on a
worldwide income basis, so the problem is common for non-HK residents.

As HK adopts the territoriality basis of taxation, HK residents generally do not suffer

from double taxation. If double taxation occurs for HK resident (individual or
company), there are 4 types of relief for the foreign tax suffered:

1) Exclusion from salaries tax of income already taxed overseas under s.8(1A)(c):
(i) Services rendered overseas,
(ii) The foreign tax was paid, and
(iii) The foreign tax is substantially the same nature as HK salaries tax.

2) Other foreign tax paid may be deducted under s.16(1) [DIPN 28]:
(i) Foreign tax on gross earnings, e.g. Value added Tax on service income in
China. It is deductible because the foreign tax is charged regardless of
whether or not a profit is made (provided that gross earnings are subject to
profits tax in HK).

(ii) Foreign tax on profits, e.g. Corporate Income Tax in China. It is not
deduction as the tax is a charge on profit but not on gross earnings. It
was paid ’after’ the production of profit but not ‘in’ the production of
profit. It was only an appropriation of profit.
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Tutori ACY4401 Advanced Taxation Lecture 2
International aspects of current Hong Kong Taxation law and practice

3) Foreign tax paid on interest income or profits on certificate of deposit etc. can
be deducted under s.16(1)(c).

4) Tax credit set-off for Double Taxation Arrangement (“DTA”) signed with other
countries.

Hong Kong has tried to establish a DTA network that minimises exposure of Hong
Kong residents and residents of the DTA partner to double taxation.
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Tutori ACY4401 Advanced Taxation Lecture 2
International aspects of current Hong Kong Taxation law and practice
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Tutori ACY4401 Advanced Taxation Lecture 2
International aspects of current Hong Kong Taxation law and practice