Overseas Taxation and Accounting – Hong Kong
Hong Kong was handed over from the United Kingdom to the People’s Republic of China (China) on 1 July 1997. Under the principle of “one country, two systems”, Hong Kong maintains its own political, economic, and social systems for fifty years from the transfer of sovereignty. Taxation in Hong Kong adopts its own rules as well, which is separated from China. We have mentioned the consideration of expanding your business to Hong Kong in the previous News. In this News, we will introduce taxation and accounting in Hong Kong.
2. Accounting Rules in Hong Kong
● Accounting rules
Hong Kong adopts Companies Ordinance (CO) as generally accepted accounting principles, in which the following basic principles are stipulated:
1) Accounting period
Under the CO, every limited liability company in Hong Kong must appoint an auditor and prepare audited financial statements. It is also stipulated that the first annual general meeting (AGM) shall be held within 18 months after the company’s incorporation, and also the first financial statements must be prepared within 18 months after the incorporation.
2) Retaining accounting records
The CO requires Hong Kong’s incorporated companies to retain accounting records appropriately for at least 7 years after the end of the accounting period.
Principally, accounting records should be booked in the main trading currency (the Hong Kong dollar). In Japan, companies are required to keep accounting records in the Japanese currency, yen. On the other, in Hong Kong, foreign trading currencies are also allowed; for example, in cases where most transactions are settled in the US dollar, accounting records are principally booked in the US dollar.
● Accounting Standards
The CO does not stipulate accounting rules in detail. Thus, companies order the following rules disclosed by the Hong Kong Institute of Certified Public Accountants (HKICPA).
・Hong Kong Financial Reporting Standards (HKFRS) and Hong Kong Accounting Standards (HKAS)
・Small and Medium-sized Entities Financial Reporting Framework and Financial Reporting Standards : SME-FRF&FRS)
HKAS were fully conversed to (International Financial Reporting Standards: IFRSs) and (International Accounting Standards: IASs) (all together, called IFRSs) on 1 January, 2005. Thus, HKAS are practically the same standards as IFRSs.
● Accounting Audit
Under the CO, every listed and unlisted company in Hong Kong is required to have its financial statements audited by auditors.
3. Taxation in Hong Kong
Hong Kong is known as one of the tax-haven counties. Hong Kong is characterized as its simple taxation with low-tax rate or no tax liability, compared to Japan.
1) Simple taxation
The Japanese tax code consists of the high volume of principal taxes such as Corporation Tax Law, Individual Income Tax Law, and Inheritance Tax Law, etc. together with Special Tax Measures Law, Cabinet Order and Basic Interpretive Regulation from tax authorities or judicial precedents, which makes Japanese tax system more complicated to understand and use adequately. On the other, in Hong Kong, there is no local tax, consumption tax, or inhabitant tax. Type of taxes in Hong Kong is very limited.
2) Elimination of double taxation by Non-taxable system
On-shore income (a territorial income sourced in Hong Kong) is taxable, and off-shore income (an income sourced outside Hong Kong) is principally not taxable. There is no tax imposed on dividends which corporations or individuals have received.
3) Withholding tax system
There is no withholding tax system in Hong Kong except the limited income such as payment made to non-residents (royalties paid to non-residents, etc.)
4. Anti-tax haven rules
Companies in various advanced countries aim to avoid paying high taxes in their home countries and shift their profits/income to low-taxed countries. Hong Kong is one of the low-taxed countries. Companies can benefit from reducing tax-burdens; but at the same time, it causes reducing tax revenues of their home countries. In order to prevent such international tax avoidance, the Japanese government sets Anti-Tax Haven Rules. For details, please refer to News in June, 2016 and January, 2017.
5. Transfer Pricing Rules
Similar to Anti-Tax Haven Rules, Transfer Pricing Rules are set to prevent international tax avoidance. The guidelines for Transfer Pricing Rules were introduced in December, 2009. The transfer pricing rules in Hong Kong follow the OECD Transfer Pricing Rules. In cases where the prices for transactions with overseas affiliates are unreasonably high or low compared to the ordinary prices for similar transactions with non-affiliated parties or arm’s-length prices and as a result cause reducing profits, such transactions are deemed to have occurred at arm’s length prices and imposed in Hong Kong.
In this News, we have mentioned “Overseas Taxation and Accounting – Hong Kong”.
There are various business merits utilizing characteristics of Hong Kong’s tax and accounting rules. We fully support your start-up business in Hong Kong including introduction of investment schemes, and tax and accounting services. If you are interested in doing business or investing in Hong Kong, please do not hesitate to contact us.
Please note that this News only introduces general outlines and does not include professional advice. So please make sure not to make any decisions without taking professional advice individually. If you have any questions, please feel free to contact us.