Hong Kong Corporate Tax Law

After the turmoil of 2019, Hong Kong, once a dazzling "Pearl of the Orient," has seemingly lost its luster. Economically, Shenzhen's GDP has surpassed Hong Kong and the gap continues to widen. In terms of free trade, the Hainan Free Trade Zone is emerging as a potential replacement. As for aviation and port throughput, mainland China has long outperformed Hong Kong. It seems that, aside from its role as an international financial hub, Hong Kong has no other advantages left. Does this mean that the country no longer needs Hong Kong?

We disagree. For Chinese enterprises seeking to "go global," a high degree of freedom is indispensable, including investment and capital mobility. After the mainland experienced a wave of pandemic challenges, Hong Kong's advantages in these areas have become increasingly evident. Moreover, in the realm of international taxation—especially against the backdrop of the U.S.-China trade war—Hong Kong's value to mainland enterprises going global will only grow. We can even assert with near certainty: mainland enterprises that bypass Hong Kong in their global ventures are likely to face significant international tax disadvantages. The facts support this: according to the 2019 Statistical Bulletin of China's Outward Foreign Direct Investment, Hong Kong was the top destination for China's outward direct investment, accounting for 66.1% of the total, amounting to $90.6 billion—ten times that of the second-ranked British Virgin Islands (6.3%).

For enterprises, Hong Kong offers ten major international tax advantages:

1. Dividends: Dividend income received by Hong Kong enterprises, whether domestic or foreign, is tax-exempt.
2. Capital Gains: Profits from the sale of capital assets by Hong Kong enterprises are tax-exempt.
3. Withholding Tax: Hong Kong does not impose withholding tax on dividends or interest, and royalty withholding tax is minimal.
4. Offshore Income: Hong Kong does not tax profits sourced from outside Hong Kong.
5. Controlled Foreign Corporations (CFC): Hong Kong does not implement CFC rules, meaning profits from subsidiaries outside Hong Kong are not subject to Hong Kong tax.
6. Anti-Avoidance Measures: Hong Kong does not enforce anti-avoidance measures targeting tax havens, such as withholding tax, thin capitalization, or hybrid mismatch rules.
7. Tax Treaties: Hong Kong has signed the most favorable and stable bilateral tax treaties with mainland China.
8. Economic Substance: For mainland enterprises, Hong Kong is the easiest jurisdiction outside China to establish economic substance.
9. Politics: Mainland enterprises face no risk of unfair treatment in Hong Kong due to political reasons.
10. Tax Incentives: Hong Kong not only has low tax rates but also offers various tax incentives.

In the following sections, we will analyze these ten advantages in detail, comparing them with other jurisdictions and examining international tax trends to explain why Hong Kong’s value to mainland enterprises going global will only increase.

Of course, no jurisdiction is perfect. Hong Kong also has the following shortcomings in international taxation:

1. Low Tax, Not No Tax: Hong Kong is not a tax haven like Ireland, which offers tailor-made tax planning, or the UAE, which imposes a direct 0% tax rate.
2. Limited Tax Treaty Network: Hong Kong has signed tax treaties with only about 40 countries/regions.
3. Tax Residency Certificates: Obtaining a tax residency certificate in Hong Kong is more challenging than in other jurisdictions.
4. Ambiguity in Tax Law: Due to its simplicity, Hong Kong's tax system has many gray areas.

We will also analyze these shortcomings and propose strategies to address them.