Hong Kong Taxation Reform: From An Offshore Financial Center Perspective
Hong Kong Taxation Reform: From An Offshore Financial Center Perspective
Hong Kong Taxation Reform: From An Offshore Financial Center Perspective
Group 8
Interim Deliverable • Year 3 Surveying Studio • 11 November 2009
We should note that, which will be discussed in the later parts, stamp duty fee is not very common
in other o!shore financial centers in other part of the world. To be competitive, a policy reformed
about the stamp duty should be made. Lam (2000) suggests that the stamp duty policy variations
mainly focused on the property market, which is the major industry in Hong Kong, compared to
Singapore.
From the general point of view of the public, the higher the stamp duty, the lower transaction
volume of the securities market will be. According to Umlauf (1993), transaction tax (i.e. the stamp
duty rate in Hong Kong) imposition will reduce the security market turnover. However, according
to Hu (1998), the changes of the transaction tax rate will only a!ect the stock prices in the market,
but not the volatility and turnover, if the capital market is highly regulated. The author therefore
suggested that any policy adjustment on stamp duty fee requires considerations on the migration
possibility in trading. Hence, the suggested future policy reform on stamp duty should focus on the
regulation itself, but not the stamp duty rate.2
1 Low-tax.net: www.lowtax.com
2Lam, N. M. K. (2000). "Government Intervention In The Economy: A Comparative Analysis of Singapore
and Hong Kong." Public Administration and Development 20: 397-421.
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SUBJECT: TAXATION REFORM IN HONG KONG! ! SURVEYING STUDIO III
Property Tax
All property owners shall not be subject to this tax unless he or she has received a consideration, for
example, a rental income. The property tax shall be computed on the net assessable value at the
standard rate. The property tax rate from the financial year 2008/09 onwards is 15% per year.3
From the report of property consultant, Jones Lang LaSalle, the common practice in Hong Kong
o"ce market is that the property tax is payable fully by the landlord but not equally share among
him and the tenants. Sales of grade A o"ce properties is also not the major transactions type of the
market in Hong Kong. Most of the grade A o"ce buildings in CBDs are occupied by major
landlords. Foreign investors who would like to set up their regional o"ces in Hong Kong will
probably rent the spaces they needed instead of purchase. In other words, the property tax system in
Hong Kong won’t a!ect the development of o!shore financial services much.
However, there are certain situations that profit tax is exempted in Hong Kong 5:
1. dividends received from a corporation which is subject to Hong Kong Profits Tax;
2. amounts already included in the assessable profits of other persons chargeable to Profits Tax;
4. interest on, and any profit made in respect of a bond issued under the Loans Ordinance (Cap.
61) or the Loans (Government Bonds) Ordinance (Cap. 64), or in respect of an Exchange Fund
debt instrument or in respect of a Hong Kong dollar-denominated multilateral agency debt
instrument;
5. interest income and trading profits derived from long term debt instruments; and
6. sums received or accrued in respect of a specified investment scheme by or to the person as:
• a person chargeable to Profits Tax in respect of a mutual fund, unit trust or similar investment
scheme that is authorized as a collective investment scheme under section 104 of the Securities
and Futures Ordinance (Cap. 571); or
• a person chargeable to Profits Tax in respect of a mutual fund, unit trust or similar investment
scheme where the Commissioner is satisfied that the mutual fund, unit trust or investment
scheme is a bona fide widely held investment scheme which complies with the requirements of a
supervisory authority within an acceptable regulatory regime.
Withholding Tax
Generally, there is no withholding tax in Hong Kong. But under certain circumstance that the
payment paid by a Hong Kong company to its foreign associate (subsidiary or holding company) is
deemed to be treated as Hong Kong source income, the company should withhold the tax for Hong
Kong taxation.
For instance, when a Hong Kong entity pays royalties for the use of intellectual property to its own
o!shore licensing a"liate, then tax is due of 10% of 17.5% = 1.75% and this must be withheld by the
Hong Kong paying company.6
• a mutual fund, unit trust, or similar collective investment vehicle which the Commissioner of
Inland Revenue is satisfied is bona fide, widely held, and complies with the requirements of a
supervisory authority within an acceptable regulatory regime.
Therefore, all profits of the funds will be exempted from profit tax to the extent that the profits arise
from investment activities which are in accordance with the fund`s constituent documents and the
requirements of the regulatory regime under which it operates.7
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SUBJECT: TAXATION REFORM IN HONG KONG! ! SURVEYING STUDIO III
To define non-resident person out of resident person is crucial to apply exemption provision.
According to KPMG Taxation of international executives Hong Kong, “the definition depends on
where the relevant entity exercises its central management and control. The Inland Revenue
Department has indicated that the central management and control requirement refers to the
highest level of control of the entity concerned rather than day-to-day management of the entity.”
Moreover, although other funds and trusts are not eligible to be exempted from profit tax in Hong
Kong, they are generally not subject to tax in respect of dividends, capital gain, certain interest
income, and o!shore sourced income.
8 KPMG International fund and fund management survey database for Hong Kong
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SUBJECT: TAXATION REFORM IN HONG KONG! ! SURVEYING STUDIO III
As a result, taxation treatments is among the most important factors influencing the way
international business is transacted. This also explains the phenomenon that most OFCs are
characterized as “tax haven”.
One of the most rapidly growing type of tax haven operation is that of shifting business profits from
high-tax jurisdictions to tax haven ones. The profit shifting transactions are usually carried out by
large conglomerates through tax haven subsidiaries, using sophisticated approaches to diminish the
tax base in high-tax countries while increasing it in tax haven places.
The other dominant type of activity carried out in tax haven is by the financial sector. The financial
sector usually comprises a large number of banks and trust companies, most of which are branches
and subsidiaries of foreign-owned financial institutions. The reason of their presence in OFCs can
be attributed as the following:
On the other hand, construction would be boosted, principally o"ce buildings. In addition, tourism
would be another sector that could be stimulated, as meetings of directors in the jurisdiction might
be a requirement for incorporation.
Finally, the tax haven sector is a course of revenue for the government. There will always be some
form of tax or fee for which foreign investors will be liable, no matter how the tax system will be like.
For Singapore banks, for example, profits from domestic sources are taxable while income from
foreign sources is exempt. Also, indirect taxes such as customs duties and sales taxes are fully
taxable in most OFCs.
Taxes and levies on o!shore business are virtually nonexistent in OFCs, in “marked contrast” to the
situation in alternative locations. The taxation treaties in major OFCs around the globe can be
summarized as Table 1. Almost none of these OFCs impose minimum reserve requirement; None
of them enforces withholding taxes on internal income; And they impose very limited profit tax, if
any at all.
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SUBJECT: TAXATION REFORM IN HONG KONG! ! SURVEYING STUDIO III
According to KPMG International fund and fund management survey database for Hong Kong,
Hong Kong has a comprehensive double tax agreement with Belgium, Thailand, and, more
recently, with Mainland China, Vietnam, and Luxembourg. The Hong Kong government is
presently in the process of negotiating a double tax agreement with Italy and the Netherlands.”
For Hong Kong to be a competitive Asian o!shore financial center, we suggest the HKSAR
government to speed up the negotiation process with other world famous financial jurisdictions in
achieving more double taxation treaties as early as possible. A complete and comprehensive double
taxation treatment system will attract investors from di!erent jurisdictions all over the world into
Hong Kong with little concern about taxation problem.
As discussed in part 1, stamp duty is the major taxation related to the transactions of commodities in
the Hong Kong Exchange market. According to the annual report 2007-08 of the Inland Revenue
Department, during the peak periods, i.e. the so-called economic crest like in 2008, where the
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SUBJECT: TAXATION REFORM IN HONG KONG! ! SURVEYING STUDIO III
transaction volume per day were huge, stamp duty would be the second major tax income source
(concluded for 25.7% of total tax incomes) of the HKSAR government. On the other hand, in a
complicated regulatory environment like Hong Kong 12, changing the stamp duty rate will greatly
a!ected the transaction volume as suggested by Umlauf (1993). Therefore, providing stamp duty fee
exemption would be the most appropriate measure to increase the investment incentive to the
foreign funds and trusts, rather than decreasing the stamp duty rate. The details of the fee
exemption should be discussed further in order to strike a balance between of the resulting benefits
and induced implications.
References
1. KPMG International fund and fund management survey database for Hong Kong
4. Hu, S.Y. (1998). “The e!ects of the stock transaction tax on the stock market – Experiences from
Asian markets.” Pacific-Basin Finance Journal 6(3-4): 347-364.
5. Umlauf, S.R. (1993). “Transaction taxes and stock market behavior: the Swedish experience.”
Journal of Financial Economics 33: 227–240.
6. Low-tax.net: www.lowtax.com
12Hong Kongʼs financial market is regulated by the Hong Kong Monetary Authority (HKMA), Securities and
Futures Commission (SFC), Hong Kong Insurance Authority (HKIA) and Hong Kong Association of Banks
(HKAB) with different sets of regulations.
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