How the profit tax receipts are calculated in different scenarios like an affiliate, foreigner and individual taxpayer doing business in Hong Kong?


04 Jan

In this blog we will have discussion on the hiring of income for the use or right to use non-immovable property in Hong Kong. Then we will discuss the receipts of a taxpayer who have Hong Kong open company and we will throw light on interest income.


Profit Tax Receipts

Computable profit considered to be 30% (Section 21A of Hong Kong tax law). The computable profit of remuneration that is taxable under Section 15 (1) (a), (b), (ba) of Hong Kong tax law is considered to be 30 percent of the total receipts. The percentage is 10 percent for remuneration obtained or accumulated before 1 April 2003. Where applicable, the double tax arrangements / agreements restricted the percentage.

Receipt from an Affiliate

Still, if an affiliate paid the remuneration, the complete remuneration is considered to be the chargeable profit. In a case where CIR is convinced that no taxpayer that have decline business or trade in Hong Kong has completely or partially owned property at any time in respect of which the remuneration is paid. This property may include sound recording, film, tape etc. The chargeable profit shall only be 30 percent of the remuneration received.

The word ‘associates’ is defined widely in Section 21A (3) of Hong Kong tax law. This word is similar in meaning to that used in some other sections of anti-tax avoidance. For example, as described in Section 39 E (5) of Hong Kong tax law.      

Tax need to remain operative upon the payment by the payer to the recipient. It is the responsibility of payer to pay the tax over to the Inland Revenue department. The reference for this statement is taken from the Section 20 B of Hong Kong tax law.

Let’s consider an example, in Hair (Taiwan) Inc. it was observed that, Hair (HK) Ltd. was licensed by Hair (Taiwan) Inc. The Hair (HK) Ltd. is completely owned secondary branch of Hair (Taiwan) Ltd. Hair (HK) Ltd. markets the anti-balding tea of Hair (Taiwan) Inc. in Hong Kong. The main quality of tea is that; it can stimulate the growth of hair in balding men. In the year ended 31 March 2015, a royalty of amount $100,000 was paid by the Hair (HK) Ltd. to Hair (Taiwan) Inc.


                                                                       

It is required by the Hair (HK Ltd.) to suppress the amount $ 1,237 from the $ 100,000 and pay over the amount $ 1,237 to the Inland Revenue department. $ 100,000 is the amount that is payable to the Inland Revenue department.

Consider that the formula for the tea was developed in reality by Hair (HK) Ltd. That company transferred the formula later to the Hair (Taiwan) Inc. After that, an amount of worth $ 100,000 was paid to the Hair (Taiwan) Inc. by Hair (HK) Ltd. The amount was paid in the year ended 31 March 2015. So the total tax payable for that assessment year by Hair (Taiwan) Inc. will be:

                                

It is required by the Hair (HK) Ltd. to suppress the amount $ 4,125 from the royalty payable to company named as Hair (Taiwan) Inc. and pay over the amount $ 4,125 to the Inland Revenue department.

Hire Income in Hong Kong for the ‘Use’ or ‘Right to Use’ Movable Property

According to the Section 15 (1) (d) of Hong Kong tax law, rental or hire income in Hong Kong for the ‘use’ or ‘right to use’ is chargeable to tax.

The point to be noted here is that, almost 30 percent requirements of withholding tax and rule under Section 20B of Hong Kong tax law for further Sections 15 (1) (a) and (b) of Hong Kong tax law are not relevant.

Applicable to Foreigners (Section 15 (1) (a), (b), (ba) and (d) of Hong Kong tax law)

If a person does not carry on business, profession or trade in the form of after foreign company registration in Hong Kong, then he is not covered by the Section 14 (1) of Hong Kong tax law. But in case if he / she obtains remuneration that are covered by the Sections 15 (1) (a), (b), (ba) of Hong Kong tax law, he shall be allowed to some sort of tax. The reason for this is that, these subsections are considering sections. The key point to note here is that, if the property is used in Hong Kong then only the remunerations are taxable. These properties include tapes, knowledge, film, patent and movable property, etc.


If a business is carried on by the recipient in the Hong Kong, then he / she may be chargeable to tax under Section 14 (1) of Hong Kong tax law. This charge may be in respect of the remuneration earned from these properties. In these type of scenarios, Section 21A of Hong Kong tax law is not applicable. (i.e. the assessable profits shall not be considered to be 30 % or 100 % of the remuneration obtained but shall by calculated in normal way: taxable receipts = allowable expenses + assessable profits). One can derive the assessable profits from this simple equation.

In the case of Lam Soon Trademark Ltd. it was observed that, the name of taxpayer having sole proprietorship HK was a Cook Islands company. That company was assessed originally under Section 21A and 15 (1) (b) of Hong Kong tax law. The ground of this assessment was that, the assessable profits were considered to be 10 percent of the received royalties. In the same way, it was the view of Inland Revenue department that, a business was carried on by taxpayer having Hong Kong open company and due to that business, he was falling within the Section 14 of Hong Kong tax law and an extra assessment was raised on him / her to Section 60 of Hong Kong tax law. This extra assessment raised on the full amount of remuneration obtained. The additional assessment was supported by the both court of appeal and court of final appeal.


Person’s Receipts of Carrying on Profession, Trade or Business in Hong Kong

The remuneration discussed below are the sums obtained by a taxpayer doing business in Hong Kong. Section 15 of Hong Kong tax law considers these sums to be receipts derived in or arising from Hong Kong:

  • A refund to an employer in the tribute of his/her contributions to a well-known retirement scheme so far as the remuneration were allowed as deductions previously. The reference for this statement is taken from the Section 15 (1) (h) of Hong Kong tax law.
  • The interest deduced from the Hong Kong accumulated to or obtained by a corporation carrying on profession, trade or business in Hong Kong. The reference for this statement is taken from the Section 15 (1) (f) of Hong Kong tax law
  • A subsidy, grant or financial aid in connection with a profession, trade or business carried on in Hong Kong, other than the remuneration in connection with capital expenses of the person. The reference for this statement is taken from the Section 15 (1) (c) of Hong Kong tax law.
  • Profits or gains derived from or arising in Hong Kong accumulated to or obtained by a person, other than a company carrying on profession, trade or business in Hong Kong from disposal or other deal; or on the display of a certificate of a bill of exchange or deposit or saving on maturity. The reference for this statement is taken from the Section 15 (1) (j) of Hong Kong tax law.
  • Profits or gains derived from or arising in Hong Kong accumulated to or obtained by a person, other than a company carrying on profession, trade or business in Hong Kong from disposal or other deal; or on the display of a certificate of a bill of exchange or deposit or saving on maturity where these type of profits or gains are in consideration of the funds of profession, trade or business. The reference for this statement is taken from the Section 15 (1) (k) of Hong Kong tax law.
  • Interest accumulated to or received by a person or obtained from Hong Kong, other than a company, carrying on profession, trade or business in Hong Kong and the interest in consideration of the funds of business, trade or profession. The reference for this statement is taken from the Section 15 (1) (g) of Hong Kong tax law.
  • The interest carrying on arising through by a business of financial corporation or institution in Hong Kong, not or else allowable to tax, despite that the money are made available in consideration of which the interest is accumulated or received. The reference for this statement is taken from the Section 15 (1) (i) of Hong Kong tax law.
  • Any profit or gain from the disposal or sale of a certificate of bill of exchange or deposit being raised from or through a business carried on in Hong Kong by financial corporation or institution, despite that the disposal’s place or allowance’s place is not inside the Hong Kong. The reference for this statement is taken from the Section 15 (1) (l) of Hong Kong tax law.     
  • Income that is obtained from the transfer of a right to obtain income form the property except for the property is also vended at the same time or before of this type of transfer. The reference for this statement is taken from the Section 15 (1) (m) and 15A of Hong Kong tax law.
  • Freedom of the liability. As long as the deduction has been provisioned for a debt included in the course of a profession, trade or business, and that liability is released completely or partly in subsequent manner, the part that is set free is considered as a receipt of profession, trade or business in the fundamental period in which that release is realized. The reference for this statement is taken from the Section 15 (2) of Hong Kong tax law.

Income of interest

Since the introduction of interest income, interest tax is only subject to tax on profits, Section 14 of Hong Kong tax law is the charging section for tax on profits. Due to this reason income of interest may subject to tax under Section 14 of Hong Kong tax law. Moreover, income of interest is considered to be allowable income under Sections 15 1 (f), 15 1 (g) and 15 1 (i) of Hong Kong tax law. As described earlier Sections 15 1 (f), 15 1 (g) and 15 1 (i) of Hong Kong tax law are respectively related to the corporations (that can be either sole proprietorship HK or a full established business), to individuals other than corporations, and to financial institutions.

The income derived from the tax interest is taxed only under Sections 14, 15 1 (f) and 15 1 (g) and 15 1 (i) of Hong Kong tax law. The ‘provision of credit test’ (departmental interpretation and practice notes 13) are usually adopted by the Inland Revenue department to determine the interest income’s source. According to this test the interest source is from that place where it was given the credit. The meaning of this statement is that, the place where loan is receivable in consideration of the interest was made obtainable to the borrower. (i.e. where the debtor is able to utilize the money first). The first and foremost reference to the source of income of interest in tax cases of Hong Kong appears in commitment of Lord Bridge’s in Hang Seng Bank case.


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