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22 February 2022

Hong Kong is famous for its simple taxation system and low tax rate, so would most probably be the first set-up to consider when investors enter the Asian market (particularly the Mainland China market). However, without a better understanding of the benefits, investors may not realise just how attractive Hong Kong is. Cheng & Cheng Taxation Services Limited (Cheng & Cheng Taxation) provides 10 quick facts about the taxation system investors need to know before deciding to move to Hong Kong.

Benefits of setting up a Hong Kong intermediate holding company:

1.Hong Kong does not have withholding tax in most circumstances

Most countries impose withholding tax when money is transferred out of the country. This tax could be even higher than the local corporate income tax rates. However, Hong Kong is the complete opposite. In general, there is no withholding tax on dividend and interest, or on services, while only a low withholding tax will be imposed on royalties. When a Hong Kong company has to pay royalties to an overseas entity, it has to withhold tax on behalf of the overseas entity. The general tax rate is between 2.475% and 4.95%, but under some circumstances the tax rate could be as high as 16.5%.

The fact that Hong Kong does not charge withholding tax on dividend and interest makes it an ideal place for setting up an intermediate holding company.

2.Hong Kong does not tax on capital gains

Capital gains tax planning is common in Hong Kong, because there are huge differences between tax rates on long-term capital gains and short-term trading gains. While short-term trading gains are subject to normal tax rates of 16.5%, long-term capital gains are subject to a tax rate of 0%.

There is no clear definition that distinguishes between long-term and short-term investments. There are six “badges of trade” tests that are generally used to judge the difference, which leaves room for tax planning opportunities before the investment decision is made. Investments in securities and immovable properties for long-term investment purposes are also eligible for the non-taxable capital gain claim.

From a group structure perspective, the non-taxable capital gain claim provides more flexibility in the exit of an underlying investment or subsidiary. This adds to the benefits of setting up an intermediate holding company in Hong Kong.

3.Hong Kong does not tax on dividend income

Dividend income from both Hong Kong and foreign investments are non-taxable under Hong Kong Profits Tax. Hong Kong–sourced dividend income is exempted under Section 26 of the Inland Revenue Ordinance to avoid double taxation on the same profits, while foreign-sourced income is generally non-taxable in Hong Kong.

Fund distribution income is generally exempt from Hong Kong Profits Tax under the same logic.  [...]

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