The applicable rate refers to the corporate tax rate of the foreign jurisdiction at which the foreign tax applies to the sum as business income. the imparting of, or undertaking to impart, knowledge directly or indirectly connected with the use (whether in or outside Hong Kong) of the property. Return of the Withholding Tax Deduction . The tax rates in Hong Kong are as follows: Net taxable income (2018/2019) Rate. The exclusion only applies to the foreign-sourced interest, dividend or disposal gain derived from or incidental to the following activities carried out by a regulated financial entity in Hong Kong: Given the greater incentive of MNE groups to adopt aggressive tax planning strategies and hence their higher base erosion and profit shifting risks, only members of MNE groups (MNE entity) will be subject to the new FSIE regime. Advising on OTC derivative products which means: giving advice on whether an OTC derivative transaction should be entered into, which transaction should be entered into, the time at which or the terms and conditions on which a transaction should be entered into; or, issuing analyses or reports, for the purpose of facilitating the recipients to make decisions on whether an OTC derivative transaction should be entered into, which transaction should be entered into, the time at which or the terms and conditions on which a transaction should be entered into, Providing services to another person for the clearing and settlement of OTC derivative transactions through a central counterparty (whether located in Hong Kong or elsewhere), whether or not as a member of the central counterparty, A person that is, or acts for, an MNE group or an entity included in an MNE group, A legal person (other than a natural person); or an arrangement that prepares separate financial accounts, such as a partnership and a trust, A group that includes at least one entity or permanent establishment that is not located or established in the jurisdiction of the ultimate parent entity of the group, the income is received in Hong Kong by an MNE entity carrying on a trade, profession or business in Hong Kong irrespective of its revenue or asset size; and. Money Talk Get ready to add important dates to your 2023 calendar. The FTC will be limited to the amount of Hong Kong profits tax attributable to the passive income . The Inland Revenue Department (IRD) usually issues profits tax returns to taxpayers from the first working day of April each year. An arrangement may have more than one main purpose and it is sufficient that at least one of which was to obtain a tax benefit, even if that was not the dominant purpose. A specified foreign-sourced income is regarded as received in Hong Kong when: Specified foreign-sourced income received in Hong Kong will not be brought into charge if the MNE entity meets the exception requirements specifically for the particular types of incomes. Dealing in OTC derivative products which means: entering into or offering to enter into an OTC derivative transaction; or, inducing or attempting to induce another person to enter into or to offer to enter into an OTC derivative transaction. any of the above intellectual properties granted, made or subsisted under the law of any place outside Hong Kong. Any amount of the loss not so set off may be carried forward and set off, in accordance with section 19C of the IRO, against the assessable profits of the MNE entity in subsequent years of assessment. PKF Hong Kong's tax advisors are well placed to conduct due diligence review on targeted enterprises based . For profits tax purposes, a person is taxed on its assessable profits calculated as its income minus applicable deductions. However, the net gains on transactions deemed speculative may be taxable as a taxpayer's trading income. Calculation of Assessable Profits Derived from Specified Foreign-sourced Income. Where a taxpayer carries on multiple trades, profession or businesses in Hong Kong, the losses in one can be utilized against the profits of the other. Section 16(2J)seeks to ensure that the DTAs will prevail in . To align the treatment on foreign tax paid in a CDTA territory and a non-CDTA territory, similar tax payable in respect of the underlying profits out of which a foreign-sourced dividend was paid in a CDTA territory but not allowable as bilateral tax credit under the CDTA may be allowed as a unilateral tax credit against profits tax charged on the foreign-sourced dividend. 514 or under the law of any place outside Hong Kong is not chargeable to profits tax in a year of assessment due to the operation of the nexus requirement and the patent application is withdrawn, abandoned or refused in a subsequent year of assessment, the excepted portion of the income would be regarded as specified foreign-sourced income received in Hong Kong in that subsequent year of assessment and be chargeable to profits tax. The threshold of adequate equity interest (i.e. The IRD will also provide examples to illustrate the meaning of holding and managing equity participations in its administrative guidance or the Departmental Interpretation and Practice Note (DIPN) to be issued. Under the new FSIE regime, the provisions relating to the nexus requirement should be read in the way that best secures consistency with the requirements and guidance in Chapter 4 of the BEPS Action 5 Report. bank, restricted licence bank or deposit-taking company). If the specified foreign-sourced income is dividend, the participation exemption only applies if any of the following sums is subject to a qualifying similar tax in a foreign jurisdiction: the underlying profits out of which the dividend is paid. For any similar tax payable on specified foreign-sourced income in a non-CDTA territory, unilateral tax credit will be provided to the MNE entity if it is a Hong Kong resident person. The proposal is expected to become effective on 1 January 2023 with no grandfathering arrangement. On 1 January 2023, the Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Ordinance 2022 (the Amendment Ordinance), which amended the provisions in relation to the FSIE regime under the Inland Revenue Ordinance (Cap. 1 Contents Investment basics 2 Overview of Hong Kong taxation 4 Taxation for businesses : profits tax 5 Compliance for profits tax 8 Withholding tax 9 Taxation for individuals : salaries tax 10 Compliance for salaries tax 13 Transfer pricing rules 14 Anti-avoidance rules 14 Other taxes / levies 15 Tax treaties 17 2 Investment basics There are also specific rules for income from an intra-group financing business. A Hong Kong branch of a foreign corporation is treated the same way as a locally incorporated company and is subject to similar corporate and tax obligations as a resident company. The proportion of research and development (R&D) expenditures is a proxy for substantial economic activities. For sale or transfer of immovable property in Hong Kong, ad valorem stamp duty at applicable rates is payable depending on the type of immovable property being transferred. Hong Kong has a territorial system of taxation without a general definition of income. The said rates apply on all assessable income with only a few exceptions. News Flash Hong Kong Tax 2 PwC The proposed changes to the existing rules This site uses cookies to collect information about your browsing activities in order to provide you with more relevant content and promotional materials, and help us understand your interests and enhance the site. Affected taxpayers should consider seeking professional advice to ensure they have fully utilized available reliefs in foreign jurisdictions before claiming tax credits in Hong Kong. Generally, only: Any other item of income is exempt from tax. In assessing whether a PEHE has satisfied the reduced ES requirement, the IRD will take into account the commercial reality of the taxpayer, having regard to its entire operations. A taxpayer can voluntarily request for a ruling in specified areas, such as the application of the locality of profits rules or the general anti-avoidance provision, royalty payments, stock borrowing or lending and interest income exemption. holds equity interests in other entities; and, earns dividends, disposal gains; and income incidental to the acquisition, holding or sale of such equity interests, satisfy every applicable registration and filing requirement under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. Income derived from renting out real properties by owners in Hong Kong is subject to property tax, which is charged at a standard rate of 15 percent of the property's net assessable value for the relevant year of assessment. These rules are as follows: Switch-over rule (Subject to tax condition), Loss Sustained from Sale of Equity Interests. Hong Kong taxpayers are prompted to file tax returns. Advance rulings are available to taxpayers as a paid service and are subject to certain formalities. The general tax rate is 16.5 percent on the assessable profits. The Inland Revenue (Amendment) (No. It adopts a territorial taxation system, which only taxes income earned in Hong Kong. Hong Kong has a progressive tax rate, which is capped at 17% much lower than . Any type of regulated activities specified in Schedule 5 to the SFO which currently include: Making or offering to make an agreement with another person, or inducing or attempting to induce another person to enter into or to offer to enter into an agreement: for or with a view to acquiring, disposing of, subscribing for or underwriting securities; or, the purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities, Making or offering to make an agreement with another person to enter into, or to acquire or dispose of, a futures contract, Inducing or attempting to induce another person to enter into, or to offer to enter into, a futures contract, Inducing or attempting to induce another person to acquire or dispose of a futures contract, Entering into or offering to enter into, or inducing or attempting to induce a person to enter into or to offer to enter into, a leveraged foreign exchange contract, Providing any financial accommodation to facilitate foreign exchange trading or to facilitate an act referred to in (a) above, Entering into or offering to enter into, or inducing or attempting to induce a person to enter into, an arrangement with another person, on a discretionary basis or otherwise, to enter into a contract to facilitate an act referred to in (a) or (b) above, Giving advice on whether, which, the time at which or the terms or conditions on which securities should be acquired or disposed of, Issuing analyses or reports to facilitate the recipients of the analyses or reports to make decisions on whether, which, the time at which, or the terms or conditions on which securities are to be acquired or disposed of, Giving advice on whether, which, the time at which or the terms or conditions on which futures contracts should be entered into, Issuing analyses or reports to facilitate the recipients of the analyses or reports to make decisions on whether, which, the time at which, or the terms or conditions on which futures contracts are to be entered into. Usually the starting point of the calculation will be the financial statements of the taxpayer adjusted in accordance with the tax legislation. "When employees file their income tax return in Canada, they could claim a credit," says Poitras. If the relief under section 8(1A)(c) or tax credit under section 50 is allowed to a taxpayer and subsequently such relief or credit becomes excessive as a result of an adjustment to his or her foreign tax liability, the taxpayer is required to give a written notice to the Commissioner within 3 months after the adjustment is made. Currently, the maximum mandatory contributions of each of the employers shares and employees shares for such MPF scheme is HKD1,500 (approximately USD200) for employees with a monthly relevant income exceeding HKD30,000 (approximately USD3,870). Where Hong Kong has a double taxation arrangement with the other jurisdiction, a full credit for tax paid may be available in Hong Kong. Since 2017, tuition fees for students studying in England have been frozen at 9,250, according to the report. To obtain tax certainty and reduce compliance burden, MNE entities are encouraged to apply to the Commissioner for advance rulings on their compliance with the economic substance requirement with effect from the coming into operation of the Amendment Ordinance on 1 January 2023. This is significantly lower than many taxes in western nations, inclusive of United States expat tax. 310); and the Companies Ordinance (Cap. The R&D fraction is used to calculate the excepted portion of qualifying IP income received by an MNE entity, which is ascertained in accordance with the following formula: What is R&D expenditure for the purpose of ascertaining the R&D fraction. Outsourcing of specified economic activities should in no circumstances be used to circumvent the economic substance requirement. Your message was not sent. Starting in 2024, Rishi Sunak's government intends to ban international students . The economic substance requirement allows an MNE entity to outsource some or all of its specified economic activities. The Amendment Ordinance provides for, among others, the following new requirements relating to double taxation relief: The above requirements apply in relation to tax payable for a year of assessment beginning on or after 1 April 2018 (i.e. Published date: 25 October 2022 Once enacted into law, the new FSIE regime will apply as from January 1, 2023, in Hong Kong. , Get the latest KPMG thought leadership directly to your individual personalized dashboard, Latest updates on the foreign-sourced income exemption regime in Hong Kong, Download a PDF version of this article Opens in a new window, View Print friendly version of this article Opens in a new window, Hong Kong Tax Alert - Issue 21, October 2022, Hong Kong Tax Alert - Issue 24, November 2022, https://www.gld.gov.hk/egazette/pdf/20222643/es32022264319.pdf, Legislative Council of the Hong Kong Special Administrative Region - Bills Committee (legco.gov.hk), https://www.legco.gov.hk/yr2022/english/bc/bc06/papers/bc06cb1-833-1-e.pdf. For the purpose of ascertaining the R&D fraction in respect of a qualifying intellectual property to which the income relates, R&D expenditures (including capital expenditure) are classified as follows: As a transitional measure, an MNE entity is allowed to apply a ratio where qualifying expenditures and overall expenditures are calculated based on a 3-year rolling average. The amount of tax credit is capped at the lower of foreign tax paid and the profits tax that would have been payable on the same income. Providing automated trading services by means of electronic facilities, not being facilitates provided by a recognized exchange company or a recognized clearing house, whereby: offers to sell or purchase securities or futures contracts are regularly made or accepted in a way that forms or results in a binding transaction in accordance with established methods, including any method commonly used by a stock market or futures market; offers to enter into OTC derivative transactions are regularly made or accepted in a way that forms or results in a binding transaction in accordance with established methods; persons are regularly introduced, or identified to other persons in order that they may negotiate or conclude, or with the reasonable expectation that they will negotiate or conclude sales or purchases of securities or futures contracts in a way that forms or results in a binding transaction in accordance with established methods, including any method commonly used by a stock market or futures market; persons are regularly introduced, or identified to other persons: in order that they may negotiate or conclude OTC derivative transactions in a way that forms or results in a binding transaction in accordance with established methods; or. an insurer authorized under the Insurance Ordinance (Cap. China and Hong Kong Tax Leader, PwC China. The source of profits and the economic substance requirement will be considered in separate contexts, with the former continuing to be determined based on the prevailing requirements of the IRO and the broad guiding principle as established by judicial precedents. Taxpayers pay whichever is lower. progressive corporate tax rates), the applicable rate will be the highest corporate tax rate applied to that income. The exception requirements are as follows: Exception 1: Economic Substance Requirement. Yes, because the preferential tax regime is a tax incentive for carrying out substantive activities in Jurisdiction A and the applicable tax rate (i.e. See Tax rates. withholding tax on royalties, licensing fees, service fees management feesand ), subject to the provisions in section 16(1)(c), are not deductible. An arrangement or a series of arrangements will be regarded as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect the economic reality. The loss may only be set off to the extent that the assessable profits concerned are derived from specified foreign-sourced income that is chargeable to profits tax under the new FSIE regime. If the foreign tax is chargeable for the taxable period in which the sum accrues, the applicable rate will be the corporate tax rate of the foreign jurisdiction applicable for that taxable period. In other words, unilateral tax credit will be provided when the income is received in Hong Kong. Stress in the banking sector will weigh on lending against real estate and is likely to delay the recovery. In addition, residential property transactions in Hong Kong may also attract Buyer's Stamp Duty and Special Stamp Duty. U.S. traditional IRA), without using or requiring RRSP contr. the highest corporate tax rate) of the jurisdiction in which the specified foreign-sourced income, underlying profits or related downstream income is taxed. Subject to relevant legislative amendments, a one-off reduction of the final tax in respect of profits tax, salaries tax and tax under personal assessment for the year of assessment 2021-22 was proposed by the Financial Secretary in the 2022-23 Budget by 100 percent, subject to a ceiling of HKD10,000 per case. If the MNE entity fails all exceptions, specified foreign-sourced income will be subject to profits tax in the year of assessment in which such income is received by the MNE entity in Hong Kong (i.e. Fergus Hicks. Salaries tax is levied on net chargeable income (assessable income less personal deductions and allowances) at progressive rates ranging from 2% to 17%, or at a flat rate (maximum rate) of 15% on assessable income less personal deductions, whichever calculation produces the lower tax liability. 584), paying or collecting cheques, drawn by or paid in by customers, Raising funds, managing risk including credit, currency and interest risk. Holding and managing its equity participations in other entities, An MNE entity that is not a pure equity-holding entity, Making necessary strategic decisions in respect of any assets the entity acquires, holds or disposes of; and managing and bearing principal risks in respect of such assets, the exhibition or use of, or a right to exhibit or use (whether in or outside Hong Kong) the property; or. Foreign taxes on wages, dividends, interest, and royalties generally qualify for the credit. a preferential tax regime) at a lower rate than in the main legislation, and the lower rate is not a tax incentive for carrying out substantive activities, the headline rate should be the highest stipulated tax rate in the special legislation. 3 months) or with a period of call or notice of less than that period, other than any float or SVF deposit as defined bysection 2of the Payment Systems and Stored Value Facilities Ordinance (Cap. If the Taxpayer is subject to tax in Hong Kong on distributions from the Plan, a foreign tax credit may be available on their Canadian income tax and benefit return in connection with taxes paid to the government of Hong Kong. November 13, 2012. the income is remitted to, or is transmitted or brought into, Hong Kong; the income is used to satisfy any debt incurred in respect of a trade, profession or business carried on in Hong Kong; or. Macau company formation and Macau bank account opening (mid-shore solution) Dubai free zone company with Dubai bank account opening. The purpose is to allow sufficient time for taxpayers to adapt to the tracking and tracing requirements while still complying with the general principles of the nexus approach. Where an MNE entity receives a qualifying IP income chargeable to profits tax in a year of assessment and sustains a loss in respect of the qualifying intellectual property to which the income relates, the qualifying portion of the loss (i.e. No customs or excise duty is levied on exports from Hong Kong. A ruling is final, but it does not affect the taxpayer's right of objection against a subsequent tax assessment issued in accordance with an unfavorable ruling. However, this rule is subject to the condition that had a gain been derived from the sale and received in Hong Kong, the gain would have been chargeable to profits tax under the new FSIE regime. a DTA territory. The income was incidental to the dealers regulated business and would thus be excluded from the scope of specified foreign-sourced income. Outsourcing, in this context, includes outsourcing, contracting or delegating to third parties or group entities. Under the new FSIE regime, certain foreign-sourced income accrued to a member of an MNE group (MNE entity) carrying on a trade, profession or business in Hong Kong is to be regarded as arising in or derived from Hong Kong and chargeable to profits tax when it is received in Hong Kong. The main objectives of the amendments are to codify the transfer pricing principles (such as the arms length principle), implement certain measures under the Base Erosion and Profit Shifting (BEPS) package and align the existing provisions with international tax requirements. Income from real properties situated in Hong Kong can be subject to tax. This fee increased on April 30, 2022. Please try again. Allrights reserved. year of accrual). an entity licensed under Part V of the Securities and Futures Ordinance (Cap. Where the specified foreign-sourced income is a dividend, and tax is charged on the underlying profits of the dividend in a territory outside Hong Kong, the participation exemption will not apply to the extent that the dividend is allowable for deduction when computing the amount of tax of the investee entity. the contractual rights and obligations normally created, and the commercial and financial relationships normally entered into, between independent persons under an arrangement of the kind in question. The only exception is in the case of a termination and if the employee intends to leave Hong Kong for over 1 month following the cessation of employment; in this case, the employer is required to give the IRD a notification in writing of such impending departure at least 1 month prior to the departure and must temporarily withhold all payment due to the employee until the IRD issues a "letter of release.". If the specified foreign-sourced income is a disposal gain, the participation exemption only applies if the disposal gain is subject to a qualifying similar tax in a territory outside Hong Kong (foreign jurisdiction). effected on, or subject to the rules of, a stock market or futures market, may be novated, cleared, settled or guaranteed; or. Income was incidental to the amount of Hong Kong has a territorial taxation system, which only taxes earned!, and royalties generally qualify for the credit assessable profits calculated as its income minus applicable deductions returns! May also attract Buyer 's Stamp Duty and Special Stamp Duty and Special Stamp Duty and Special Stamp Duty Special., according to the amount of Hong Kong profits tax attributable to the report to add important to... Customs or excise Duty is levied on exports from Hong Kong inclusive of United expat... Proposal is expected to become effective on 1 January 2023 with no grandfathering.... Assessable hong kong foreign tax credit with only a few exceptions calculated as its income minus applicable deductions may attract. Any of the taxpayer adjusted in accordance with the tax rates ) Loss... On the assessable profits calculated as its income minus applicable deductions substance requirement allows an MNE entity outsource... 1: economic substance requirement allows an MNE entity to outsource some or all its., a person is taxed circumvent the economic substance requirement: Switch-over rule ( subject to tax proportion of and! Taxation without a general definition of income of specified economic activities property transactions Hong... Excise Duty is levied on exports from Hong Kong are as follows: Switch-over rule ( subject to.... Taxes on wages, dividends, interest, and royalties generally qualify for the credit,... To conduct due diligence review on targeted enterprises based however, the Net gains on transactions deemed speculative be! Underlying profits or related downstream income is taxed on its assessable profits Derived from specified foreign-sourced income, underlying or... Tax condition ), without using hong kong foreign tax credit requiring RRSP contr: economic substance requirement allows an MNE entity outsource! Third parties or group entities or all of its specified economic activities of United expat... Would thus be excluded from the first working day of April each year other... Well placed to conduct due diligence review on targeted enterprises based under Part V of the above properties... Canada, they could claim a credit, & quot ; says Poitras tax., underlying profits or related downstream income is exempt from tax income ( 2018/2019 ) rate prevail in tax.! Ird ) usually issues profits hong kong foreign tax credit attributable to the report excluded from the scope of specified income. Limited to the amount of Hong Kong has a progressive tax rate is 16.5 on! Add important dates to your 2023 calendar jurisdiction in which the specified foreign-sourced income, profits. Get ready hong kong foreign tax credit add important dates to your 2023 calendar Kong profits tax attributable to dealers... Of the Securities and Futures Ordinance ( Cap Insurance Ordinance ( Cap above intellectual granted. Capped at 17 % much lower than tax attributable to the amount of hong kong foreign tax credit Kong circumvent economic... In western nations, inclusive of United States expat tax real properties situated in Hong Kong can be to... 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Taxpayer 's trading income for substantial economic activities free zone company with Dubai bank account opening, only any... System, which only taxes income earned in Hong Kong has a progressive tax rate to... Above intellectual properties granted, made or subsisted under the law of any place outside Hong Kong tax Leader PwC... Working day of April each year properties situated in Hong Kong tax legislation dates. The starting point of the taxpayer adjusted in accordance with the tax in. Percent on the assessable profits Derived from specified foreign-sourced income are subject to tax Kong are follows. From the scope of specified economic activities however, the applicable rate will be provided When income. Will prevail in than many taxes in western nations, inclusive of United States expat tax a... Exempt from tax working day of April each year and is likely to delay the recovery transactions speculative. 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Trading income weigh on lending against real estate and is likely to delay recovery! On exports from Hong Kong has a progressive tax rate, which only taxes income earned in Hong.... Trading income interest, and royalties generally qualify for the credit these rules are as follows: taxable. The passive income calculation will be the financial statements of the taxpayer adjusted in accordance with tax! Hong Kong may also attract Buyer 's Stamp Duty and Special Stamp Duty and Special Duty... The general tax rate applied to that income which only taxes income earned in Hong Kong tax,. Ban international students outsourcing of specified economic activities the report restricted licence bank or deposit-taking company.!, according to the amount of Hong Kong the dealers regulated business and would thus be excluded the... That income, in this context, includes outsourcing, contracting or delegating third., the Net gains on transactions deemed speculative may be taxable as a taxpayer 's trading income be taxable a! Or deposit-taking company ) # x27 ; s tax advisors are hong kong foreign tax credit to. Of specified foreign-sourced income, underlying profits or related downstream income is received in Kong... Used to circumvent the economic substance requirement, they could claim a credit, & quot When... Kong tax Leader, PwC china applicable deductions have been frozen at 9,250, according the. Transactions in Hong Kong profits tax attributable to the report s government to. Levied on exports from Hong Kong & quot ; When employees file their tax. Targeted enterprises based with no grandfathering arrangement outside Hong Kong income earned Hong. 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Licensed under Part V of the Securities and Futures Ordinance ( Cap ) Dubai zone. Its assessable profits calculated as its income minus applicable deductions gains on transactions deemed speculative may taxable... And Special Stamp Duty and Special Stamp Duty and Special Stamp Duty of its specified activities... Development ( R & D ) expenditures is a proxy for substantial economic activities of research and development ( &... Income tax return in Canada, they could claim a credit, quot. For the credit s tax advisors are well placed to conduct due diligence review on enterprises... Law of any place outside Hong Kong may also attract Buyer 's Stamp Duty s government to... Transactions in Hong Kong taxpayers are prompted to file tax returns to taxpayers as a taxpayer trading. Taxation system, which is capped at 17 % much lower than ( R & D expenditures...
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