Personal taxation in Hong Kong
Effective personal income tax rate
Teleport city rankings for personal income tax
An individual "domiciled" in the Chinese mainland is subject to individual income tax on his/her worldwide income. A nondomiciled individual staying in China for less than one year is subject to personal tax only on China-source income. A nondomiciled individual staying in China for one full year, but less than five consecutive full tax years, is subject to individual income tax on China-source income, plus foreign income borne by Chinese entities or establishments. A nondomiciled individual staying in China for more than five consecutive full tax years is taxed on worldwide income as from the sixth year for each full tax year spent in China.
There is no specific definition of tax resident for personal tax purposes in domestic law (see above under “Basis”.) However, the test for domicile in China is whether an individual is usually or habitually residing in China due to his/her household, family or economic situation.
Each individual must file a separate return; joint filing is not permitted. Non-Chinese nationals may need to register with the competent Chinese tax authorities as soon as they become liable to individual income tax.
Seven progressive tax rates, ranging between 3% and 45%, are levied on wages and salaries. Dividends, interest, royalties, income from leasing property, income from the transfer or assignment of property, income from manuscripts and contingency income are taxed at 20%. Interest on bank deposits is temporarily exempt from individual income tax (previously taxed at 5%). Income from production and business, income derived from contracting or leasing operations are taxed at progressive rates between 5% and 35%. Income from personal services is subject to progressive rates up to 40%.
Deductions and allowances
Deductions and allowances are available, depending on the category of income. Individuals are entitled to a fixed monthly deduction of RMB 3,500 (foreign nationals are entitled to an additional fixed deduction of RMB 1,300) for wages and salaries received in China. Personal basic contributions also are deductible. These include payments to housing funds and certain medical insurance, pension and unemployment insurance payments.
Taxable income comprises employment income; production and business income; income derived from the contracting for, or leasing operations of, enterprises or institutions; income from personal services; dividends and bonuses; interest income (except interest from bank deposits); royalty income; income from leasing property; income from the assignment or transfer of property; contingency income; income from manuscripts; and other income specified as taxable by the finance department of the State Council.
Gains derived from the sale of property, net of relevant expenses and taxes, are subject to tax at a rate of 20%. Individuals generally are exempt from tax on gains from the sale of their sole private dwelling if they have occupied the residence for five years.
Other taxes on individuals
Real property tax
An individual who rents out his/her property is subject to real estate tax, which is 12% of the rental income. The rate may be reduced to 4% for the leasing of residential property. However, the practice may vary across China since the rates are determined by the local authorities.
Both the employer and the employee must contribute to a pension fund, medical insurance fund, maternity insurance, unemployment insurance and work-related injury insurance. The employee is required to contribute a certain percentage of his/her monthly salary to the above funds up to certain limits set by the local authorities.
Stamp duty at varying rates applies to contracts, agreements and certain documents.
Compliance for individuals
A late payment surcharge will be imposed on a daily basis at a rate of 0.05% of the amount of underpaid tax. Penalties may be imposed in addition to the late payment surcharge.
Filing and payment
Individual income tax on wages and salaries is calculated and levied on a monthly basis. Withholding agents and individuals who file returns personally must submit a tax return to the tax authorities and make the tax payment to the state treasury within 15 days after the end of the month in which the income was derived. Annual filing is required within three months of the end of the tax year for individuals with annual income exceeding RMB 120,000. Nondomiciled individuals who have resided in China for less than a full tax year may be exempt from the requirement. In most cases, an employer or a person who pays taxable income to a taxpayer is obliged to act as a withholding agent and is responsible for filing a tax return and remitting tax payment to the tax authorities on behalf of the individual. If there is no withholding agent, the individual must file his/her tax return and pay the tax assessed.
Corporate taxation in Hong Kong
Teleport city rankings for corporate income tax
Residents are taxed on worldwide income, while nonresidents are taxed on China-source income and income effectively connected with their establishments (if any) in China.
An enterprise is resident in China if it is established in China or if its place of effective management is in China. Effective management is defined as substantial and overall management and control over manufacturing and business operations, human resources, financial and property aspects of the entity. A foreign company also will be subject to tax in China if it has an "establishment" in China or, if it does not have an establishment in China, it derives income from China. The definition of establishment is broad and does not include an exemption for an independent agent. If a foreign company has an establishment in China, it will be subject to China tax on all income effectively connected with that establishment.
Losses may be carried forward for five years. The carryback of losses generally is not permitted.
The principal incentives include a 15% preferential tax rate applicable to new/high-technology enterprises and a 50% super deduction for qualifying R&D expenditure. There is a geographically based incentive focused on new/high-technology enterprises established as from 2008. The incentive (in addition to the 15% rate that applies to all new high-technology enterprises) is a two-year tax holiday followed by three years at a 12.5% rate. The 15% preferential tax rate also is granted to qualified high-tech service enterprises in 21 specified cities between 1 January 2014 and 31 December 2018. Encouraged industries in certain regions (e.g. western China, Hengqin (Guangdong), Pingtan (Fujian) and Qianhai (Shenzhen)) can enjoy a reduced 15% enterprise income tax rate until 31 December 2020. Tax exemptions and other preferences apply to the agriculture, forestry, animal husbandry and fishery sectors, software and integrated circuit industries, major infrastructure projects, certain environmental projects and certain transfers of technology.
The standard enterprise income tax rate is 25%. Special rates mainly apply to small-scale enterprises (20%, or 10% if certain requirements are met), enterprises with new high-technology status (15%) and enterprises incorporated in certain regions of China and engaged in encouraged business activities (15%). Special rates are available for certain other encouraged business.
Foreign tax credit
Foreign tax paid may be credited against Chinese tax on the same profits, but the credit is limited to the amount of China tax payable on the foreign income. A country-by- country limitation is applied. If the foreign tax credit exceeds the limit, the excess may be carried forward for five years. An indirect tax credit also is allowed when dividends are distributed to a resident enterprise that holds directly or indirectly at least 20% of the foreign entity (generally within three tiers) deriving the underlying profits.
Taxable income is the amount remaining from gross income in a tax year after deducting allowable expenses and losses, nontaxable and tax-exempt items, and any prior year loss carryforwards. All documented costs incurred in connection with operating activities on a reasonable and actual basis are allowable, except those specifically identified as nondeductible.
Gains and losses from the transfer of assets generally are combined with other operating income and taxed at the applicable enterprise income tax rate.
Other taxes on corporations
Real property tax
Real estate tax, levied on land and buildings, is paid by the owner of real estate at 1.2% per year on the original cost, less a variable allowance depending on the location, or at 12% per annum on rental income. An urban land usage tax is imposed on the land area occupied at rates ranging from RMB 0.6 to RMB 30 per square meter. Other minor local levies may apply.
The employer is required to contribute approximately 20% of basic payroll to the state-administered retirement scheme, as well as to medical insurance, maternity insurance, unemployment insurance and work-related injury insurance funds. The total employer contribution can be up to 40% of the employee's base monthly salary, although the rates can vary across the country. The employee is required to contribute a certain percentage of his/her monthly salary to the above funds. There generally are limits on the total contribution payable if the employee's salary reaches a threshold set by the local authorities.
Deed tax is imposed at rates between 3% and 5% on the total value of land use rights or building ownership rights when transferred. Land Appreciation Tax is imposed on gains realized on the transfer of real estate. The gain is calculated based on sales proceeds less certain deductions, and the tax is charged in four bands ranging from 30% to 60%.
Stamp duty at varying rates applies to contracts, agreements and certain legal documents.
Compliance for corporations
A late payment surcharge will be imposed on a daily basis at a rate of 0.05% of the amount of underpaid tax. Penalties may be imposed in addition to the late payment surcharge. An interest-based penalty, being the basic RMB lending rate plus 5%, applies in the case of transfer pricing, thin capitalization, CFC and general anti-avoidance tax adjustments.
There generally is no advance ruling procedure, but the tax authorities can issue rulings in special cases. Taxpayers normally
Enterprises must file a provisional income tax return with the local tax authorities within 15 days of the end of each quarter, and pay quarterly installments of tax, generally based on the profits for the quarter. An annual tax return and final settlement of the tax liability must be made within five months of the end of the tax year.
Other taxation in Hong Kong
Value added tax
Filing and payment
VAT returns generally must be filed each calendar month and submitted before the 15th of the following month. Taxpayers importing goods must pay tax within 15 days after the issuance of the tax payment certificate by Customs.
China imposes two other notable indirect taxes: Business tax and consumption tax. Business Tax is a nonrecoverable turnover tax (with certain exceptions) imposed on the provision of certain services, the assignment of land/natural resource use rights and the sale of immovable property within China. Business tax rates are 3% or 5% for most services, although a 5% to 20% rate applies to entertainment as determined by the local tax authorities. Once a taxpayer’s tax status has been approved by the tax authorities, the company should
The standard VAT rate is 17%, with a lower rate of 13% applying to certain foods, goods, books and utilities. A 3% rate applies under the small-scale taxpayer scheme. Lower rates apply to certain transactions involving used goods. Exports generally are zero- rated. The rates under the VAT reform program are as follows: 17% for the leasing of moveable and tangible goods; 11% for the transportation sector, postal and basic telecommunication services;
VAT applies on the supply of goods, the provision of processing, repair or replacement services, and on the import of goods. The pilot VAT reform program launched in Shanghai in 2012 and expanded nationwide in 2013 aims to transition service industries from liability to business tax to liability to VAT. The reform applies to the transportation industry, certain modern service sectors (e.g. R&D and technology services, leasing of moveable and tangible goods, etc.), postal services and telecommunication services.
A company is required to register with the local tax authorities at the time of incorporation to have its status recognized. If the taxpayer's status is approved, VAT taxpayers (other than small- scale VAT taxpayers) must register for VAT purposes with the tax authorities. A nonresident company is not required to register for VAT.
A general anti-avoidance rule requires a bona fide business purpose for any business arrangement that has the effect of reducing, deferring or avoiding taxable revenue or taxable income. In the absence of such a purpose, the tax authorities have the power to make adjustments going back 10 years.
China has transfer pricing rules. China has adopted a broad definition of associated enterprises with a strong emphasis on control. An entity with significant control over the taxpayer's senior management, purchases, sales, production and the intangibles and technologies required for the business is defined as a related party. Accepted transfer pricing methodologies are the comparable uncontrolled price, resale price, cost plus, transactional net margin, profit split and other methods that comply with the arm's length principle. Contemporaneous documentation is required (with certain exemptions) and cost sharing agreements may be used for developing intangible property or for shared services arrangements. Advance pricing agreements are available.
Resident taxpayers are required to disclose related party transactions in the annual tax return. There are other disclosure requirements on direct and indirect share transfers, contracting or services provided by nonresident companies, certain foreign investments, etc.
Controlled foreign companies
Resident companies must include in taxable income their relevant share of the undistributed profits of a CFC in certain cases. This rule applies to CFCs incorporated in low tax countries where their effective tax rates are lower than 12.5%. The inclusion in income is not required in certain situations (e.g. where the undistributed profits of a CFC are lower than a threshold amount).
Excessive interest expense from related party financing is nondeductible for tax purposes. In general, if an entity’s debt-to-equity ratio exceeds 2:1 (5:1 for financial institutions), the excess portion of interest expense will be nondeductible, unless contemporaneous documentation demonstrates the arm's length nature of the expense.
A 10% withholding tax, which is lowered from a 20% statutory rate, is imposed on dividends paid to a nonresident company unless the rate is reduced under a tax treaty.
Technical service fees
Technical service fees paid to a nonresident are subject to the statutory enterprise income tax rate (i.e. 25%) on a net-profit basis to the extent the services are rendered in China, unless the tax is reduced under a tax treaty. A minimum 15% deemed profit rate is used where documents substantiating costs and expenses are unavailable. A 6% VAT generally will be levied regardless of where the services are rendered.
A 10% withholding tax, which is lowered from a 20% statutory rate, applies to interest paid to a nonresident unless the rate is reduced under a tax treaty. A 5% business tax also is imposed.
A 10% withholding tax, which is lowered from a 20% statutory rate, applies to royalties paid to a nonresident unless the rate is reduced under a tax treaty. A 6% VAT generally is applicable, but may be waived when royalties are paid for the transfer of qualified technology.
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