Corporate taxation is very different! In-depth comparison between Hong Kong and Mainland companies

As two important economic regions in China, Hong Kong and the Mainland have significant differences in their tax regimes. Understanding these differences, theIt is crucial for companies to choose the right place of incorporation, for tax planning and for compliance.

In this article, we will compare and analyze in detail the differences between Hong Kong companies and mainland companies in terms of taxation.

01

Tax differences

Main taxes

Hong Kong company

❍ Profits Tax: levied on profits derived from business operations in Hong Kong at a low rate and subject to the territorial source principle of taxation, i.e. only profits derived from Hong Kong are taxed.

❍ Salaries Tax: levied on income derived from employment or occupation in Hong Kong and calculated using progressive rates or standard rates.

❍ Property tax: levied on rental income derived from property held in Hong Kong at a low rate.

Mainland companies

❍ Enterprise Income Tax: levied on production and business income and other income earned in China, with a relatively high tax rate.

❍ Value-added tax (VAT): levied on the sale of goods, the provision of processing, repair, and repair services, the sale of services, intangible assets, or real estate within the territory of China, and is subject to multiple tax rates.

❍ Individual Income Tax (IIT): levied on individuals who earn income within China, using a combination of comprehensive and categorized tax system.

Other taxes

Hong Kong company

Stamp duty, betting duty, hotel room rental tax, etc.

Mainland companies

Consumption tax, urban maintenance and construction tax, resource tax, land value-added tax, etc.

02

Differences in tax rates

corporate income tax

Hong Kong company

The standard tax rate is 16.51 TP3T, with a preferential rate of 8.251 TP3T for the first HK$2 million of profits for qualifying companies.

Mainland companies

The standard tax rate is 25%. For qualified high-tech enterprises, small and micro-profit enterprises, etc., they can enjoy preferential tax rates such as 15% and 20%.

personal income tax

Hong Kong company

Calculated using progressive or standard tax rates with a maximum rate of 17%.

Mainland companies

A combined comprehensive and categorized tax system is adopted, with an ultra-progressive tax rate of 3%-45% applied to comprehensive income.

03

Tax incentives

Hong Kong company

❍ Territorial source principle of taxation: only Hong Kong-sourced profits are taxed; overseas-sourced profits are not subject to profits tax.

❍ Tax allowances and deductions: Hong Kong tax law provides for a number of tax allowances and deductions that can effectively reduce taxable income.

❍ Double Taxation Avoidance Arrangements: Hong Kong has entered into Double Taxation Avoidance Agreements (DTAs) with a number of countries and territories, which can effectively avoid duplication of tax payments by enterprises.

Mainland companies

❍ Industry Preferential Policies: For specific industries such as high-tech enterprises, software enterprises, integrated circuit enterprises, etc., preferential policies such as enterprise income tax reduction and exemption and additional deduction for research and development expenses are given.

❍ Regional Preferential Policies: For specific regions such as western regions, free trade zones, special economic zones, etc., preferential policies such as enterprise income tax exemption and value-added tax rebate are given.

❍ Other preferential policies: for small and micro-profit enterprises, venture capital enterprises, etc., preferential policies such as enterprise income tax exemption and VAT threshold are given.

04

Tax Returns and Payments

Hong Kong company

❍ Filing cycle: Hong Kong companies implement a voluntary filing system, taxpayers need to take the initiative to declare the previous year's income to the Inland Revenue Department. The first declaration cycle for profits tax is 18 months after the commencement of business and thereafter on a natural year basis. The salaries tax year is from April 1 each year to March 31 of the following year.

❍ Bookkeeping and Audit: The process of bookkeeping and tax filing for a Hong Kong company includes providing financial documents, making assessments, quotations and making payments, followed by an audit by a licensed accountant, and upon completion of the audit, the shareholders will sign the audit report and file a tax return.

Mainland companies

❍ Filing cycle: Mainland company tax administration is more stringent. For example, corporate income tax is subject to prepayment and annual remittance is completed at the end of the tax year. Value-added tax (VAT) is usually declared on a quarterly basis, personal income tax is withheld and paid by the organization, and taxpayers with an annual income exceeding a certain standard are also required to declare it on their own.

❍ Bookkeeping process: The bookkeeping process for mainland companies includes reviewing various original documents, preparing journal vouchers, making accrual, amortization, and carryover journal vouchers at the end of the month, summarizing all the journal vouchers, preparing a journal voucher summary, and registering the general ledger based on the journal voucher summary.

Overall, Hong Kong companies have significant advantages in taxation, offering a number of tax incentives and double taxation avoidance arrangements, as well as an efficient and stable business environment.Ideal for companies to optimize their taxes and expand into international markets.

If you are interested in registering a Hong Kong company, please feel free to contact us!