Posted by hwuason2012 on May 8, 2013 under Corporate Tax Planning | 
Hong Kong, one of the world most famous financial and trade center, gathered a vast majority of headquarters or regional headquarters of multinational companies. Aside from its strategic location and convenient transportation, the reason why it is extremely welcomed by international investors is also closely related to its transparent and efficient tax system.
1. Major Taxes in Hong Kong
(1) Profits Tax
Profits tax shall be charged for each year of assessment at the standard rate on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits (excluding profits arising from the sale of capital assets) arising in or derived from Hong Kong for that year. As for a corporate, its profit tax rate is 16.5%. And as for non-corporate, its profit tax rate is 15%. Compared with enterprise income tax in mainland, profits tax makes no distinguish between resident enterprise and non-resident enterprises. Therefore, oversea-gained profits by resident enterprise may not subject to profits tax, while profits gained from Hong Kong by non-resident enterprise may subject to profits tax.
(2) Salaries Tax
Salaries tax shall be charged for each year of assessment on every person in respect of his income arising in or derived from Hong Kong by sources of any office or employment of profit or any pension. Whether income is aroused in or derived from Hong Kong depends on the work place of employment of such person. When calculating salaries tax, taxpayers may choose from the following two methods which are of the lower tax burden.
1. The net assessable income multiplied by the standard tax rate of 15%;
2. The total taxable income minus the deductable amount and exempt amount, then subject to progressive tax rate ranging from 2% to 17%.
(3) Property Tax
Property tax shall be charged on every person being the owner of any land or buildings or land and buildings wherever situate in Hong Kong and shall be computed at the standard rate of 15% on the net assessable value of such land or buildings or land and buildings for each year.
The assessable value of land or buildings shall be the consideration paid to the owner in respect of the right of use of that land or buildings, such as rents. And the net assessable value refers to the assessable value of land or buildings minus an allowance for repairs and outgoings of 20% of that assessable value after deduction of any rates where the owner agrees to pay.
2. Advantages of Hong Kong Tax System
(1) Source Principle of Taxation
Hong Kong applies source principle of taxation and only taxes income derived from its jurisdiction. To decide whether profits are derived from Hong Kong, it is up to the court to make the final decisions based on the principles established by prior cases and considerations on comprehensive factors.
Therefore, if a Hong Kong company has profits not derived from Hong Kong, it may fall out of the scope of profits tax pursuant to Inland Revenue Ordinance. However, it still needs to make the application and provides transaction process, contracts or other materials to the tax authority and properly answer the enquiries proposed by the tax authority when necessary.
(2) Schedular System
Hong Kong applies schedular system and has only limited categories of taxes. Generally speaking, it has both narrow tax base and low tax rate. To be more specific, it may be shown on the following aspects.
a. No tax on capital gains;
b. No turnover taxes, such as VAT or Business Tax;
c. No tax on dividends;
d. No withhold tax system and no withhold taxes;
e. Aside from tobacco, alcohol, cosmetics, automotive or fuel, most import goods are not subject to tariffs.
3. Tax Treaties of Hong Kong
So far, Hong Kong has signed many agreements with other countries or districts on the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. And the Arrangement between the Mainland of China and the HKSAR for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion is among the most important ones. According to this agreement, the tax charged on dividends paid by a Mainland resident company to a resident of Hong Kong in the Mainland shall not exceed 5% of the gross amount of the dividends when certain requirements are satisfied. It is also an important factor why many foreign companies or individuals choose Hong Kong holding companies when considering investments in mainland.
For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (liutianyong@hwuason.com) or Lingyan Hu (hulingyan@hwuason.com). You can visit our website at www.hwuason.com or our tax blog at www.chinataxblog.com.
About us
Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.
Posted by hwuason2012 on April 25, 2013 under Corporate Tax Planning, Tax Incentives |
In early March, the National Development and Reform Commission issued the Permitted Industry Catalogue for Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone (Fa Gai Chan Ye [2013] No. 468), which further clarifies the scope of encouraged industries enjoying the preferential enterprise income tax rate of 15%. Since Qianhai was positioned as Shenzhen-Hong Kong Modern Service Industry Cooperation Zone in 2010, a series of preferential policies have been formulated from both central and local government level, which create perfect environment for innovation and development in modern service industries. It is reported that the total number of registered enterprises has increased to 236 and the total amount of registered capital has reached 248 million in Qianhai by the end of February. In view of Qianhai’s strategic position in the new round of China’s economic transformation and development, Hwuason Lawyers summarized the relevant documents and offered brief analysis on preferential fiscal policies for the reference of enterprises seeking opportunities in Qianhai.
Generally speaking, the preferential tax policies mainly concern enterprise income tax, individual income tax, business tax and so on, which are further explained as follows:
1. Enterprise Income Tax
According to Guo Han [2012] No.58, qualified enterprises shall be eligible for a preferential enterprise income tax rate of 15% in Qiuanhai. And according to Fa Gai Chan Ye [2013] No. 468, the permitted industry catalogue covers six industry sectors including financial services, modern logistics, information services, technology services, professional services and public services. The detailed industrial segments listed below the six industries could amount to 112. Observing the current tax system, the 15% enterprise income tax rate is largely applied in western region. Therefore, Qianhai is among the few areas in eastern region which could enjoy such tax incentives.
2. Individual Income Tax
According to Shen Fu [2012] No. 143, overseas talents and professionals in short supply working in Qianhai will receive financial subsidies concerning the part exceeding 15% from the Shenzhen municipal government and such rebates shall be exempt from individual income tax. It may actually reduce their tax burden to a flat tax rate of 15% and avoid the highest tax bracket of 45% under the progressive tax rates. Therefore, Hwuason Lawyers suggest the company pay special attentions on the qualifications and application process in relation to overseas talents and professionals in short supply and try to obtain such financial subsidies. However, it is worth noting that such financial subsidies are merely subject to income from wages and salaries. Other categories of individual income are excluded from the scope of financial subsidies, such as income from remuneration for personal services, income from the transfer of property, incidental income, etc.
3. Business Tax
According to Guo Han [2012] No. 58, qualified logistics companies that registered in Qianhai are allowed to apply a net basis for business tax. Furthermore, according to the Ordinance of Shenzhen Special Economic Zone on Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone, incomes derived from international transportation insurance services provided to enterprises registered in Qianhai Cooperation Zone by insurance enterprises registered in Shenzhen are exempted from business tax. And incomes derived from offshore outsourcing services by enterprises registered in Qianhai are exempted from business tax. The exemption policies of business tax will definitely reduce the tax burden of the relevant industries like modern logistics and promote the development of these industries.
In addition, enterprise may apply for special funds to Qianhai Administration Bureau pursuant to Shen Cai Jian [2013] No. 28 and Shen Qian Hai [2013] No.55 if they have some projects requiring government support. The special fund will give priorities to projects applying core technology or innovative business models, equipped with significant social and economic benefits, available to integrate resources, etc.
For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (liutianyong@hwuason.com) or Lingyan Hu (hulingyan@hwuason.com). You can visit our website at www.hwuason.com or our tax blog at www.chinataxblog.com.
About us
Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.
Posted by hwuason2012 on April 19, 2013 under Corporate Tax Planning |
Recently, the maximum income tax on equity transfer in Wuhan had been collected smoothly. The transfer income came to 140 million Yuan and the income tax hit 3.473 million Yuan. In this case, a hotel held 1.63% shares of a security company as a nominal shareholder while the actual shareholder was an investment corporation. As the security company going public, the hotel sold these shares in batches after destabilization of non-tradable shares with net income of 160 million. Actually, this trade involved in share transfer, nominal share-holding contract, sale and other processes, which was rather complicated regarding tax treatment. Through investigation and analyses, Wuhan tax authority confirmed the hotel as the taxpayer, and collected enterprise income tax on basis of trade price. No income tax shall be collected when the rest of income was diverted from the hotel (the nominal shareholder) to the investment corporation (the actual shareholder).
Nominal share-holding here refers to a situation that the actual shareholder reaches an agreement with the nominal shareholder, in which case the nominal shareholder could enjoy investment rights and obligations belonging to the actual shareholder, in its own name. It often happens in real life. However, the actual shareholder often gets troubled by tax issues when he plans to terminate the agreement. Normally, the actual shareholder cannot get approval from tax authority without enough evidence, and is often required to pay income tax on the base of fair value. It’s unfair for the actual shareholder because no share transfer happens and no transfer income is acquired actually. Therefore, Hwuason Law Firm will offer brief legal analysis for taxpayers on this issue.
i. The normal tax treatment of nominal share -holding by tax authority
Tax issues involved in the situation that an enterprise acts as the nominal shareholder for individual actual shareholder are made clear by Notice 2011 No. 39th by The State Administration of Taxation. Specifically, an enterprise nominally holds shares actually belonging to individual shareholder due to split-share reform, and income taxation will be levied on the enterprise when shares are transferred. When the income is diverted to individual actual shareholder, no tax needs to be paid. The former case in Wuhan just referred to the regulations.
What should be noticed is that the fore-mentioned notice shall be applied merely in certain situations. Double taxation risks still exist in other forms of nominal share-holdings.
Nominal share-holding between individuals is very common in reality. According to Notice 2010 No. 27th by The State Administration of Taxation, when shares are transferred to spouse, parents, children, brothers and sisters, grandparents, maternal grandparents, grandchildren, maternal grandchildren and other immediate relatives whom a person raises, support or is raised or supported by, the transferor is entitled to be exempt from verification collection even if the transfer price is unreasonably low. Hence, the actual shareholder shall choose nominal shareholder confining to the aforementioned range to minimize involved tax burden.
ii. The tax treatment under substantive principles of taxation
Substantive principles of taxation refers that tax should be imposed on the basis of the substance of business activities rather than the appearance. According to the Third Provisions of the Supreme People’s Court on issues concerning the application of Corporate Law, when the actual shareholder has disputes on investment rights and interests with the nominal shareholder, the people’s court shall uphold the claim of the actual shareholder. If the nominal shareholder claims rights for the appearance by shareholders register, the people’s court shall not support the claim. In conclusion, the actual shareholder enjoys investment rights and interests. Under substantive principles of taxation, the alternation registration from the nominal shareholder to the actual shareholder is not share transfer essentially. No income tax should be imposed without transfer income.
However, it’s hard for the taxpayers to prove the legal relations of nominal share-holding to the taxation authority due to lack of evidence in practice, thus they have to pay tax based on fair value. In view of this, we suggest that the actual shareholder shall emphasize on collection of relevant evidences (such as the financial contribution certificates, involved resolutions of the meeting of shareholders, certificate of profit distribution and so on) and communication with tax authority. Besides, it would be helpful to get the verdict confirming the shareholder’s right in order to safeguard the legitimate tax-related rights.
iii. Risk tips
Based on substantive principles of taxation, the alternation registration from the nominal shareholder to the actual shareholder is formal change, which should not be levied taxes. Things go contrary in practice due to lack of evidence to demonstrate the legal relations of nominal share-holding. Risks of double taxation do exist in such circumstance.
Furthermore, seen from corporate law and property law, the third party acting in good faith can get the shareholder’s rights according to bona fide acquisition system if the nominal shareholder sells the shares to them. The status as the actual shareholder cannot be used against the third party acting in good faith. On this case there still exist risks of losing shareholder’s rights.
To sum up, we suggest that taxpayer should see the risks of nominal share-holding clearly. If it is necessary, the framework should be simplified to the maximum and the actual shareholder should be chose prudently to avoid the underlying risks. Besides, proper attention should be paid on the involved evidence to get favorable tax treatment.
For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (liutianyong@hwuason.com) or Lingyan Hu (hulingyan@hwuason.com). You can visit our website at www.hwuason.com or our tax blog at www.chinataxblog.com.
About us
Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.
Posted by hwuason2012 on April 9, 2013 under Corporate Tax Planning, Latest Regulation& Regulatory Impact Analysis |
Taking effective on April 1, Administrative Measures for Network Invoices were formulated for strengthening the administration of ordinary invoices. However, some customers may have their own concerns whether electronic commerce is affected by it.
Ⅰ.Network Invoices will be the Future Trend of Invoice Administration
In December 2010, the State Council amended the Administrative Measures of the People’s Republic of China for Invoices and clearly stipulated in Article 23 that the State shall actively promote the use of network invoice management systems for invoicing. In February 2013, the State Administration of Taxation further promulgated Administrative Measures for Network Invoices for regulating the issuance and application of network invoices. Therefore, as a long-term mechanism to combat false invoices, there is no doubt that the application of network invoices will be the future trend of invoice administration.
In fact, the application of network invoices may bring numerous conveniences to taxpayers. On one hand, taxpayers may check invoice information on official websites or by scanning two-dimensional codes to avoid false invoices and economic losses. Since invoice codes and invoice numbers are generated automatically and randomly by the system and there are security codes and two-dimensional codes on network invoices, to fake invoices becomes more difficult. On the other hand, taxpayers may save plenty of time and energy by dealing with invoice issues on-line in the network invoice system. In addition, with the improvement of invoice system and tax administration, the copies of each invoice may reduce correspondingly and tax authorities may not require taxpayers to purchase Fiscal Cash Registers, which may further reduce the tax burden of taxpayers.
As for tax authorities, they could collect invoice information timely through the invoice system and compare such information with taxpayers’ tax returns and financial statements. These may assist the tax authorities to detect violations or illegal activities such as reporting less sale revenues or reporting more expenses, which meanwhile enhance the effectiveness of tax collection and prevent the losses of taxes.
However, the available scopes for checking network invoices are now limited to province, which means the taxpayers could only check network invoices within a province. As for cross-provincial invoices, taxpayers are not able to check contemporarily. Generally speaking, the network invoices mainly refer to ordinary invoices and taxpayers still need to use Fiscal Cash Registers to issue VAT invoices.
Ⅱ.Network Invoices are not targeted at Taxing E-Commerce
It could be concluded that the application of network invoices is a significant progress of tax administration and meanwhile bring conveniences to taxpayers. But some customers mistook the meaning of network invoices and thought that all on-line shops would pay taxes due to the application of network invoices and these shops may shift the tax burden to final consumers by increasing the sales prices.
According to the tax law, electronic commerce is not listed as exempted item and therefore subjects to tax. In practice, some large on-line suppliers (e.g. JD, Amazon, etc) are taxpayers and able to provide invoices for customers. Only those small on-line suppliers without business registration or tax registration may not pay any taxes because of tax administration difficulties, which obviously cause the injustice between on-line shops and entity shops. With improvement of tax collection, such injustice may be corrected eventually.
In short, the network invoices mainly focus on invoices issues covering industrial, commercial, construction, real estate, services, etc. As for taxing electronic commerce, it still needs extensive discusses and surveys to solve real problems rising from real practice.
For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (liutianyong@hwuason.com) or Lingyan Hu (hulingyan@hwuason.com). You can visit our website at www.hwuason.com or our tax blog at www.chinataxblog.com.
About us
Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.
Posted by hwuason2012 on April 3, 2013 under Tax Incentives |
Ⅰ.Brief Introduction on Additional Deduction Policies
According to Law of the People’s Republic of China on Enterprise Income Tax, R&D expenses incurred for developing new technologies, products or techniques are subject to additional deduction when the amount of taxable income of an enterprise is calculated. Specifically, additional 50% deduction of the R&D expenses incurred from the research and development of new technologies, new products and new techniques could be deducted on the basis of the actual deductions if no intangible asset has been formed and included in the current profits and losses; where intangible asset has been formed, such expenses shall be amortized at 150% of the cost of the intangible asset.
Ⅱ.Application Process
Enterprises shall submit relevant additional deduction documents to tax authorities when filling annual enterprise income tax returns (within five months from the end of a taxable year) and shall fill in the amount of additional deduction in Statement of Tax Breaks (Annual Tax Return Form for Enterprise Income Tax Annexes 5) as required. The detailed application process as follows:
i. Obtain Enterprise R&D Project Appraisal Opinion issued by science and technology department before 30th April;
ii. Submit the application materials to tax authority before 15th May;
iii. Tax authority will finish the review within 7 working days. As for enterprises passed the review, tax authority will grant recordation notices; otherwise, tax authority will issue disapproval recordation notices;
iv. Enterprises receiving recordation notices shall be recorded in accordance with the relevant legal procedures and enjoy tax incentives of additional deduction of R&D expenses.
Ⅲ.Remind of Main Focuses
i. Scope of Additional Deduction of R&D Expenses
According to laws and regulations, the scope of additional deduction of R&D expenses merely includes eight items, such as the design expenses for new products, the expenses for formulating new technique procedures, expenses for technical books and materials and material translation expenses in direction connection with the research and development activities; expenses of materials, fuel and power directly consumed in the research and development activities; the wages, salaries, bonuses, subsidies and allowances for the personnel who are engaged entirely in the research and development activities; etc. Other expenses beyond the listed scope shall not be calculated. Therefore, companies shall be aware of the scope of additional deduction of R&D expenses and strictly comply with relevant regulations to impute R&D expenses accurately.
ii. Establishment of Auxiliary R&D Accounts
According to laws and regulations, enterprises shall set out special accounts for R&D expenditures, and meanwhile shall, based on the listed items, classify and complete accurately each item of actual R&D expenditures incurred in the year eligible for additional deduction. To impute the R&D expenses precisely is the essential condition to enjoy the tax incentive of additional deduction. Otherwise, suppose that the R&D expenses are mixed with production and operation expenditures, companies shall not subject to such tax incentive. Therefore, companies shall establish auxiliary R&D accounts to impute the expenditures of each R&D projects. In addition, companies’ R&D expenses are more likely to be recognized by tax authorities provided with auxiliary R&D accounts.
For more information or advice on the above tax issues, please feel free to contact us by Tianyong Liu (liutianyong@hwuason.com) or Lingyan Hu (hulingyan@hwuason.com). You can visit our website at www.hwuason.com or our tax blog at www.chinataxblog.com.
About us
Hwuason Lawyers, a prominent law firm with a focus on taxation, are committed to providing comprehensive tax law services including international tax, tax consulting, tax planning, tax incentives, tax controversy, etc. And we are granted ALB China Law Awards and Chambers China Awards respectively in 2012 for our excellent performance in taxation.
