Introduction
Businesses and individuals in Hong Kong benefit from one of the most tax-friendly systems in the world. The government has imposed only three direct taxes and there are several deductions and allowances that can lower all businesses’ tax burden, which is a huge advantage for startups in Hong Kong.
In this article, we would outline all the important factors in accounting and tax considerations for Hong Kong startups, and would answer the following questions:
- What are the tax considerations you will have to face as a startup?
- What are the most important things to consider when preparing accounting hong kong and tax returns?
- What should you consider when selecting an accounting software?
- What are some of the advantageous tax benefits that you will receive as a Hong Kong startup?
To make the whole process simpler for you, we’ll look at an industry like blockchain/ cryptocurrency as an example.
What you will learn:
Hong Kong Tax System
Hong Kong has one of the simplest tax systems in the world, with only three direct taxes: salaries tax, profit tax, and property tax. There may also be various indirect taxes such as stamp duty and betting duty.
Businesses in Hong Kong are required to declare their income, apply for exemptions and account for everything they own during the tax year, which is typical during the start of April. Businesses are taxed in Hong Kong only if the taxes are calculated on income generated from a trade or business carried on in Hong Kong, which is currently 16.5% on profits. If your company is incorporated in Hong Kong but the earnings are generated outside of the country, you will not be charged taxes.
Features Of the Hong Kong Tax System
Hong Kong’s tax system has certain characteristics when compared to other countries taxation systems.
Unlike most countries that apply both residential jurisdiction and territorial jurisdiction in determining tax liability, taxes in Hong Kong are only levied on a territorial basis. Only income based from Hong Kong is taxable whereas income coming from global activities is not taxable irrespective of the residence status of the taxpayers.
Secondly, there is no overall system of income taxation in Hong Kong, instead, a taxpayer is liable for tax on three different types of income. Any income that fails to fall within any of the three specific tax provisions will not be taxed.
What Are Tax Considerations For Hong Kong Startups?
Although Hong Kong has one of the simplest tax systems in the world, there are still 3 important tax considerations that startups have to be aware of.
Territorial Tax System
- Only income that arises in and derives from HK is taxed
- Any distribution made by HK company to people outside of HK is exempt from withholding tax
- Double tax agreement between Hong Kong & China: Chinese companies enjoy a 5% withholding tax rate on dividends distributed to HK tax residents
No GST/VAT & Capital Gains Tax
- No Goods and Services Tax (GST)
- No Value Added Tax (VAT) system
- Capital gains taxes are not imposed
Two-Tiered Profit Tax Rate Regime
- Will be taxed at 8.25% when your company’s income hits the first HK$2 million
- Any income after HK$2 million, you will be charged 16.5%.
- Individuals who are self-employed and entrepreneurs are also subject to the profit tax rate hong kong
What Are The Tax Considerations For Blockchain And Cryptocurrency Startups?
Now, we will look at all accounting and tax considerations that blockchain and cryptocurrency startups should know.
Tax implications for companies when dealing with crypto
There is no indication in the Inland Revenue Ordinance (IRO) about how cryptocurrencies should be taxed.
The DIPN 39 lays out some basic rules for digital assets but may not necessarily address the constantly changing digital asset economy which leads to over-simplifying the taxpayer’s tax positions and may lead to tax over-simplification that invites future IRD conflicts. The IRD will tax digital assets based on their type and how they are utilised in the taxpayer’s business. There are three categories of crypto assets: Payment token, Security token & Utility token
If the tokens are securities, such as equity or ownership interests in a business, profits received from their issuance will be considered capital in nature and non-taxable. On the other hand, the tokens only provide purchasers with the right to goods or services rather than any equity or ownership interests (utility tokens), the issuance proceeds should be considered a prepayment for goods or services, and the timing of the revenue recognition should generally follow how the token proceeds are accounted for, in the Profit and Loss, in accordance with generally accepted accounting hong kong principles.
If a company is considered to be carried on by trading, exchanging, or mining assets, Hong Kong-sourced profits are the only ones that are subject to profits tax as it is regarded as profit-generating activities. For such taxpayers, events like airdrops and blockchain splits are treated as Hong Kong-sourced earnings in the course of the cryptocurrency business.
Salaries tax for employees receiving crypto
Employees will be subject to the salaries tax provision when they are paid in crypto. The amount to be reported in the employee’s return should be the market value of the crypto at the time of accrual and not the amount received when investing it into fiat. If crypto is granted as part of an employee’s salary package, it will be taxed up-front for the granted amount and any future appreciation in the value of the crypto when sold will typically be tax-free. When cryptocurrency is received as employment income, both employers and employees are required to report them via the reporting obligations.
Tax implications for investing in crypto
The capital gains derived from cryptocurrency trading are not taxed if the investors hold digital assets for long-term investment. Profits generated through the sale of crypto assets would be capital in nature and not be taxed for profits tax since there is no capital gains tax in Hong Kong. The nature of the crypto assets, such as whether they are capital assets or trading stock of a company, is a question of fact and circumstances e.g. frequency of activity, hiring of personnel and the purpose of the activity are all factors to consider.
Favourable Tax Factors For A Hong Kong Startup
Tax Reduction
Hong Kong is an ideal place for investments since it is widely recognized as the world’s most free economy, with well-established financial and legal systems and a simple and low tax structure. In recent years, Hong Kong has offered tax reductions of up to $20,000 HKD per company each year.
Tax Incentives Policies
Hong Kong has also suggested a two-tiered profit tax rate hong kong system, in which the first 2 million HKD of a corporation’s taxable profits would be taxed at a lower rate of 8.25 percent from 16.5%, subject to legislation. Certain tax incentive schemes have been implemented to encourage research and development as well as the acquisition of intellectual property rights.
Financial Supports For Startups
Hong Kong also provides financial support for start-up enterprises like…
- Implementing Small and Medium-sized Enterprise (SME) Financial Guarantee Scheme
- Establishing an HKD 2 billion Innovation and Technology Venture Fund that will co-invest in local innovation and technology start-ups
- Introducing a Pilot Technology Voucher Programme to subsidise the use of technological services and solutions by SMEs for up to HK$200,000 per eligible SME.
Private Enterprises Assistance
Aside from the government’s support, some private companies in Hong Kong have established investment funds like Alibaba Entrepreneurs Fund to assist young people’s start-ups in Hong Kong and encourage them to start their own businesses. For the previous two years, the mentioned fund has aided more than 10 start-ups in Hong Kong.
Profession accounting hong kong companies, like Fastlane, are also available to assist SMEs in company setup and mandatory activities like annual audits and assisting firms in annual tax procedures so that they can be aware of crucial steps or paperwork that are required in the process.
6 Tips To Conduct Proper Accounting And Tax Filing
With the understanding of how Hong Kong offers support to startups along the journey, here we would offer 6 tips to help your business to conduct proper accounting and tax filing.
Be familiar with Hong Kong’s Tax Compliance Laws
- Mandatory for businesses to declare and file their taxes to IRD
- Lowered the profit tax rate hong kong from 16.5% to 8.25%
- Required to submit several types of tax return form
- Received proper tax return firms from IRD when the tax filing deadline approaches
Prepare for reconciliation
- Accurate reconciliation prevents errors in the financial statements
- Report any account that appears suspicious to your auditors
- Get your audit done as soon as possible for checking and avoiding mistakes
Prepare your document before audit
- Prepare the required documents/information asked by auditors
- More efficient and save audit fees as auditors are usually paid hourly
Prepare trial balance
- Frequently requested by auditors during an audit
- Companies should properly prepare trial balances in order to have a successful audit
- If your trial balances do not reconcile with your financial statements, you will need to invest more time and money
Use cloud accounting software
- Use cloud accounting software like Xero hk
- Better manage every aspect of their operations
- Information is better presented to your auditors
- Convenience in sharing data with your advisers
Outsource your accounting and tax filing
- Skilled professionals can assist with your accounting and tax filings
- Ensure completing the procedure accurately
- Inform and update you with tax and regulatory changes
- Save your money employing staff to complete the same tasks
Factors You Should Look For In An Accounting Software
There are 5 major factors to consider when finding the best accounting software hk for your business such as…
| Easy integration – Connection with your current systems e.g. sales platforms & payroll systems – Choose accounting software hk that works with your existing solutions – No compatibility issues leading to time-consuming errors | Multi-user access – Grant other users access to your accounting system & limit what information they have access to – Solutions offer unlimited access to support developing organisations – Understand your company’s requirements for access |
| Multi-business support – Allows you to keep track of each business under one account at no extra charge if you run more than one business | Cloud-based software – Enable you to access your account anywhere and anytime e.g. using mobile apps |
| Mobile access – Some packages provide apps for employees & perform functions e.g. time tracking and inputting expense reimbursement Ensure that the software works on your preferred devices e.g. some only work with iOS | |
Now, you may wonder whether there is software that offers the above factors. Fortunately, Xero hk has all of the features we’ve mentioned above, read the below infographics:
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How Can FastLane Help?
FastLane specialises in handling all businesses’ accounting and tax filing in particular for start-ups and SMEs. We embrace technology and that’s why we ensure to run all our clients’ accounting and hong kong taxation work through our cloud-based accounting platform, Xero.
As one of the Xero Platinum Partners, FastLane uses Xero accounting software hk, which is one of the most comprehensive cloud-based solutions, to conduct your company’s accounting and bookkeeping procedures. Xero hk has a feature called Xero Tax that aids in the preparation and filing of accurate financial statements, and corporate and personal tax returns, together with an add-on to assist companies with tax calculations on salaries. This facilitates the process of offering our audit and tax filing services to our clients.
If you would like to explore how Xero hk can benefit your business,
Visit www.xero.com or Contact us today!