Country report Hong Kong 

Economic overview

The rigid public finance constraints dictated by the Basic Law traditionally represent a limit to the capacity of the Hong Kong administration to guide the development of the city and to cope with its social emergencies. The annual appropriations must in fact respect the principles of sound financial management referred to in Article 107 of the Basic Law: containment of expenditure within the limits of revenues, achievement of budget balance and implementation of a budget whose size is commensurate with the growth rate. of GDP. The economic policy measures therefore respond to the need to optimize the use of resources and to maintain a solid fiscal discipline with a view to safeguarding the assets of public finances.

However, the pandemic forced the adoption of a less restrictive fiscal policy, which led the Executive to approve in 2020 and 2021 a series of extraordinary measures to support businesses and the community and to protect employment. The public stimuli have thus determined the first fiscal deficit in 15 years, which, in consideration of the need to support an economy severely damaged by the effects of the health crisis, according to government projections should continue throughout the current fiscal year.

To cope with the Omicron emergency that has hit the city, the budget for the financial year 2022-2023 presented on February 23 by the Financial Secretary, Paul Chan, allocates a large part of the resources to the fight against the pandemic and to support the community and to businesses.

Within the framework of medium-long term policies, the budget law proposes interventions aimed at strengthening Hong Kong as a financial center of global importance and as a pole of scientific and technological research. On the one hand, measures are taken to encourage the placement of large technology companies on the local securities market, to expand the issuance of Green Bonds and Retail Bonds and to strengthen collaboration channels with the Shanghai and Shenzhen markets. On the other hand, investments in research and innovation in sectors such as health, biotechnology and artificial intelligence will be increased and incentives aimed at encouraging technological entrepreneurship and the birth of new startups in the university sector will be expanded.

Main sectors of industry

According to the Heritage Foundation’s Index of Economic Freedom, Hong Kong is the second freest economy in the world behind Singapore. The city has an agile and efficient bureaucracy, certain rules and facilitated taxation. The adoption of international business methods, the spread of the English language and the favorable environment for technological innovation ensure the generation of continuous opportunities in exchanges, investments and in the recruitment of qualified personnel. All these characteristics contribute to making this market very attractive for foreign investors.

The leading sector of the economy is the tertiary sector, which represents about 94% of the GDP. In this context, the most important sectors of the economy are finance and insurance (23% of GDP), public administration and social services (21%), wholesale and retail trade (19%), real estate and professional services (10%), postal, warehousing and transport services (5%).

Hong Kong is a platform of excellence for relations with mainland China and the rest of the world: its cargo port is the eighth worldwide for container handling behind Shanghai, Singapore, Ningbo-Zhoushan, Shenzhen, Guangzhou , Qingdao and Busan. Its airport, ranked several times as one of the best in the world, is one of the main hubs in the region.

Taxation for businesses in Hong Kong

Taxes on corporate income – Profit tax

The residence of a legal person carrying out a commercial activity is determined by the territory in which the central management and the administrative management body are located, or the territory in which the entity was established. However, to qualify the taxable person and the taxable amount burdened by the taxation, the source principle prevails, therefore the place where the income was produced rather than the residence of the company. Therefore, if the income is derived from sources outside Hong Kong, it is not subject to tax. Finally, resident companies that do not carry out commercial activities in Hong Kong are not subject to income tax, even if the source is in the Special Status Region.

Taxable persons subject to the payment of the Profit Tax are qualified with reference to the place where the central management of the administrative and managerial control of the activity is located, regardless of the residence of the legal person, and to the territory in which the companies are incorporated. Taxable persons are legal entities and professionals who conduct a commercial or business operation in the territory of Hong Kong. The tax is calculated according to the self-determination principle and the calculation is processed in compliance with local accounting principles, in accordance with the domestic tax regulations in force there. If a legal entity does not carry out a productive activity with a profit, it is not subject to tax on any income accrued in Hong Kong.

In general, the domestic law provides for a proportional tax system in which the rate is equal to 16.5% of the taxable amount for companies and 15% for legal entities other than companies.

Since 2018, a new regime has been introduced that taxes the first 2 million profits at a halved rate for companies (8.25%) and for other different subjects (7.5%).

Deductions are envisaged for the costs incurred for the accomplishment of the corporate purpose, the amortization quotas and the lump-sum deductions from the tax.

If an activity is carried out partly in Hong Kong and partly outside the territory, only the costs related to the income accrued in Hong Kong are deductible.

Investing in Hong Kong

Asian markets are a reality that can no longer be ignored.

Although there are no specific incentives for foreign investment, it is above all the strong and effective fiscal and administrative policies and proven financial and banking skills that make Hong Kong the first choice for those who want to invest in China and one of the most attractive business centers for potential investors.

The government’s policy of attracting foreign investments is based on freedom and the opening of the market with few and limited restrictions; in most cases, the foreign investor can invest in any company and own up to 100% of its net assets, and the capital and profits can be freely repatriated without currency controls.

Furthermore, by virtue of Hong Kong’s free port status, most of the goods, both incoming and outgoing, are absolutely free and there are no customs duties (Exempted articles).

Do not underestimate the favorable political and institutional link that binds Hong Kong to the Chinese motherland; fundamental in this regard is the Closer Economic Partnership Arrangement (CEPA), the first free trade agreement concluded on 29 June 2003 between China and Hong Kong which, in some circumstances, has brought to Hong Kong’s goods and services exclusive advantages of access to the Mainland China.

Legal certainty, ensured by a system of laws and an Anglo-Saxon judicial system (common law), as well as a wide availability of services in the financial and legal sectors, are the main reasons that have pushed thousands of foreign companies (including which hundreds of Italians) to decide to establish their operational headquarters throughout Asia in Hong Kong.

As is known, despite the transition to Chinese sovereignty, Hong Kong enjoys a separate jurisdiction from China, whose tax, legal and financial regime follows different rules and regulations.

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