presented by ayesha macpherson tax partner, kpmg hong kong making the best tax decisions for your...

Presented byAyesha Macpherson

Tax Partner, KPMG Hong Kong

Making the Best Tax Decisions for Your China Business

Ventures

March 2004

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Comparison of Corporate Tax rates between

Hong Kong & other ASPAC countries

15

20

25

30

35

40

45

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Comparison of Individual Tax rates between

Hong Kong & other ASPAC countries

15

20

25

30

35

40

45

50

55

60

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No capital gains tax

Dividend income not taxable

Territorial concept of taxation (i.e. exempt offshore profits)

Tax exemption for interest income from deposits placed with Hong Kong financial institutions

Generous capital allowances (100% deduction on computers & manufacturing equipment)

No withholding tax on dividends / management fees / interest (low effective withholding tax rate of 5.25%on royalties)

No import/export duties (only excise duty onhydrocarbon oils, liquor, tobacco, cigarettes& methyl alcohol)

Low capital duty of 0.1% (max: HK$30,000)

Low stamp duty of 0.2% on share transfers

No GST/VAT

Other Tax Advantages of Hong Kong

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Hong Kong as Investment Holding Vehicle

PRC Co

Foreign Parent

HK Co

Foreign Parent

PRC Co

10% PRC Withholding Tax on disposal

No PRC Withholding Tax on disposal

No Withholding Tax on dividends

No Withholding Tax on dividends

No Withholding Tax on dividends No tax on dividends

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Contract Processing Arrangementbetween Hong Kong & PRC entities

Shenzhen CoHK Manufacturer

Processing fees, Technical know-how & management skills,

Plant & machinery

Land, Factory premises,

Labor

Raw materials

Finished goods

HK Tax on 50% of Profits(effective tax rate: 8.75%)

Hong Kong PRC

No PRC Tax on Profits(no permanent

establishment in PRC)

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Foreign investment enterprises (“FIE”):

Corporate tax rate reduced from 33% to 15%

Service provider~ Yr 1: Tax exempt~ Yr 2 to 3: 50% reduction of tax rate (7.5%)

Production-oriented~ Yr 1 to 2: Tax exempt~ Yr 3 to 5: 50% reduction of tax rate (7.5%)

Export-oriented / Technologically advanced~ Yr 6 & beyond: Tax at 10%

Reinvestment of profits~ 40% tax refund~ 100% tax refund for export-oriented or technologically advanced enterprises

Tax Advantages of Shenzhen (Special Economic Zone)

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Trading Co in Hong Kong,Manufacturing Co in Shenzhen

HK Co(Trading)

Foreign Parent

Shenzhen Co(Manufacturing)

Corporate Tax Rates

17.5%

15% but Yr 1 & 2 full exemption,Yr 3 to 5 @ 7.5%,

& Yr 6 onwards @ 10%

Profits

HK$20

HK$80

_______

HK$100_______

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Trading Co in Hong Kong,Manufacturing Co in Shenzhen

ILLUSTRATIVE EXAMPLE Yr 1 & 2 Yr 3 to 5 Yr 6 & beyond(HK$) (HK$) (HK$)

Shenzhen Manufacturing Co

Manufacturing profits 80 80 80PRC Corporate Tax rate Exempt 7.5% 10%PRC tax liabilities Nil (6) (8)

Distributable profits 80 74 72

PRC WHT on dividends Nil Nil Nil

Hong Kong Trading Co

Dividend income 80 74 72Trading profits 20 20 20

100 94 92

HK Profits Tax liabilities on trading profits only (17.5% x HK$20) (3.5) (3.5) (3.5)

Distributable profits 96.5 90.5 88.5

HK WHT on dividends Nil Nil Nil

Effective tax rate 3.5% 9.5% 11.5%

(6% + 3.5%) (8% + 3.5%)

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