When you think of Hong Kong, you might imagine towering skyscrapers, bustling streets and vibrant city life. But it’s not just its hectic cityscape that makes Hong Kong stand out. Beyond the city’s stunning skyline, Hong Kong is also a thriving business hub, particularly for e-commerce.
Operating an e-commerce business in Hong Kong comes with its unique set of perks, one of which is the friendly taxation system. Unlike many other places, Hong Kong does not impose sales tax or GST on e-commerce businesses. Plus, the city’s profit tax rates are notably low or can be voided all together if you claim offshore tax exemption.
The competitive tax structure, combined with an advanced banking system, makes Hong Kong a magnet for online businesses.
The Tax Landscape for E-Commerce in Hong Kong
The tax game changes when it comes to e-commerce. Traditionally, businesses are taxed based on their brick-and-mortar presence. But in the digital realm, the lines blur- how do you tax a business that operates across borders, with no physical storefront?
In Hong Kong, the Inland Revenue Department (IRD) has come up with guidelines to help all companies, including e-commerce businesses, navigate this complex landscape. The crux of the matter is that an e-commerce company is considered to be carrying out a business in Hong Kong if its core operations and support activities are performed in the city.
This applies even if the server is located overseas. This will have two implications, either the business owner will push towards onshoring having its tax residency recognized in Hong Kong, or towards offshoring trying to prove it has no permanent establishment in Hong Kong in order to claim offshore tax exemption and pay no corporate tax in Hong Kong.
This position aligns with the Organization for Economic Cooperation and Development’s stance on servers constituting a permanent establishment. Essentially, the taxation of profits for e-commerce businesses is determined by where the core operations occur.
Understanding Profit Tax in Hong Kong
Hong Kong’s tax system is a boon for e-commerce businesses. The city doesn’t impose a capital gains tax, shareholder dividends tax, foreign-sourced income tax, sales tax, VAT, customs tariffs, or excise duty. The only tax that e-commerce businesses need to concern themselves if they are onshore in Hong Kong is the profit tax.
The profit tax operates on a two-tier system. The first HK$2 million earned by a business is taxed at a friendly rate of 8.25%. Any earnings above that threshold are taxed at 16.5%. This structure encourages businesses to maximize their profits, knowing that the tax rate is favorable.
What about VAT/GST overseas (Such as EU)?
Although Hong Kong has no VAT/GST, this doesn’t mean that your e-commerce based in Hong Kong will not have to pay VAT at all. For example, if you deal with the European market, you will have to register VAT number(s) and pay the VAT in the countries where you sell your goods. Most of our clients work with companies specialized EU tax representation to handle those VAT needs. We have great and affordable partners that we can refer.
Setting Up Shop: How to Register an E-Commerce Business in Hong Kong
The process of registering a business in Hong Kong is straightforward and efficient. The government offers various incentives to encourage entrepreneurs to set up shop in the city. These incentives, coupled with the city’s advanced technology infrastructure, digitally-savvy population, and strategic location near mainland China, make Hong Kong an attractive market for e-commerce businesses.
When it comes to banking, Hong Kong’s system is reliable and offers a range of services that e-commerce businesses can utilise. However, opening a business account in Hong Kong can be challenging due to strict due diligence processes and the requirement for personal interviews. Luckily, fintech platforms have emerged as viable alternatives to traditional bank accounts, offering a simpler registration process without the need for lengthy procedures or daunting meetings.
Keeping the Books: Accounting for E-Commerce in Hong Kong
One critical aspect of running an e-commerce business in Hong Kong is maintaining accurate business transaction records. These records serve as the foundation for filing your tax returns annually to the IRD. Moreover, it’s essential to retain these records for seven years.
E-commerce can be quite difficult for accountants who are not used to it.
It is important to find an accountant that can use the right tools and liaise with the right partners to make the accounting process as streamlined as possible. For example, using accounting software such as Xero with integrations is essential to make the whole process as effective as possible.
Navigating the complex landscape of e-commerce taxation can seem daunting. However, with a clear understanding of Hong Kong’s tax policies and the right support, it becomes a manageable task. The key is to stay informed and seek professional advice when needed. After all, the goal is to focus on growing your business and reaching new heights in Hong Kong’s dynamic e-commerce scene.
So, are you ready to embark on your e-commerce journey in Hong Kong? With its welcoming tax structure, advanced banking system, and digitally-savvy population, Hong Kong is a city that’s ready to embrace your e-commerce venture and help it flourish.
At ATHENASIA we built our brand around e-commerce. We have incorporated countless business and done their accounting using the latest technology to provide the best possible quality accounting that can be used not only for compliance but also for managerial purpose.
If you would like to understand how we can help you, please contact us at: info@athenasia.com for booking a free consultation.
