International business and financial centre

Together with London, New York and Tokyo, Hong Kong is acknowledged to as one of the highest respected financial centres in the world. It is one of the world's busiest cities and its efficiency as a financial centre and as a hub for transacting business in Asia is world- renowned. Hong Kong is the leading Asian centre for both finance and commerce and ranks as the world's third largest financial centre after New York and London. There are over 135 licensed banks with over 120 foreign banks having representative offices in Hong Kong and a further 39 licensed deposit-taking finance companies, all of which play an active role in the financing of international trade and commerce.

Hong Kong is not normally regarded as an offshore country as it is famous for being a major financial centre. However, it is one of the few countries in the world that tax on a territorial basis. Many countries levy corporate income tax on a different basis and they tax the worldwide profits of a business, including profits derived from activities outside of the country. Unlike other Asian countries such as Japan, Korea, Thailand, India and China, Hong Kong does not have any exchange or capital controls which therefore allow funds to flow freely in and out of the territory.

Profits tax is simple and low

Hong Kong profits tax is ONLY charged on profits derived from a trade, profession or business carried on in Hong Kong. Consequently, this means that a company which carries on a business in Hong Kong, but derives profits from another place, is not required to pay tax in Hong Kong on those profits. Hong Kong sourced income is currently subject to a rate of taxation at 16.5 percent. There is no tax in Hong Kong on capital gains, dividends and interest earned.

The factor that determines the locality of profits from trading in goods and commodities is generally the place where the contracts for purchase and sale are affected. "Affected" does not only mean that the contracts are legally executed. It also covers the negotiation, conclusion and execution of the terms of the contracts. If a business earns commission by securing buyers for products or by securing suppliers of products required by customers, the activity which gives rise to the commission income is the arrangement of the business to be transacted between the principals. The source of the income is the place where the activities are performed. If such activities are performed in Hong Kong, the income has a source in Hong Kong. Consequently, if a Hong Kong company's trading or business activities are based outside Hong Kong, say in the USA, no income tax will be levied in Hong Kong. This makes Hong Kong an extremely cost- effective tax planning vehicle for trading.

Exchanging flexibility

Hong Kong will soon become a much more important jurisdiction for tax planning as it is not subject to review by the OECD. It is one of the only "offshore" banking centres which will not be subject to the new directive on withholding tax on savings accounts which will affect not only the EU Member States but "all territories under their control" and Switzerland and the USA. This leaves Hong Kong as one of the only respectable international banking centres not subject to automatic exchange of information on savings accounts belonging to EU residents.

The gateway to Mainland China

With China pushing forward with the modernisation of its own economy, the PRC has expressed the wish that Hong Kong should assist in this endeavour. It has stated that its future development will be based on market-led reforms with socialist characteristics and this has resulted in the opening up of its economy to foreign investments. It is widely recognised that Hong Kong is and will continue to be a significant gateway to China.