Tax treatment of a Hong Kong branch of a foreign company

Hong Kong Branch Tax Treatment Explained

A Hong Kong branch is taxed only on profits that arise in or are derived from Hong Kong. This follows the territorial source principle. The branch files a profits tax return on Form BIR52, the return for persons other than corporations, and is assessed at the two-tiered profits tax rate for unincorporated businesses: 7.5% on the first HK$2,000,000 of assessable profits and 15% on the remainder.

A branch is not a separate legal entity from its overseas parent. The non-Hong Kong company that established the branch remains fully liable for all the branch's obligations, including its tax liabilities. This is the fundamental difference between a branch and a subsidiary. A subsidiary is a separate Hong Kong company with its own legal personality, while a branch is the same legal entity as the foreign company that registered it.

Branch Taxation Hong Kong

The Inland Revenue Department assesses branch taxation in Hong Kong on the same territorial source principle that applies to all taxpayers. Only Hong Kong sourced income is chargeable to profits tax. The Department's guidance on this principle is set out in Departmental Interpretation and Practice Note 21 (DIPN 21), which explains how the locality of profits is determined for different types of business activities.

A branch must compute its assessable profits by reference only to the income and expenses attributable to its Hong Kong operations. The overseas parent's global profits are not relevant to the branch's Hong Kong tax position, except where transactions between the branch and its parent are not at arm's length and the Department adjusts the branch's profits accordingly.

Non-Hong Kong Company Tax

A non-Hong Kong company tax obligation arises when a foreign company establishes a place of business in Hong Kong and registers under Part 16 of the Companies Ordinance (Cap. 622). The company must register on Form NN1 together with Form IRBR2, and must appoint an authorised representative in Hong Kong.

The non-Hong Kong company is then required to file an annual return on Form NN3 with the Companies Registry, and a profits tax return on Form BIR52 with the Inland Revenue Department. The tax return is issued annually, typically in April, and is due within one month of the date of issue unless a tax representative has been appointed and a block extension applies.

Profits Tax Branch Hong Kong

The profits tax a Hong Kong branch pays is calculated on the same basis as for any other business. The branch deducts allowable expenses wholly and exclusively incurred in producing the assessable profits, and may carry forward losses indefinitely to set against future profits of the same trade.

The two-tiered profits tax rates apply to branches as unincorporated businesses. The first HK$2,000,000 of assessable profits is charged at 7.5%, and the remainder at 15%. Only one entity in a group of connected entities may claim the lower rate; the others are charged at 15% on all their profits.

Territorial Source Principle Branch

The territorial source principle branch taxation follows means that a branch is not taxed on profits that arise outside Hong Kong, even if those profits are remitted to Hong Kong or used to fund the branch's operations. The branch must be able to demonstrate, with supporting documentation, that its income is not of Hong Kong source.

DIPN 21 provides detailed guidance on how the source of profits is determined. For trading businesses, the source is generally where the contracts of purchase and sale are effected. For service businesses, the source is where the services are performed. The branch should maintain clear records of where its business activities take place.

Compliance and Audit

A Hong Kong branch must comply with the same record-keeping requirements as any other business. Accounting records must be kept for seven years. The branch's financial statements must be audited by a practising certified public accountant registered with the HKICPA, unless the branch qualifies for an exemption.

The branch must also maintain a Significant Controllers Register if it is a company incorporated in Hong Kong. A registered non-Hong Kong company is not required to maintain a Significant Controllers Register, but must keep its own records of its beneficial owners.

The Inland Revenue Department may issue an estimated assessment if the branch fails to file its profits tax return on time, and penalties may apply for late filing or for making an incorrect return.