Complete Guide to E-Commerce Taxes in Hong Kong
The e-commerce market has thrived over the years, with revenues estimated to reach HKD 159.22 Billion in 2023. It’ll continue to grow with a CAGR of 9.42% till 2027.
Hong Kong has emerged as an early user of e-commerce with its high internet connectivity and urban living population, offering an ideal environment for e-commerce to flourish.
However, the swift development of the e-commerce business presents new questions for Hong Kong’s tax framework. If you are baffled about how to deal with the taxation of your e-commerce company’s income, this article will explain everything in detail.
At Sleek, we help you stay up-to-date with all taxation requirements. Expert accountants ensure your books are always up-to-date, and taxes, management reports and financial statements are ready and filed timely.
What is the taxation system adopted by Hong Kong?
Hong Kong taxes your income on a territorial basis. This means that any revenue generated or derived from the country will be taxed. However, any money made outside of Hong Kong will be considered foreign-sourced and will not be taxed. It adopts a two-tiered tax structure for charging e-commerce income tax.
Companies pay 8.25% tax on the first HK$2 million earned; anything beyond HK$2 million will be taxed at 16.5%.
Hong Kong’s low tax rates make it the most appealing destination to establish your e-commerce business.
How are e-commerce businesses taxed in Hong Kong?
Under Hong Kong’s territorial source system, e-commerce income is subject to Hong Kong profits tax if:
- The e-commerce business is conducted in Hong Kong, and
- The ensuing company income is generated in or obtained from Hong Kong
Introduction to DIPN 39
DIPN 39 is a Departmental Interpretation and Practice Note issued by the Inland Revenue Department (IRD) of Hong Kong. It provides guidance on the taxation of e-commerce transactions, the digital economy, and digital assets.
In March 2020, the IRD updated the DIPN 39 guidelines, which replaced the old guidance from 2001. It provides much-needed clarity on the tax treatment of these transactions and will help businesses to comply with their tax obligations.
Here are some of the key points of DIPN 39:
- The definition of a permanent establishment for e-commerce businesses
- The taxation of royalties and other payments related to digital assets
- The taxation of initial coin offerings (ICOs)
- The taxation of virtual currencies
For instance, if a non-Hong Kong resident company sells products to customers in Hong Kong through its website. The company does not have any employees or offices in Hong Kong, but it maintains a server in Hong Kong that is used to store and process orders.
Under the revised DIPN 39, the server in Hong Kong could be considered a fixed place of business, and therefore a permanent establishment, of the company.
This means that the company could be liable to pay profits tax on the income it derives from the sales of its products to customers in Hong Kong.
What are the different types of taxes applicable to e-commerce businesses?
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The main types of taxes applicable to e-commerce businesses & their employees in Hong Kong are:
- Profits tax: E-commerce businesses are subject to profits tax on their Hong Kong-sourced profits. The profits tax rate is a two-tier system, with the first HK$2 million of profits taxed at 8.25% and any amount above that taxed at 16.5%.
- Salaries tax: Employees of e-commerce businesses are subject to salaries tax on their salaries and wages. The salaries tax rate is progressive, with the highest rate being 17%.
- Property tax: E-commerce businesses that own property in Hong Kong are subject to property tax. The property tax rate is 15% of the value of the property.
- Stamp duty: E-commerce businesses that make certain types of transactions, such as the transfer of property, are subject to stamp duty. The stamp duty rate varies depending on the type of transaction.
Deadlines for profit tax returns
What are the double taxation reliefs for e-commerce businesses in Hong Kong?
Hong Kong has a comprehensive network of double taxation agreements (DTAs) with over 50 jurisdictions including the USA and UK. These DTAs aim to prevent double taxation by ensuring that a taxpayer is only taxed once on their income, regardless of where the income is earned.
For instance, a Hong Kong e-commerce company sells goods to customers in the United States. The company pays HK$10,000 in tax to the US government on the profits from these sales.
The company is also liable to pay profits tax in Hong Kong on the profits from the sales made in the US. However, the DTA between Hong Kong and the United States provides credit relief.
This means that the company can credit the HK$10,000 in tax paid to the US government against the Hong Kong profits tax payable.
As a result, the company will only have to pay the difference between the Hong Kong profits tax rate and the US tax rate on the profits from these sales.
In this example, the Hong Kong profits tax rate is 16.5% and the US tax rate is 21%. The company will only have to pay a maximum of HK$10,000, hence HK$0 Hong Kong Profit Tax.
Exemption from taxes
Tax exemptions for e-commerce businesses in Hong Kong are provided under the double taxation agreements (DTAs) that Hong Kong has with other jurisdictions. These exemptions typically apply to dividends, interest, and royalties.
For example, the DTA between Hong Kong and the United States provides for an exemption for dividends paid by a US company to a Hong Kong resident. This means that the Hong Kong resident will not be taxed on the dividends in Hong Kong.
The specific exemptions that are available will depend on the specific DTA and the circumstances of the taxpayer.
It is important for e-commerce businesses to seek professional advice from a tax accountant to determine the double taxation exemptions that are available to them.
E-commerce taxation experts at Sleek can save you the maximum on taxes.
Penalties for non-compliance
The reason why you should provide timely and complete paperwork to IRD while filing taxes is that failure to do so will attract penalties.
If you fail to file a proper Annual Tax Return with the IRD by the due date, you will be subject to a HK$10,000 compound penalty. Moreover, you will also be liable to pay additional tax for any amount undercharged.
The following are the additional charges in case you don’t comply with the e-commerce tax rules in Hong Kong:
How e-commerce taxation in Hong Kong can be challenging?
You may have encountered difficulty while trying to pinpoint the source of your e-commerce business income. This is because most business operations these days are automated and heavily reliant on technology, such as servers.
Therefore, to easily identify an e-commerce transaction that needs to be taxed in Hong Kong, the IRD introduced DIPN 39.
According to the IRD’s DIPN 39, the fact that an activity process is controlled and performed via a server located outside of Hong Kong does not imply that the origin of the income is located outside of Hong Kong.
Instead of focusing solely on the location of the server and the work done electronically, the IRD will additionally investigate the location of the primary activities and support activities required to accomplish e-commerce transactions.
Furthermore, certain non-automated tasks including administrative tasks, promotional and sales operations, and after-sales support, will be taken into account when identifying the source of business income for e-commerce tax purposes.
As a result, having a professional check on your taxes for your e-commerce firm is a far better choice. At Sleek, we provide complete e-commerce bookkeeping, accounting and taxation solutions so you can focus on growing your e-commerce business.
We offer dedicated accounting services for e-commerce businesses in Hong Kong.
Common mistakes to avoid while filing your e-commerce taxes
As an e-commerce business, here are a few mistakes that you should avoid while filing your e-commerce taxes:
- Not keeping accurate records and documentation
- Misclassifying income and expenses
- Calculation and math errors
- Neglecting to report all sources of income
- Disregarding tax filing deadlines
Requirements to file timely and accurate taxes
You should take into account the IRD-released profits tax return while disclosing the required information in your e-commerce business tax return and submit it alongside the audited financial statements.
The tax return for your e-commerce business must be filed within the time period specified, which is normally one month from the date of issue.
Once the IRD issues assessments, you must pay a provisional profits tax for the following year, which is normally based on the previous year’s profits. This payment is used to offset the final profits tax for the next year. Any overpayment will be added to the provisional profits tax due the following year.
To sum up,
The e-commerce sector is expected to grow even more in the future years as more businesses embrace digitalisation. With increasing growth comes increased compliance. Therefore, it becomes your responsibility to make sure your e-commerce business is compliant and up-to-date with all taxation requirements. But don’t you worry!
We are here to help.
Our team of experts will assist you in filing your profits tax return accurately and on time, as well as providing the best e-commerce accounting solutions. Connect with us today!
FAQs
In Hong Kong, there are banks that work well for online businesses, like Standard Chartered, HSBC, and Citibank.
When you want to open a business bank account there, you usually need to share your company’s information, like when it started. This is because banks have to follow rules to prevent illegal money activities and to get to know who their customers are.
Opening the bank account might take 2-4 weeks.
Here are the general steps involved in applying for double taxation relief in Hong Kong:
- Identify the relevant double taxation agreement (DTA)
- Determine the type of relief that is available
- Gather the necessary documentation i.e. copies of tax return
- Fill out the relevant forms
- Submit the application to IRD
- Is there any e-commerce sales tax or GST applicable to e-commerce businesses in Hong Kong?
Luckily, no. Hong Kong doesn’t impose any sales tax or GST for e-commerce businesses.
