How the territorial tax principle works
In Hong Kong
Territorial principle: Companies are taxed only on profits earned or arising in Hong Kong. If a company earns income outside Hong Kong, that income is not subject to tax.
Offshore status: Companies can obtain tax exemption on income earned outside Hong Kong if they can prove that all operational activities and transactions took place outside the territory.
Tax rate: Hong Kong has one of the lowest corporate tax rates — 16.5%.
In Singapore
Territorial principle with foreign-income rules: Companies pay tax only on income earned in Singapore. However, there is an important nuance — foreign income (such as dividends, branch profits, royalties) is not taxed as long as it is not remitted to Singapore.
Foreign income exemption: If foreign income is brought into Singapore, it may be exempt from tax if:
- The foreign jurisdiction’s corporate tax rate is at least 15%.
- The income has already been taxed abroad.
- Tax rate: Singapore’s corporate tax rate is 17%, which is slightly higher than Hong Kong’s. However, Singapore offers various tax incentives and exemptions for new companies and startups.
Key differences between Singapore and Hong Kong
Foreign income
- Hong Kong: Foreign income is not taxed if the activity is not connected to Hong Kong.
- Singapore: Foreign income not remitted into Singapore is not taxed. However, once remitted, certain conditions must be met to qualify for exemption.
Tax incentives
- Hong Kong: Does not offer significant incentives for new companies, relying primarily on its low flat tax rate.
- Singapore: Offers substantial tax incentives for newly incorporated companies, reducing their tax burden in the early years.
Proving the source of income
- Hong Kong: Companies seeking to exempt foreign income must prove that all income-generating activities occurred outside Hong Kong.
- Singapore: Has more rules and exceptions related to the repatriation of income.
Conclusion
Both jurisdictions apply the territorial tax principle, but Singapore has additional rules regarding foreign income, especially when it is remitted into the country. Hong Kong offers a simpler system where foreign income is fully exempt from taxation if it is not connected to local business activities.
