Are you structuring your business across Hong Kong and Mainland China? Understanding the stark differences between these two tax systems could mean saving millions in tax liabilities or facing unexpected compliance headaches. While both jurisdictions are part of Greater China, their corporate tax approaches couldn’t be more different—from fundamental principles to daily compliance requirements. This comprehensive guide breaks down exactly what you need to know to navigate both systems effectively in 2024-2025.

Fundamental Tax Principles: Territorial vs. Worldwide

The most fundamental difference between Hong Kong and Mainland China’s tax systems lies in their core principles. Hong Kong operates on a strict territorial basis, meaning only profits sourced from Hong Kong are taxable. This creates a clear, predictable environment for international businesses—if your income comes from outside Hong Kong, it’s generally not taxed there, regardless of whether you bring the money into the territory.

Mainland China, in contrast, follows the worldwide taxation principle for resident enterprises. Chinese companies are taxed on their global income, while non-resident enterprises only pay tax on China-sourced income or income connected to a permanent establishment in China. This aligns with international tax norms but creates more complex compliance requirements for multinational operations.

Corporate Tax Rates: Headline Numbers vs. Effective Rates

At first glance, Hong Kong’s corporate tax rates appear significantly lower than Mainland China’s. But the reality is more nuanced when you consider preferential rates, incentives, and effective tax burdens.

Hong Kong’s Two-Tiered System (2024-2025)

Hong Kong introduced its two-tiered profits tax system in 2018/19, and it remains in effect for 2024-2025:

• Corporations: 8.25% on first HK$2 million of assessable profits, 16.5% on remainder
• Unincorporated businesses: 7.5% on first HK$2 million, 15% on remainder
• Important restriction: Only ONE entity per connected group can claim the lower tier

Mainland China’s Standard and Preferential Rates

Mainland China’s standard Enterprise Income Tax (EIT) rate is 25%, but numerous preferential rates are available:

• High and New Technology Enterprises (HNTEs): 15% rate
• Small and Low-Profit Enterprises: Effective rates as low as 5-10% on certain income brackets
• Special Economic Zones: Various reduced rates and tax holidays
• Encouraged Industries: Sector-specific incentives in strategic areas

Withholding Taxes: A Major Differentiator

One of the most significant practical differences for international businesses is the treatment of cross-border payments. Hong Kong’s approach is remarkably favorable for foreign investors and multinational groups.

Hong Kong’s zero withholding tax on dividends, interest, and royalties (when not connected to Hong Kong business) makes it an attractive location for holding companies and regional headquarters. Mainland China’s 10% standard rate can often be reduced through double tax treaties, but this requires additional compliance and treaty qualification.

Double Tax Agreements (DTAs)

Both jurisdictions have extensive tax treaty networks, but their importance differs:

• Hong Kong: Has Comprehensive Double Taxation Agreements (CDTAs) with 45+ jurisdictions. While beneficial for clarifying tax positions, they’re often less critical for withholding tax purposes due to Hong Kong’s generally favorable regime.
• Mainland China: Has one of the world’s largest tax treaty networks. Treaties are essential for reducing the 10% withholding tax rate on cross-border payments.
• Hong Kong-Mainland China DTA: The arrangement between Hong Kong and Mainland China provides specific benefits for cross-border investments and can reduce withholding taxes on certain payments.

Compliance and Administration: Night and Day Difference

The administrative burden of tax compliance represents one of the most practical differences between the two systems. Hong Kong’s streamlined approach contrasts sharply with Mainland China’s comprehensive requirements.

The Fapiao System: Mainland China’s Unique Requirement

In Mainland China, the Fapiao (official tax invoice) is not just a receipt—it’s a legally mandated document essential for:

1. Claiming input VAT deductions – Without proper Fapiaos, you cannot deduct input VAT
2. Substantiating business expenses for Corporate Income Tax purposes
3. Compliance verification – Tax authorities closely monitor Fapiao usage

Recent Policy Developments (2024-2025)

Both jurisdictions are evolving their tax systems in response to global trends and domestic priorities. Here are the key developments you need to know:

Hong Kong’s Major Changes

• Pillar Two Implementation: Hong Kong enacted the Global Minimum Tax framework on June 6, 2025, effective from January 1, 2025. This imposes a 15% minimum effective tax rate on multinational enterprises with revenue ≥ EUR 750 million.
• Foreign-Sourced Income Exemption (FSIE) Regime: Expanded in January 2024 to cover dividends, interest, disposal gains, and IP income. Requires economic substance in Hong Kong for exemption.
• Family Investment Holding Vehicle (FIHV) Regime: Offers 0% tax rate on qualifying income for family offices meeting specific requirements (minimum HK$240 million AUM, substantial activities in HK).

Mainland China’s Strategic Focus

• Enhanced R&D Incentives: Continued focus on “super deductions” for research and development expenses, allowing deductions exceeding 100% of costs.
• Technology Sector Support: Targeted tax breaks for high-tech enterprises and strategic emerging industries.
• Digital Economy Taxation: Ongoing development of rules for taxing digital services and cross-border data flows.

Strategic Planning Considerations

When structuring operations across Hong Kong and Mainland China, consider these strategic factors:

1. Entity Structure and Location Strategy

• Hong Kong as Holding Company: Leverage zero withholding tax on dividends for regional investments
• Mainland China Operating Entities: Position in Special Economic Zones or qualify for preferential rates
• Regional Headquarters: Consider Hong Kong for management functions with favorable tax treatment

2. Intellectual Property Planning

• IP Ownership: Consider holding valuable IP in Hong Kong to benefit from favorable royalty treatment
• R&D Location: Mainland China offers generous R&D deductions but consider IP protection implications
• Licensing Structures: Structure cross-border licenses to optimize withholding tax outcomes

3. Supply Chain and Transfer Pricing

• Intercompany Transactions: Document transfer pricing policies for goods, services, and financing
• Value Chain Analysis: Allocate functions and risks appropriately between jurisdictions
• Compliance Documentation: Both jurisdictions require robust transfer pricing documentation

Navigating the corporate tax landscapes of Hong Kong and Mainland China requires understanding not just the headline rates, but the fundamental principles, compliance realities, and strategic opportunities in each jurisdiction. While Hong Kong offers simplicity and favorable treatment for international businesses, Mainland China provides targeted incentives for specific industries and activities. The most successful businesses don’t choose one over the other—they strategically leverage the strengths of both systems through careful planning and structure. As both jurisdictions continue to evolve their tax policies in response to global trends, staying informed and adaptable will be key to maintaining tax efficiency across your Greater China operations.

David Wong, CPA

Senior Tax Partner, CPA, CTA

David Wong is a Certified Public Accountant with over 15 years of experience in Hong Kong taxation. He specializes in corporate tax planning, profits tax optimization, and cross-border taxation matters.

CPACTAFCCAHKICPA Fellow15+ Years Exp.

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