Introduction to the Hong Kong Tax System

Introduction to the Hong Kong Tax System

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Taxation

Hong Kong is a tax-free port, meaning that goods are generally not subject to taxation, except for a few exceptions, such as alcohol and tobacco. The country’s attractive tax regime, added to its strong infrastructure, minimal government intervention, and available capital, make it a preferred destination for foreign investors and thus position it against other nations in the region.

The HK tax rate is a lower level when compared to the rates in other OECD (Organization of Economic Cooperation and Development) countries. Nevertheless, Hong Kong’s tax rate is still highly regarded as higher when compared to those nations with the region of tax haven. Another feature is the high level of transparency in Hong Kong tax against countries that are offshore and do not disclose financial concentration. Because of that, Hong Kong is no longer a tax haven.

History of Evolution in Hong Kong Tax System

The Inland Revenue Ordinance (IRO) was first passed in 1947 to ensure the collection of taxes from the residents of Hong Kong. This was drawn from the legislative package known as the British part for the colonies. The similarity to UK, Australia, South Africa and other so called Commonwealth countries is a consequence of that.

Initially, the tax was established to be a temporary measure – a measure that was supposed to be abolished within a year or so, as the higher rates of tax revenue were to be substituted.

1945 to 1970 decade has remained the period without any tax reform despite the two reviewed committees, which were constituted in 1954 and 1967 respectively.

It was during the decades when Hong Kong was rapidly flourishing and transforming into a global city-state and an internationally recognized trading and financial hub. Thus, the reform of the tax system that would have changed the structure itself and increase the public spending and tax rates became a necessity. It followed that the third review committee was established.

Nevertheless, the colonial authority decided not to implement the proposed policy options. Consequently, the tax system that has been developed in the 1940s maintained a stable state.

In mid-1997, the Government released a consultation paper on the profits tax system that encouraged local people to submit their thoughts on how Hong Kong’s tax and business environment could be enhanced.

Thus, during 1998, the effort was crowned with a number of concessions.

A Goods and Services Tax (GST) was introduced in 2002, after a review committee had suggested this in the previous year. The Government had also given serious thought to the introduction of GST but eventually decided against it due to the active opposition from a large section of the public in Dec 2006.

Current HK Tax Rate

HK Tax Rate for Companies

IncomeTax Rate
HK Tax rate for corporationsFirst HK$2 million8.25%
Over HK$2 million16.5%
HK Tax rate for unincorporated businessesFirst HK$2 million7.5%
Over HK$2 million15%
HK Tax rate on capital gains0%
HK Tax rate on shareholder dividends0%
HK Tax rate on foreign-sourced income0%

HK Tax Rates for Individuals

Net Chargeable Income (in HKD currency)Tax rate
1 – 50,000 HKD2%
50,001 – 100,000 HKD6%
100,001 – 150,000 HKD10%
150,001 – 200,000 HKD14%
Above 200,000 HKD17%
HK Tax rate on capital gains0%
HK Tax rate on income earned overseas0%
HK Tax rate on dividends from a Hong Kong company0%

Territorial Hong Kong Tax System

In Hong Kong, taxes are charged on a territorial basis and can be broadly divided into (i) direct tax, which includes a variety of taxes such as Salaries Tax, Property Tax, and Profits Tax; and (ii) indirect tax, which includes Stamp Duty and Betting Duty.

The major component of legislation responsible for controlling Hong Kong tax include the Inland Revenue Ordinance and Stamp Duty Ordinance which have been furnished in part with further tax regulations. Similarly, there are other tools of legislations that facilitates tax in Hong Kong, which include the Hotel Accommodation Tax Ordinance, Betting Duty Ordinance, and Tax Reserve Certificates Ordinance. The Inland Revenue Ordinance, in addition to the Inland Revenue Rules that are the subsidiary legislation, represents the main legislative framework that controls tax matters for both individual as well as corporate entities within Hong Kong.

Additionally, both stamp duty and estate duty rules are enacted under the Stamp Duty Ordinance and Estate Duty Ordinance, respectively.

The Inland Revenue Department aims to gather revenue efficiently and works to foster the consciousness of compliance through rigorous enforcement of rules and educational campaigns.

The Hong Kong tax agency, known as the Inland Revenue Agency, is in charge of the administration:

  • Betting Duty Ordinance
  • Inland Revenue Ordinance
  • Estate Duty Ordinance
  • Stamp Duty Ordinance,
  • Tax Reserve Certificates Ordinance
  • Business Registration Ordinance
  • Hotel Accommodation Tax Ordinance

Hong Kong collects taxes based on the country’s territorial principle. The Hong Kong Inland Revenue law encompasses income tax on salaries and wages, interest, and pensions. Also, profits from trade or business and income from property tax are subject to income taxation. Finally, any other income that is out of these categories and from outside Hong Kong is not within the scope of Hong Kong tax.

Hong Kong has three tax returns and they are 

  1. individual tax return 
  2. profits tax return
  3. property tax return 

Tax returns are issued with regard to the fiscal year each year. The taxpayer after accessing the tax returns does a tax compliance by confirming the tax obligations and by the date of submission of the tax returns, which is the reporting period.

Hong Kong Tax System Facts

The distinctive features of the Hong Kong taxation system include its straightforwardness and palatability to businesses as well as individuals. There is diversity in tax matters for the corporate sector from tax option to personal tax rate with favorable consideration for financial activities in Hong Kong. Here’s an in-depth look at key aspects of taxation in Hong Kong:

Hong Kong Currency

The currency of Hong Kong is called Hong Kong Dollar (HKD) which ranks at 9th place in terms of being traded country in the world. HKD is linked to the US dollar at a rate of 1 USD = 7.8 HKD through the pegged system.

Foreign Exchange Control in Hong Kong

Hong Kong operates with no foreign exchange controls and thus businesses as well as individuals can freely convert between Hong Kong Dollars and foreign currencies. This policy enhances financial flexibility, market efficiency, and strengthens Hong Kong’s position as an international financial center of the highest caliber.

Tax Jurisdiction

In Hong Kong, taxes are based on “territorial principle”. It means that taxes are only levied on income “derived from or arising in” Hong Kong, not on income sourced from outside Hong Kong. As a matter of fact, this means that a person who carries on a business in Hong Kong but makes money from another place is not supposed to pay taxes to Hong Kong for those profits.

There is no tax imposed on foreign-sourced income, regardless of whether they are brought to Hong Kong. Whether a business is carried on in Hong Kong or whether profits are derived from Hong Kong would largely depend on the factual circumstances.

But in the absence of specific guidelines, this may be found in cases, which have been analyzed by the courts in Hong Kong and other common law jurisdictions.

Corporate Tax

In Hong Kong, companies have a choice of two options for Profit Tax Rates. The first one is the traditional one: The first is the Single-Tier Corporate Tax System and the second one is the Two-Tier Profits Tax Regime.

Hong Kong boasts of a favorable corporate tax regime with one of the lowest tax rates in the world. In Hong Kong, for Single-Tier Tax System: corporations are taxed at 16,5% on assessable profits and unincorporated businesses are taxed at 15%.

The Two-Tier Profits Tax Rates Regime, which has been effective since Year of Assessment 2018/19.

From April 1, 2018 a two-tiered profits tax rates system has been implemented. The two-tiered profits tax scheme applies differently to corporations and unincorporated businesses by cutting the tax rate on the first $2 million of assessable profits. The two-tier profits tax rates will apply from year 2018/19.

Capital Gains Tax

There is no capital gains tax in the city of Hong Kong tax system. Similarly, capital loss expenses are also not allowed to be used as deductions.

Dividend Tax

Income from dividend, which is from Hong Kong or overseas, is not subject to tax. No withholding tax is applied on a dividend paid to a tax resident or non-tax resident in the Hong Kong tax system.

Personal Tax

Chargeable income is subject to a progressive rate of tax beginning at 2%, capping at 17% of net chargeable income (assessable income after deductions and allowances) or 15% of net income (income after deductions only), whichever is lower. For more detailed information, please refer Hong Kong Personal Income Tax Guide.

Withholding Tax

Income received by non-resident performers and sportsmen for their performances in Hong Kong is subject to withholding tax at the rate of profits charged to tax. Withholding taxes are not imposed on dividends and interests. To learn more, please read through Hong Kong Withholding Tax Guide.

Vaule Added Tax (VAT)

In contrast to some nations where it’s referred to as Goods & Services Tax (GST), Hong Kong tax system does not impose a Value Added Tax (VAT) or sales tax.

Double Tax Treaties

Hong Kong has set up a DTA network (37 treaties) that helps provide the least exposure of Hong Kong residents and residents of the DTA partner to the problem of double taxation. Additional information please visit Hong Kong DTA Guide for your reference.

Accounting Standards

Since 1st Jan, 2005, Hong Kong tax system adopted the Financial Reporting Standards (FRS) framework, which in turn was modeled on International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB).

Tax Year

Tax year in Hong Kong runs from 1 April to 31 March. Profits derived during the tax year end within the accounting year are deemed to be the same as the tax year profit. Read How to Choose a Financial Year End Date for Hong Kong Companies.

Property Tax

The tax imposed on the property owners in Hong Kong tax system is known as the property tax, and it is calculated at the fixed rate of 15% of the net assessable value of the property (that is, property’s rental income).

Estate Duty

Estate duty, also termed as death tax or inheritance tax in certain countries, was abolished from Hong Kong tax system on February 10, 2006.

Stamp Duty

Stamp duty is the duty payable on certain documents (related to stock and shares, and immovable property) as specified in the First Schedule of Stamp ordinance and it is a fixed duty on some documents and an advalorem duty on other. Besides the fixed rates of HKD 3.00 to HKD 100, the customs duties also come with ad valorem rates ranging from 0.1% to 4.25%.

Customs and Excise Duty

Hong Kong is a free port. It’s common that there’s no customs duty on regular imports. Liquors, tobacco, hydrocarbon oil and methyl alcohol are the products subject to excise tax.

Chemical products, like hydrocarbon oil and methyl alcohol, are dutiable at a specific rate according to the quantity used as a base.

Taxing liquors by percentages of their values in different categories have been defined with the help of three different categories based on the alcoholic content.

There is no import/export tax or excise duty on the exports from Hong Kong.

Hotel Accommodation Tax (HAT)

This tax is charged on the hotel and guest house owners who offer lodging services to the people. The waiver of HAT fees will be effective from 1st July 2008. The zero percent tax rate (formerly 3% for the period up to 30 June 2008) applies on the charges paid by the guests for their accommodation.

When is Hong Kong Tax Year?

A tax year used to assess the Salaries Tax charges in Hong Kong Tax System is from 1 April to 31 March of the following year, which is cultivated by 12 months. Further, a tax year is considered 12 months determining the company’s calendar year or fiscal year.

Is Hong Kong assigned the Tax Identification Number?

The Hong Kong Inland Revenue Department does not issue Tax Identification Numbers (TINs). Instead, it utilizes Hong Kong identity numbers for individual taxpayers and business registration numbers for corporate taxpayers as identifiers.

Individuals are subject to progressive tax rates on their net chargeable income, ranging from 2% to 17%. Alternatively, they may opt for a standard rate of 15% on their net income, whichever is lower.

Starting from the year of assessment 2018/19 and beyond, Hong Kong’s tax brackets for individuals have been as follows:

  • First 50,000 @ 2%
  • Next 50,000 @ 6%
  • Next 50,000 @ 10%
  • Next 50,000 @ 14%
  • Remainder @ 17%

The Hong Kong Tax System tax brackets for corporations (under the two-tiered rates) from the year of assessment 2018/19 and onwards are:

  • The maximum amount of HK$2,000,000 @ 8.25%
  • Any profits from HK$2,000,000 and up @ 16.5% 

The Hong Kong Tax System tax brackets for unincorporated businesses (under the two-tiered rates)  from the year of assessment 2018/19 and onwards are:

  • Up to 7.5% for a value of HK$2,000,000 @ 7.5%
  • On any profits above HK$2,000,000 over @ 15% 

In addition, Hong Kong’s tax is viewed as one of the lowest income taxes in the world. So, there is no tax-free threshold for Hong Kong’s tax either. On the other hand, there is a flat tax rate of 2% imposed on income within the taxable income up to HK$50,000.

In Hong Kong, the Salaries Tax payable will be computed progressively on the net income or at standard rates on the net chargeable income, whichever is lower. For tax calculation within the scope of Hong Kong Salaries Tax, deductions and allowances minus the total income results in net chargeable income. However, net income is defined as the income remaining after subtracting from the total income, any expenses and costs.

The rate of profits tax is set at the standard rate on the assessable profits under the Hong Kong Profits Tax payable. In Hong Kong taxable profits context, assessable profits are resulting after differences between net profits and adjustments have been made.

What is the provisional tax for the Hong Kong Tax System?

Hong Kong provisional tax is an estimated tax which is charged for the following year to provide an element starting point for taxpayers of the year of assessment. Provisionally taxed taxpayers are required to pay provisional tax payable unless the taxpayer had chosen personal assessment or if the taxpayer had successfully applied for provisional tax hold-over.

Taxpayers who are likely to see a decline in their income or profits or those who are experiencing difficulty in settling their tax bills may opt to be allowed to pay their tax on the interest basis or in instalments. If the fall in the income in the year of assessment is less than 90% of the income in the previous year, the person can still claim the tax relief.

What is a Hong Kong Tax Demand Note?

Assessment followed by final tax notice and provisional tax payment, also known as demand note, tax assessment, is the official document issued by the Hong Kong Inland Revenue Department to the taxpayers for the amount of tax to be paid for the relevant period after relevant tax return filed. In brief, the demand note/tax assessment contains a brief description of the basis of the assessment, the total amount of tax payable, the amounts payable under the 1st and 2nd instalments, the due date, tax computation, and standard assessor’s notes.

Upon receipt of the tax demand note (tax assessment), taxpayers have one month to file an objection if they disagree with the demand note/tax assessment. If an objection is not made within the one month time limit, the demand note/tax assessment will become final and conclusive.

Under Hong Kong tax system, the tax payable will vary depending on the chargeable income of the taxpayers. The amount of tax payable and the due date are indicated on the tax assessment issued by the Hong Kong Inland Revenue Department. The tax payable is usually divided into two installments.

When Should I do Tax Clearance in Hong Kong?

Under the Hong Kong Tax System, it is mandatory for any person, who is going to leave Hong Kong and has or would have a chargeable income at the time of departure, to notify the Inland Revenue Department at least one month before the date when they leave the territory. After having sent the tax clearance certificate to the authority in charge of the person leaving Hong Kong the Tax Department, it will be assessed whether the person is required to clear his/her tax liabilities before departure or not.

It is worth mentioning that the excess tax paid in the final year will not be refunded by the taxpayer automatically after he/she pf the tax payment. Instead of a rebate, the Balance of any tax overpaid in a particular year will be taken forward as a credit against the tax liabilities of the preceding year.

What does FastLane Group Offer?

Fastlane Group is an established company that has been providing corporate services, accounting, auditing, and taxation advisory services in Hong Kong. Our special is in an area that helps clients in international operations are fully tailored to clients’ requirements and situations. 

Our team of experts who excel in the Hong Kong Tax System can help you get started on the taxation process for your business. We offer products as a one-stop solution, corporate incorporation, accounting and bookkeeping, payroll administration, and corporate secretarial services. Contact us now.

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