Taxation in Hong Kong is low. Offshore income, capital gains and dividends are not taxed.
Basis of taxation
Hong Kong adopts the ‘territorial source principle‘in charging tax. This means that generally income is only taxed if it arises in or is derived from Hong Kong through a trade, business or profession carried on in Hong Kong. However, there are a limited number of business receipts which would not otherwise be chargeable to tax in Hong Kong based on the above principle but are nonetheless deemed to be taxable in Hong Kong (e.g. certain royalties received by a non-resident for the use of copyright materials in Hong Kong or by a Hong Kong taxpayer).
Hong Kong has a scheduler income tax system. Incomes of different nature are taxed separately. The main applicable taxes for doing business in Hong Kong are:
- Profits tax – tax on profits derived from Hong Kong from carrying on a trade, business or profession in Hong Kong.
- Salaries tax – tax on income derived from Hong Kong from an office, an employment or a pension.
- Property tax – tax on income derived from a real property in Hong Kong.
Apart from income tax, stamp duty is payable on chargeable instruments executing certain transactions. For transfer or sale of residential property, special stamp duty may be applicable.
Under the Basic Law, Hong Kong is an autonomous Special Administrative Region of China and has a legal system that is separate from that of China. The adherence to the rule of law by the HKSAR Government ensures that an independent and effective legal system is being maintained in Hong Kong. The Hong Kong judiciary is renowned for its transparency and efficiency in upholding justice and safeguarding the rights and freedoms provided under the law.
The principal governing law for direct taxes is the Inland Revenue Ordinance, which is administered by the Commissioner of Inland Revenue. A dispute between taxpayers and the Commissioner on a question of law may be resolved through the court system.
The profits tax rates are 16.5% for corporations and 15% for unincorporated businesses for the year of assessment 2012-13, which are amongst the lowest in the region (e.g. compared with 25% in China and 17% in Singapore).
Below are the key features of the Hong Kong profits tax system.
Taxation of income:
- Trading receipts with a Hong Kong source are taxable.
- Capital receipts are not subject to tax.
- Dividends from local companies chargeable to tax are exempt whereas dividends from overseas companies are generally offshore in nature and not subject to tax.
- Certain exemptions are available, e.g. certain interest income derived by non-financial institutions; certain income of offshore or non-resident investment funds; exemptions for mutual funds/unit trusts/ qualifying debt instruments etc.
- Foreign source income is not taxed even if it is remitted to Hong Kong.
Tax residence is generally irrelevant for profits tax purposes, except for the purpose of double taxation arrangement/agreements.
Deduction of expenses:
Expenses that are revenue in nature and incurred in the production of assessable profits are deductible.
Generous tax depreciation allowance or outright deduction for capital assets are available.
Certain capital expenditure is deductible, e.g. qualified expenditure on research and development, cost of purchasing certain intellectual property rights etc.
Treatment of tax losses
There is no group tax relief in Hong Kong. Allowable tax losses can be carried forward indefinitely to offset against future assessable profits but cannot be carried backward.
Taxation of payments to non-residents Hong Kong does not impose any withholding tax on dividends or interest paid to non-residents. Certain royalties received by non-resident corporations are subject to profits tax at 4.95% (i.e. a deemed profit rate of 30% of the sum received at the profits tax rate of 16.5%) or 16.5% (i.e. 100% of the sum received is deemed taxable where the amount is received from an associated corporation and where the intellectual property was once owned by a person carrying on business in Hong Kong). A lower withholding rate may be available when the recipient is a resident of a jurisdiction with which Hong Kong has a tax treaty.
For transactions between a Hong Kong company and a closely connected non-resident, where the transactions result in no profit or less than the ordinary profit for the Hong Kong company, the non- resident is deemed to carry on business in Hong Kong through the Hong Kong company. Other than the specific transfer pricing rule that deals with transactions between Hong Kong companies and non-residents, the general anti-avoidance provisions may also be used by the tax authority to challenge non- arm‘s length transactions. The tax authority issued a Departmental Interpretation and Practice Note in December 2009 to provide guidelines on transfer pricing methodologies and related issues. In general, the Organisation for Economic Co-operation and Development (OECD) transfer pricing guidelines will be applied by the tax authority. Taxpayers with cross-border related-party transactions may apply for an advance pricing arrangement in respect of their transactions with associated companies who are resident in a jurisdiction with which Hong Kong has a tax treaty.
For the year of assessment 2012-13, the progressive rates range from 2% to 17% (with a marginal tax band of HK$40,000) and the standard rate is 15%.
Below are the key features of the Hong Kong salaries tax system:
Taxation of income:
- Income arising in or derived from Hong Kong from an office, an employment or a pension is subject to salaries tax. This includes but is not limited to:
- salaries and wages – leave pay
- the rental value of a
- place of residence provided by an employer
- income from vesting
- of share awards
- gains derived from any employee share options are also taxable when the option is exercised, assigned or released.
- For non-Hong Kong employments, only income derived from services rendered in Hong Kong is taxable.
- Residence, domicile or citizenship is generally irrelevant except for the purpose of double taxation arrangement/agreements.
Deductions and allowances:
- Various concessionary deductions are available: e.g. approved charitable donations, home loan interest, self education expenses, contributions to recognised retirement schemes etc.
- Various personal allowances such as basic allowance, child allowance and dependent parent allowance are also available when progressive tax rates apply.
There is a 60-day income exemption in Hong Kong. Individuals who ‘visit’ Hong Kong for not more than 60 days in a year of assessment may not be liable to salaries tax. Nevertheless, tax reporting may still be required depending on the employment arrangement. With Hong Kong’s recent expansion of the treaty network, the threshold as defined in the respective treaties is more widely used to provide additional protection from being liable to salaries tax. Individuals who are eligible for treaty protection can generally be exempt from salaries tax if the following conditions are met:
- the individual‘s cumulative stay in Hong Kong does not exceed 183 days in a base period (this base period varies from one treaty to another);
- the remuneration is not paid by, or on behalf of, a resident entity in Hong Kong; and
- the remuneration is not borne by a permanent establishment in Hong Kong.
In order to enjoy treaty protection, the individual is required to file an individual tax return and make the claim in the return.
Structuring of remuneration package
Employees will often receive allowances and benefits in addition to their regular salary, bonuses and commissions.
It is essential that the relevant tax issues be considered prior to the determination of the remuneration package. Tax advantages may be provided without increasing the overall cost of the employer. The following are some examples of components which, if properly structured, would be exempt from salaries tax or taxed preferentially:
- Accommodation provided by the employer.
- Company car.
- Relocation expenses.
There is no withholding on wages, with the exception that an employer is under an obligation to withhold any payment to an employee who is about to leave Hong Kong other than on a normal business trip.
Property tax is levied on the owner of any land or buildings in Hong Kong at the standard rate of 15% (for the year of assessment 2012-13) on income derived from the right to use such land or buildings (i.e. rental income).
If income from property chargeable to property tax is included in a corporation's profits for profits tax purposes, the amount of property tax paid is set-off against the profits tax assessed. A corporation which pays profits tax on the profits derived from a property can alternatively claim exemption from property tax.
Property tax is not assessed when the property is used as a residence by the owner because there is no consideration for the use of the property.
The following table summarises the stamp duty rates for three major types of chargeable instruments for year of assessment 2012-13.
Relief is provided for the transfer of shares or properties between group companies if certain conditions are satisfied.
There is a Special Stamp Duty (‘SSD‘) on resale of residential property which was acquired on or after 20 November 2010 and resold within 24 months from the date of acquisition. The SSD will be imposed on top of the ad valorem stamp duty currently payable on conveyance on the sale of immovable property as shown in the table below, with a few certain exemptions available. The SSD rates range from 5% to 15% with higher rates for shorter holding periods. The SSD payable will be calculated based on the stated consideration or the market value (whichever is higher) of the resold property at the applicable duty rate.The seller and buyer are jointly and severally liable for paying the SSD.
Capital gains tax
There is no capital gains tax in Hong Kong.
Hong Kong does not impose any turnover tax.
1. Rate varies with the property consideration, with higher rate for higher property value and marginal relief upon entry into each higher rate band.
2. Rate varies with the term of the lease with higher rate for longer lease period.
Administration of the tax system
The tax year runs from 1 April of a year to 31 March of the following year.
Note: The withholding rates under the domestic law would apply if they are lower than the rates specified in the arrangement/agreements.
Taxable profits are computed based on the accounting profits of the financial year ending within the tax year with appropriate adjustments for tax purposes. Normally, the profits tax return is issued on the first working day in April following the tax year. Companies are required to file the tax return within a prescribed period. Electronic filing via the eTAX system is available to small corporations if certain conditions are satisfied.
Individual taxpayers will receive their tax returns in May. The individual tax return has to be filed within a month from the date of issue in general. Electronic filing via the eTAX system is available to individual taxpayers whose case is not complicated. Notice of assessment will be issued after the tax return has been examined by the tax authority. The dates of payment of tax are specified in the assessment notice. A system of provisional tax payments applies whereby estimated tax payments are made during the current tax year. The provisional tax payable is normally estimated based on the previous year‘s tax liability. The final tax liability for a tax year is subsequently determined after lodgement of the return and the provisional tax paid will then be deducted from the final tax payable.
Tax treaty network
As of mid-May 2012, Hong Kong entered into 24 comprehensive double tax arrangement/agreements with the following countries respectively: Austria, Belgium, Brunei, the Czech Republic, France, Hungary, Indonesia, Ireland, Japan, Jersey, Kuwait, Liechtenstein, Luxembourg, mainland China, Malaysia, Malta, the Netherlands, New Zealand, Portugal, Spain, Switzerland, Thailand, the United Kingdom and Vietnam. As of mid-May 2012, the agreements with Jersey, Kuwait, Malaysia, Malta, Portugal and Switzerland have not yet entered into force pending the completion of the ratification procedures of the governments concerned. The table on the left summarises the withholding tax rates on various passive incomes specified in the arrangement/ agreements concluded by Hong Kong so far.
In addition, Hong Kong has entered into agreements for relief from double taxation with respect to international air traffic and international operation of ships with numerous countries.