Taxation in Hong Kong: What you need to know

The Hong Kong tax system is one of the lowest and simplest in the world. In line with its free economy and its dynamic business environment, Hong Kong imposes few kinds of taxes, makes it easy to pay them and keeps rates low.

This year, the city holds the fourth position in the overall ranking of the Paying Taxes 2017 Report. The study analyses the burden imposed to companies by the tax regimes of 190 countries around the world, considering total tax rates, the amount of time it takes for companies to fulfill their tax obligations, the number of tax payments required and post filing processes[1].

Since taxation in Hong Kong is simple, there are only three direct taxes (the profits, the salaries and the property tax), which are administered by the Inland Revenue Department, the main tax authority.

Hong Kong follows the territorial principle in its tax system. Therefore, according to Cap. 112 of the Inland Revenue Ordinance, the profits tax is imposed on those who meet the following conditions:

  1. Carry out a trade, profession or business in Hong Kong
  2. There are profits deriving from that trade, profession or business
  3. These profits arise in or derive from Hong Kong

Companies who do not meet these conditions may be subject to the offshore regime and would therefore, not be liable to profits tax in Hong Kong.

The profits tax rate in Hong Kong is 16,5% for corporations (15% for unincorporated businesses). It should be noted that nominal and effective tax rates are almost always equal, except when specific tax incentives are applied (in the fields of R&D, patent box, etc.).

Furthermore, companies must have their financial statements audited, as well as follow the disclosure requirements established by the Companies Ordinance and the standards established by the Hong Kong Institute of Certified Public Accountants. They must then be submitted together with the tax returns.

Regarding the salary tax in Hong Kong, which applies to income arising in or derived from Hong Kong, the standard rate is 15%. The property tax (which also imposes a standard rate of 15%) is payable by those who obtain rental income from renting out properties located in Hong Kong; therefore, owners who do not obtain such income are not subject to this tax.

However, taxation in Hong Kong is also known by the levies which it does not charge: Hong Kong charges no sales tax or VAT, no withholding tax, no capital gains tax, no tax on dividends and no estate tax. It is, however, required for all companies to pay a yearly fixed Business Registration fee, which currently amounts to approximately 290 USD[2]-.

Known for being a free port, Hong Kong also does not charge tariffs on imports and exports. Furthermore, over the past years it has signed several income tax treaties to avoid double taxation, 32 of which are currently in force, while three others are being negotiated.

In accordance to its title as one of the freest economies in the world, Hong Kong’s tax law is another advantage for foreign investors willing to make the most of the possibilities offered by this dynamic city, which today constitutes the “gateway to Asia” for many businesses around the world.

Sources:

Hong Kong Government: https://www.gov.hk/en/residents/

Inland Revenue Department:

-A brief guide to taxes administered by the IRD: http://www.ird.gov.hk/eng/pdf/tax_guide_e.pdf

-Honk Kong income tax Personal Assessment: http://www.ird.gov.hk/eng/pdf/pam61e.pdf

– Business Registration Fee and Levy table: http://www.ird.gov.hk/chi/pdf/brfee_table.pdf

Hong Kong SAR Tax Profile July 2016, KPMG

Taxation and Investment in Hong Kong 2016, Deloitte

Paying Taxes 2017, World Bank Group and Pwc

[1] The Paying Taxes 2017 Report is a joint study conducted by the World Bank Group and Pwc.

[2] The Business Registration Fee (composed by Fee + Levy) is subject to changes every year. The highest total amount over the past 7 years was 315 USD approx. Source: IRD Business Registration Fee and Levy Table.