Hong Kong is one of the most tax-friendly jurisdictions in the world, with low tax rates and a simple and straightforward income tax system. In this article, we will provide a comprehensive overview of the Hong Kong tax system and the tax rates that apply to individuals and businesses.
Hong Kong’s tax regime is continually evolving in line with the Hong Kong government’s fiscal and economic policy objectives. As Hong Kong looks towards 2023, it is important for taxpayers to remain up-to-date on the latest Hong Kong taxation regulations.
The Hong Kong Inland Revenue Department (IRD) oversees Hong Kong taxes. It provides guidance on income tax, property tax, salaries tax, profits tax, and other taxes applicable to Hongkongers. Taxpayers must understand the reporting requirements of each type of taxation in order to ensure their compliance with Hong Kong law.
Hong Kong residents should be aware that certain deductions may apply when filing taxes in Hong Kong. For expenses related to professional activities or studies, a taxpayer may be able to deduct some of the costs from his or her taxable income. Similarly, Hong Kong residents who invest in Hong Kong-listed stocks and unit trusts can also benefit from a deduction on their investment gains.
It is crucial for Hong Kong taxpayers to stay informed about Hong Kong taxation regulations as they are constantly changing. As Hong Kong moves closer to 2023, it is likely that new tax regulations will be introduced. By familiarizing themselves with Hong Kong taxes and understanding available deductions, Hongkongers and foreign workers and international companies can ensure that they remain compliant with Hong Kong’s taxation laws and enjoy the advantages of reduced taxable income.
Overview of Hong Kong taxation
There are three main types of tax levied under the Inland Revenue Ordinance (IRO), including profits tax, salaries tax, and property tax.
Major levies include stamp duty, customs, and excise duty, betting duty, and hotel accommodation tax.
Characteristics of the Hong Kong tax system:
- Simple tax system
- Territorial source concept
- No tax on dividends
- No sales tax, consumption tax, or value-added tax
- No withholding tax on dividends and interests
- No capital gains tax
- No estate duty
Tax Rates in Hong Kong
The tax system in Hong Kong is based on a territorial principle, which means that only income that is earned in Hong Kong is subject to tax. The standard tax rate for individuals is 15%, which applies to the first HKD 1 million taxable income. The tax rate then increases progressively to 17% and reaches a maximum of 17% for income over HKD 8 million.
For companies, the standard corporate tax rate is 16.5%. However, companies that engage in specific activities, such as offshore banking or aircraft leasing, are subject to a lower tax rate of 8.25%. There are also several tax exemptions and concessions available for companies in Hong Kong, including a 50% tax exemption for the first HKD 2 million of assessable profits, and a tax concession for companies that are incorporated in Hong Kong but operate outside of the territory.
Essential Tax Rates
Hong Kong has a low tax regime and is widely considered one of the most tax-friendly jurisdictions in the world. The tax system in Hong Kong is based on a territorial principle, meaning that only income that is earned in Hong Kong is subject to tax. The following are the key tax rates in Hong Kong:
Personal Income Tax: The standard tax rate for individuals is 15%, which applies to the first HKD 1 million of taxable income. The rate then increases progressively, reaching a maximum of 17% for income over HKD 8 million.
Corporate Tax: The standard corporate tax rate is 16.5%. However, certain activities such as offshore banking and aircraft leasing are subject to a lower tax rate of 8.25%.
Property Tax: Property tax is levied at a rate of 15% on the annual rental value of a property.
Sales Tax (VAT): Hong Kong does not have a value-added tax (VAT) or goods and services tax (GST) system.
Stamp Duty: The stamp duty rate in Hong Kong varies depending on the type of transaction, but it can be as high as 8.5% for residential properties.
The tax system in Hong Kong is based on a self-assessment system, meaning that taxpayers are responsible for calculating their own tax liability and reporting it to the Inland Revenue Department (IRD). The IRD has the power to audit taxpayers and assess additional tax if it determines that a taxpayer has underreported their income or made other errors in their tax return.
Tax treaties
Hong Kong has signed double tax arrangements/agreements with the following jurisdictions:
| · Austria | · Italy | · Pakistan | · Belarus | · Japan | · Portugal | · Belgium |
| · Jersey | · Qatar | · Brunei | · Korea | · Romania | · Cambodia | · Kuwait |
| · Russia | · Canada | · Latvia | · Saudi Arabia | · Liechtenstein | · Czech | · South Africa |
| · Estonia | · Luxembourg | · Spain | · Finland | · Macau SAR | · Switzerland | · France |
| · Mainland of China | · Thailand | · Guernsey | · Malaysia | · United Arab Emirates | · Hungary | · Malta |
| · United Kingdom | · India | · Mexico | · Vietnam | · Indonesia | · Netherlands | · Ireland |
| · New Zealand |
(as of August 2020)
Compliance with salaries tax:
· Tax year – The YOA is 1 April to 31 March.
· Filing status – Tax returns are filed on an individual basis. A married couple may choose to file a joint assessment. Suppose an individual taxpayer derives different types of chargeable income for salaries tax, profits tax, and/or property tax. In that case, he/she can choose to be assessed under personal assessment where different types of taxable income may be aggregated for tax assessment purposes.
The IRD normally issues tax returns to individual taxpayers on the first business day of May every year. The tax return for individuals must be filed within one month from the date of issuance. An extension of one month will be granted automatically if the tax return is filed electronically.
An employee and their employer must file separate returns reporting all remuneration accruing to the employee for the YOA, including taxable benefits. Assessments are issued upon the IRD receiving the tax returns.
· Payment – Salaries tax is generally payable in two installments: (1) Final salaries tax for the YOA ended on the previous 31 March is payable in January or February, along with 75% of the provisional salaries tax due for the current YOA; and (2) the balance of the provisional salaries tax is payable in April, following the end of the YOA.
· Penalties – A surcharge and penalty apply for failure to comply with the filing and payment obligations. Rulings – Taxpayers may request an advance ruling from the IRD on the application of provisions of the IRO.
· Rulings – Taxpayers may request an advance ruling from the IRD on the application of provisions of the IRO.
Withholding tax
· Dividends – There is no withholding tax on dividend distributions from a Hong Kong entity to a resident or non-resident.
· Interest – There is no withholding tax on interest payments from a Hong Kong entity to a resident or non-resident.
· Royalties – Royalties for the use of, or the right to use, most types of IP in Hong Kong, or where the royalty payments are deductible for the payer, are deemed to be taxable in Hong Kong. The amount deemed taxable is 30% of the gross amount of the royalties paid, resulting in an effective rate of 4.95% (for a corporation) in general.
If a royalty is paid to an affiliated non-resident and the IP previously was owned by a person carrying on business in Hong Kong, 100% of the royalty is deemed to be taxable, resulting in an effective rate of 16.5% (for a corporation). The two-tiered tax rates regime also applies to a non-resident royalties recipient.
The payer of royalties to a non-resident is required to withhold the tax and remit that amount to the IRD.
Income Tax System in Hong Kong
The income tax system in Hong Kong is based on a self-assessment system, which means that individuals and companies are responsible for calculating their own tax liability and reporting it to the Inland Revenue Department (IRD). The IRD has the power to audit taxpayers and assess additional tax if it determines that a taxpayer has underreported their income or made other errors in their tax return.
The tax year in Hong Kong runs from April 1 to March 31 of the following year, and taxpayers must file their tax returns by April 30 of the year following the tax year. Individuals and companies are required to keep accurate records of their income and expenses, and they must provide supporting documentation if requested by the IRD.
Keynotes
Hong Kong has a low tax rate and a simple and straightforward income tax system. The territorial principle, self-assessment system, and tax exemptions and concessions make Hong Kong an attractive location for individuals and businesses. It is important for taxpayers to understand the tax system in Hong Kong, to report their income accurately, and to keep accurate records of their income and expenses.
In conclusion, at FDI China, we offer a wide range of services to assist individuals and businesses with their tax obligations in Hong Kong. With a deep understanding of the local tax laws and regulations, our team of experts can provide guidance and support to help you navigate the complexities of the tax system.
Whether you need help with tax planning, preparation and filing of tax returns, or representation in front of the IRD, we are here to assist you. Our goal is to help you stay compliant with all tax regulations and minimize your tax liability so that you can focus on growing your business and achieving your financial goals. Contact us today to learn more about how we can help with your tax needs in Hong Kong.
