- For entrepreneurs seeking success, Hong Kong is the ideal place to set up shop – thanks to its business-friendly environment and advantageous tax system.
- Get the most out of your investments with this comprehensive guide to Hong Kong taxation!
Hong Kong is one of the world’s most business-friendly jurisdictions – owing in large part to its tax system. Simplicity, certainty and competitiveness have always been the hallmark of Hong Kong’s tax system. Hong Kong does not impose any value-added tax, withholding tax note 1, capital gains tax note 2, dividend tax note 2 or estate tax.
To further enhance the city’s competitive edge as an ideal destination for overseas companies to set up regional presence, the Hong Kong SAR Government pledged to introduce new tax incentives and refine existing tax incentive schemes in the 2022 Policy Address. These include optimising the aircraft leasing preferential tax regime, promulgating concessionary tax measures to lure higher value-added maritime companies to Hong Kong and passing a bill to offer tax benefits to eligible family offices.
Click here for a concise summary of Hong Kong taxes 2022-23 and 2023-24.
Overview of Hong Kong tax system
The local tax authority in Hong Kong responsible for collecting taxes and levies is known as the Inland Revenue Department (“IRD”). It administers the Inland Revenue Ordinance (Chapter 112) (“IRO”) that forms the cornerstone of Hong Kong taxation legislation and provides for the levying of taxes, tax computation and tax administration. Under the IRD, there are three main kinds of direct taxes: profits tax, salaries tax and property tax as well as other miscellaneous levies, such as stamp duty.
Corporate tax: Profits tax
Entities subject to profits tax
Entities including corporations, partnerships, trustees and bodies of persons carrying on a trade, profession or business in Hong Kong are subject to tax on all Hong Kong-sourced profits (except profits from the sale of capital assets) arising in or derived from such trade, profession or business.
The IRO makes no distinction between domestic and foreign entities; therefore, a foreign enterprise (including branches thereof) is chargeable to profits tax as long as it has income derived from carrying on a business in Hong Kong. By the same token, a domestic enterprise that has income derived from services rendered abroad is not subject to profits tax in Hong Kong. As such, the key determining factor in assessing an entity’s liability for profits tax is whether it derives profits from a trade, profession or business being carried on in Hong Kong.
Territorial basis of taxation
The above point is closely related to the underlying principle behind Hong Kong’s tax system. Hong Kong adheres to the territorial source principle of taxation (vis-à-vis a worldwide tax system), which means that only income sourced in Hong Kong is taxable; income sourced elsewhere is not. While the basis of taxation determined by locality should be plainly obvious and undisputed in theory, its application can oftentimes be ambiguous and may not be as straightforward and clear cut as it seems.
To determine the source of profits, the IRD will apply the “operations test”. The test consists of two parts: firstly, to ascertain the nature of activities undertaken by the taxpayer from which the profits in question are derived, i.e., the operations; secondly, to ascertain the geographical location where such activities were undertaken.
While it is not regarded as a decisive factor, the location where day-to-day investment or business decisions are made can be taken into consideration in assessing the origin of profits. As a general rule of thumb, where a company has Hong Kong as its principal place of business and does not have overseas business presence, its profits are, more often than not, subject to profits tax in Hong Kong.
However, there are certain exceptions to the rule above if it concerns foreign-sourced passive income received by a constituent entity of a multinational enterprise group.
Hong Kong corporate tax rate
A business-conducive and competitive two-tiered profits tax-rate regime is currently in operation in Hong Kong.
To safeguard against tax avoidance, in respect of a “group of connected entities”, only one entity within that group can enjoy the two-tiered profits tax rates in a given tax year.
Where the two-tiered profits tax rates are not applicable, the following standard corporate tax rates shall apply:
- A flat profits tax rate of 16.50% for corporations
- A flat profits tax rate of 15% for unincorporated businesses
A tax year or year of assessment commences on 1 April and ends on 31 March of the following calendar year. However, the companies may choose their own accounting year-end dates. Assessable profits generated over the course of a given tax year shall be chargeable to profits tax. A provisional profits tax payment based on the previous tax year’s assessable profits must be made during the year of assessment in two instalments. 75% of the provisional profits tax payment is to be settled in the first instalment, followed by a subsequent instalment after three months to settle the remaining 25%. As the provisional amount due in the same tax year is an estimate derived from the preceding year’s figures, any excess payment is credited against the final profits tax payable based on actual assessable profits, which is determined at the end of the tax year.
The basis period, defined as a specified period of time – normally one calendar year – for which annual accounts are drawn up, may differ from the year of assessment prescribed by the IRD.
The IRD usually issues tax returns on the first working day of April each year. The filing deadline is normally one month from the date of issuance. With effect from 1 April 2019, taxpayers must complete supplementary forms to provide information on the applicability of preferential tax regimes and tax incentives, and file them together with their normal tax return and the corresponding tax computation. In addition, audited financial accounts are required to be submitted as supporting documentation to the IRD.
Newly registered businesses will receive their first profits tax return around 18 months after the date of commencement of business or the date of incorporation.
Capital expenditure on the following items is fully deductible.
- Prescribed manufacturing machinery or plant
- Computer hardware and software
- Environmentally friendly vehicles
- Environmental protection-related plant and machinery
- Environmental protection-related installations (since the 2018/2019 tax year)
- Refurbishment of business premises (deductible over a five-year period, i.e., five years of assessment)
In addition, qualifying research and development expenditure, including market, management and business research, design-related expenses and payments for technical education, is eligible for enhanced tax deduction.
- The first HKD2 million is eligible for 300% tax deduction.
- The remaining amount in excess of the initial HKD2 million is eligible for a 200% deduction.
A concessionary tax rate of 8.25% is applicable to assessable profits derived by the following entities.
- Professional reinsurers engaged in the reinsurance of onshore and offshore risks
- Captive insurers engaged in the insurance of onshore and offshore risks
- Direct insurers engaged in qualified general insurance business (since 2021)
- Insurance broker companies engaged in qualified insurance brokerage business (since 2021)
- Corporate treasury centres engaged in qualified lending transactions or qualified corporate treasury services or transactions
- Aircraft lessors engaged in qualified aircraft leasing activities as well as eligible aircraft leasing managers engaged in qualified aircraft leasing management activities
Assessable profits derived by the following entities as well as other items stated below are eligible for tax exemption.
- Ship lessors engaged in qualified ship leasing activities or eligible ship leasing managers engaged in qualified ship leasing management activities
- Interest on any deposit placed with an authorised institution in Hong Kong (except interest received by a financial institution)
- Net carried interest derived by eligible entities engaged in the provision of investment management services for qualified investment funds
- Gains derived from eligible debt instruments
- All kinds of funds, including offshore funds relating to profits from transactions in securities, futures contracts, foreign exchange contracts, etc. as well as private equity funds
Capital gains tax
No tax is levied on capital gains in Hong Kong; however, cases may arise where disposal gains could be taxable if the disposal amounts to a transaction in the nature of a trade.
While no withholding tax is imposed on interest and dividends, royalties received by non-residents Note 2 for the use of certain kinds of intellectual property in or outside Hong Kong are subject to withholding tax. Types of intellectual property that fall within the scope include copyright material, trademarks, patents, designs, integrated circuit layout designs, performer’s rights, cinematographic and television films and tapes for the exhibition or use in Hong Kong as well as any sound recordings and advertising material associated with such items. 30% of the total sum of royalties constitutes the assessable profits chargeable to profits tax; in other words, the withholding tax rate is 4.95% (30% x 16.5% profits tax rate).
Where the intellectual property previously belonged to an entity carrying on a business in Hong Kong, and the sum is paid to a non-resident associate, 100% of the total sum is chargeable to profits tax, thereby effectively giving rise to a withholding tax rate of 16.5%. The purpose of this measure is to safeguard against tax avoidance practices whereby arrangements with overseas affiliated parties are made for the sole purpose of obtaining a tax benefit.
The IRD has also emphasised that where royalties are accrued through a Hong Kong-based permanent establishment, and the intellectual property for which the royalties are paid is tied to such establishment, the royalty income shall be deemed a part of the establishment’s business income and is, as such, subject to profits tax in the usual way.
Double taxation relief
Double taxation refers to the same income or profit being taxed by two jurisdictions, namely the jurisdiction where the income is sourced and the jurisdiction where such income or profit is received, usually in the taxpayer’s country of residence. Double taxation agreements seek to remedy this by eliminating the need to pay tax on the same income or profit in both jurisdictions.
Since Hong Kong operates on a territorial system of taxation, double taxation is generally not as commonplace as in other jurisdictions that adopt a different basis of taxation.
Comprehensive double taxation treaties are currently in place with Austria, Belarus, Belgium, Brunei, Cambodia, Canada, the Czech Republic, Estonia, Finland , France, Georgia, Guernsey, Hungary, India, Indonesia, Ireland, Italy, Japan, Jersey, Kuwait, Latvia, Liechtenstein, Luxembourg, Macao SAR, Mainland China, Malaysia, Malta, Mexico, the Netherlands, New Zealand, Pakistan, Portugal, Qatar, Romania, the Russian Federation, Saudi Arabia, Serbia, South Africa, South Korea, Spain, Switzerland, Thailand, the UAE, the UK and Vietnam.
Individual tax: Salaries tax
Any individual, be it a local resident or foreign expatriate, who derives his or her income from an office, employment or pension in Hong Kong will be subject to salaries tax. The residency status of the individual is not a determining factor but the source of the income, i.e., whether the income is derived from services rendered in Hong Kong.
The IRD takes a broad view of what constitutes income that is chargeable to salaries tax; for example, holiday journey benefits, award of shares, share option gains and the rental value of accommodation provided rent-free by an employer or a related corporation all fall within the definition.
Income from employment
Income arising in or deriving from Hong Kong-based employment is subject to salaries tax. In determining the source of employment income, i.e., whether it is Hong Kong-based, the IRD will take the following three criteria into account in addition to all relevant facts of the case.
- Where the contract of employment was negotiated and entered into, and is enforceable – in Hong Kong or elsewhere
- Where the employer is resident – in Hong Kong or elsewhere
- Where the renumeration is paid to the employee – in Hong Kong or elsewhere.
An individual employed under a non-Hong Kong-based contract is assessed only on the income arising in or deriving from Hong Kong-based services. Income in respect of services rendered outside Hong Kong is not subject to salaries tax. If such individual visits Hong Kong for fewer than 60 days in a given year of assessment, he or she need not pay salaries tax on the entire income.
By the same token, an individual employed under a Hong Kong-based contract will not be chargeable to salaries tax on his or her employment income if all services are rendered outside Hong Kong in a given year of assessment. This is in keeping with the territorial basis of taxation on which Hong Kong operates.
Income from an office
Income from an office refers to income received by virtue of an office held, such as a directorship. Whether directors’ fees are chargeable to salaries tax depends on the physical location where the company’s central control and management is exercised. The “60-day rule” as mentioned above does not apply to income from an office; hence, income from a directorship will be subject to salaries tax irrespective of the director’s place of residence – as long as the company is centrally controlled and managed in Hong Kong.
Income from a pension
Income from a pension shall be subject to salaries tax if the central management and control of funds from which pension payments are made reside in Hong Kong, and the pensions (excluding public pensions) are associated with services rendered in Hong Kong. The “60-day rule” does not apply to income from a pension either.
Salaries tax rates
In Hong Kong, individual taxpayers are taxed at progressive rates, ranging from 2% to 17%, on their net chargeable income, which is derived from their assessable income less any allowable deductions and personal allowances.
The maximum tax payable on Net Assessable Income note 3 is capped at the standard rate of 15%, less any allowable deductions but excluding any personal allowances.
In addition, expenses wholly, exclusively and necessarily incurred in the production of assessable income, including business travel expenses and certain entertainment expenses, as well as capital expenditure used to generate assessable income are deemed allowable deductions.
Owners of land or buildings in Hong Kong are subject to the standard tax rate of 15% on the net assessable value of the property. The net assessable value refers to the consideration paid to the owner for the right to use the property less any rates paid by the owner (excluding government rent and management fees) and a 20% statutory allowance for repairs and upkeep.
The IRD deems the following examples to be valid consideration for the computation of the net assessable value: gross rent, payment for the right of use of premises under licence, lump sum premium, service charges or management fees paid to the owner, and the owner’s expenditure (e.g., on maintenance and renovation) paid by the tenant.
A company letting property in Hong Kong is deemed to be carrying on a business in Hong Kong and is, therefore, chargeable to profits tax in the usual manner. If, however, the income subject to property tax is also included in the income subject to profits tax, or the property used to generate assessable profits is occupied by the taxpayer, the amount of property tax paid will be offset against the amount of profits tax payable. Any excess tax paid will be refunded.
While the IRO provides for the levying of profits tax, salaries tax and property tax separately, individual taxpayers who are Hong Kong residents can opt for personal assessment to reduce their tax burden. Personal assessment provides tax relief to those who earn income subject to two or more different kinds of taxes, for example, business and property owners who receive rental income.
Under personal assessment, all types of income chargeable to profits tax, salaries tax and property tax are combined to arrive at an aggregate total amount, from which the following can be deducted:
- Items listed under the “Allowable deductions” section
- Items listed under the “Personal allowances” section
- Business losses incurred in the year of assessment
- Losses brought forward from previous years of assessment
- Interest payments on loans for the acquisition of properties used for letting, i.e., used for generating income subject to property tax
The net amount after the deductions above is subject to the same progressive tax rates used in the calculation for salaries tax. Since the top progressive tax rate of 17% is higher than the standard tax rate of 15%, personal assessment may not confer any tax benefits on taxpayers with larger incomes.
An individual taxpayer can opt for personal assessment if he/she is:
- Aged 18 or over (or under 18 if both parents are deceased) and an ordinary resident or a temporary resident in Hong Kong; or
- Married and not living apart from his/her spouse, and either one or both of them are eligible for personal assessment and both have assessable income, in which case they can jointly elect for personal assessment; or
- Eligible for personal assessment, and his/her spouse does not have assessable income, in which case he/she can elect for personal assessment separately.
If the individual taxpayer and his/her spouse choose to be jointly assessed under salaries tax, both should jointly elect for personal assessment.
For married couples who jointly elect for personal assessment, the total income of both spouses, less any allowable deductions and personal allowances, will be added up together to arrive at the aggregate total income for assessment purposes. The tax liability will then be divided proportionally between both spouses according to their respective share of the reduced total income.
Documents in respect of the sale, lease or transfer of immovable property as well as the sale or transfer of shares are subject to stamp duty. These include, for example, agreements for the sale of residential property, conveyances on sale, agreements for lease, contract notes for purchase or sale of Hong Kong stock and instruments of transfer of Hong Kong stock.
Fixed duties range from HKD3 to HKD100, and ad valorem stamp duties range from 0.13% to 15%.
For transfers of immovable property in Hong Kong, ad valorem stamp duty applies, depending on the sale price or the market value of the property (whichever is higher).
- Transfers of non-residential property: Stamp duty rates vary from HKD100 for properties with consideration of up to HKD2 million to 4.25% for properties with consideration over HKD20 million.
- Transfers of residential property: A flat stamp duty rate of 15% applies, except for Hong Kong residents who are first-time buyers, in which case rates range from HKD100 for properties with consideration of up to HKD2 million to 4.25% for properties with consideration over HKD20 million. If a residential property is sold within 36 months after its acquisition, an additional special stamp duty ranging from 5% to 20% is imposed.
For the lease of immovable property, an ad valorem stamp duty rate ranging from 0.25% to 1% of the annual rent applies, based on the duration of the lease.
For the sale and purchase of Hong Kong shares, an ad valorem stamp duty rate of 0.13% of the consideration applies, and the stamp duty is borne by the buyer and seller each separately.
Betting activities, such as local bets on local horse races, football matches, cash-sweeps and lotteries, are subject to betting duty ranging from 25% to 75%.
Estate duty was abolished in Hong Kong in 2006.
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Note 1: Apart from the payment in respect of royalties and other income from intellectual properties
Note 2: Provided that the entity can fulfil the foreign-sourced income exemption requirement
Note 3: Net Assessable Income = Assessable Income – Allowable Deductions