- Ease of setting up and operating a business in Hong Kong
- Proximity to Mainland Chinese market
- Highly attractive tax regime – low personal and corporate tax rates, no capital gains tax, no VAT or sales tax, no withholding tax on dividends and interest or collection of social security benefits
This article provides an overview of the tax system in Hong Kong and points the reader to more detailed articles on each specific topic. By aligning its tax policy with growth-oriented economic goals, Hong Kong has emerged as one of the preferred locations for most global entrepreneurs and business enterprises.
Current Tax Rates in Hong Kong
Tax Rates for Companies
| Income | Tax Rate |
|---|---|
| Tax rate for corporations | 16.5% |
| Tax rate on capital gains | 0% |
| Tax rate on shareholder dividends | 0% |
| Tax rate on foreign-sourced income | 0% |
Tax Rates for Individuals
| Income (in HKD currency) | Tax rate |
|---|---|
| 1 – 40,000 HKD | 2% |
| 40,001 – 80,000 HKD | 7% |
| 80,001 – 120,000 HKD | 12% |
| Above 120,000 HKD | 17% |
| Tax rate on capital gains | 0% |
| Tax rate on income earned overseas | 0% |
| Tax rate on dividends from a Hong Kong company | 0% |
Hong Kong Tax: Key Facts
Currency
The Hong Kong currency is called Hong Kong Dollar (HKD) – the 9th most traded country in the world. HKD is closely pegged to the US dollar at approximately 1 USD = 7.8 HKD.
Foreign Exchange Control
There are no foreign exchange controls in Hong Kong.
Tax Jurisdiction
Taxes in Hong Kong are levied on the “territorial principle”. In other words, taxes are only levied on income “derived from or arising in” Hong Kong and not on income sourced outside Hong Kong. In simple terms, this means that a person who carries on a business in Hong Kong but derives profits from another place is not required to pay tax in Hong Kong on those profits. No tax is levied on profits arising abroad, even if they are remitted to Hong Kong. The questions of whether a business is carried on in Hong Kong and whether profits are derived from Hong Kong are largely questions of fact. However some guidance on the principles applied can be found in cases which have been considered by the courts in Hong Kong and in other common law jurisdictions.
Single-Tier Tax System
Hong Kong follows a single-tier tax system i.e. there is no dividend tax.
Capital Gains Tax
There is no capital gains tax in Hong Kong. Capital loss expenses are correspondingly not allowed as deductions.
Dividend Tax
Dividend income, whether from Hong Kong or overseas, is not taxable. Dividends paid to either a resident or non-resident of Hong Kong are not subject to any withholding tax.
Corporate Tax
Hong Kong has an attractive corporate tax regime highlighted by low tax rates. The corporate tax rate is a flat 16.5% on assessable profits. Tax incentives are available for specific industries.
Personal Tax
Individuals are taxed at progressive rates on their net chargeable income (i.e.assessable income after deductions and allowances) starting at 2% and is capped at 17%; or 15% of net income (i.e. income after de
ductions only), whichever is lower.
Withholding Tax
Royalties and fees paid to non-resident entertainers or sportsmen for their performances in Hong Kong are subject to withholding tax on their assessable profits. There are no withholding taxes levied on dividends and interest.
VAT Tax
Also known as Goods and Services Tax (GST tax) in some countries, there is no VAT or Sales tax imposed in Hong Kong.
Double Tax Treaties
Hong Kong has established a DTA network (37 treaties) that minimises exposure of Hong Kong residents and residents of the DTA partner to double taxation.
Accounting Standards
Since 1st January 2005, Hong Kong has adapted a Financial Reporting Standards (FRS) framework that has been modelled on International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB).
Tax Year
The tax year in Hong Kong is 1 April – 31 March. Profits earned during an accounting year ending within the tax year will be deemed to be the profits for that tax year.
Property Tax
Property tax is charged on the owners of land and/or buildings in Hong Kong and is computed at the standard rate of 15% on the net assessable value of the property (i.e. property’s rental income).
Estate Duty
Also known as death tax or inheritance tax in some countries, estate duty has been abolished since February 10, 2006.
Stamp Duty
Stamp duty is chargeable on certain documents (relating to stock & shares and immovable property) specified in the First Schedule to the Stamp Duty Ordinance, which imposes fixed duty on some documents and an ad valorem duty on others. Fixed duties vary from HKD 3.00 to HKD 100 whereas ad valorem duties range from 0.1% to 4.25%
Customs and Excise Duty
Hong Kong is a free port. There is no tariff on general imports. However, there is duty on liquors, tobacco, hydrocarbon oil and methyl alcohol.
For tobacco, hydrocarbon oil and methyl alcohol, duties are charged at specific rates per unit quantity. For liquors, duty is assessed at different percentages of their values on the basis of three different categories defined broadly according to alcoholic strength. There is no tax or excise duty on exports from Hong Kong.
Hotel Accommodation Tax (HAT)
This tax is imposed on the proprietors who provide hotel and guest house accommodation. Effective from 1 July 2008, the Government waived the charge of HAT. The rate of tax is reduced to 0% (the tax rate was at 3% for the period up to 30 June 2008) on all accommodation charges paid by the guests.
Hong Kong Tax: Governing Authority
The Inland Revenue Ordinance and its subsidiary legislation the Inland Revenue Rules is the governing statute regarding corporate and individual taxation matters in Hong Kong. Furthermore, stamp duty and estate duty are imposed under the Stamp Duty Ordinance and Estate Duty Ordinance respectively.
The Inland Revenue Department is committed to collecting revenue in an efficient and cost-effective manner and aims at promoting compliance through rigorous enforcement of law, education and publicity programmes. The Commissioner of Inland Revenue, who also holds the statutory appointments of Collector of Stamp Revenue and Estate Duty Commissioner, is responsible for the administration of the following Ordinances: Betting Duty Ordinance, Inland Revenue Ordinance, Estate Duty Ordinance, Stamp Duty Ordinance, Tax Reserve Certificates Ordinance, Business Registration Ordinance and Hotel Accommodation Tax Ordinance.
The Department’s revenue collection for 2007-08 was HKD 200.7 billion, an 29.4% increase over the previous year.
Brief History of Tax Evolution in Hong Kong
The Inland Revenue Ordinance (IRO) was first enacted in 1947 to impose income taxes in Hong Kong. This was based on the legislative package developed by the UK for its colonies. As a result the IR
O bears resemblance to the tax legislation in UK, Australia, South Africa and other Commonwealth countries. When the tax system was first introduced in the 1940s, it was intended to be a temporary measure – one that was to be replaced within a year or so, with higher rates of tax.
The period between 1945 – 1970 saw no tax reform, despite two review committees that were constituted in 1954 and 1967. During the 1970s Hong Kong was fast growing and emerging as a modern city-state and a significant international trading and financial centre. As a result, the need for structural reforms in the tax system was greatly required in order to increase public spending and rates of tax. Hence, the third review committee was formed. However, the colonial government did not adopt the recommendations proposed. As a result, the tax system established in the 1940s remained largely unchanged.
In 1997, the Government issued a consultative document on the profits tax system which invited submissions on how to increase the competitiveness of Hong Kong’s tax and business environment. As a result of this initiative, a number of concessions were introduced in 1998. A subsequent review committee was set up in 2002, which suggested the introduction of a Goods and Services Tax (GST). The Government seriously considered introducing GST but dropped the idea in Dec 2006 due to wide-spread public opposition.