For entrepreneurs diving into the business scene of Hong Kong, understanding its tax system is crucial for financial success.
The Hong Kong tax system, known for its simplicity, is a key aspect to grasp not just for following the law, but also for smart financial planning.
This guide will steer you through Hong Kong’s tax regime, explaining 4 main types of taxes and HK tax rate in a clear and simple way.
Overview of the Hong Kong tax regime
When it comes to tax regime in Hong Kong, there are 4 key points to remember:
- Tax authority
- Territorial tax principle
- Tax year
- Tax filing obligations
The authority responsible for taxation in Hong Kong is the Inland Revenue Department (IRD). The IRD is the government department tasked with the collection of taxes and duties, and it oversees matters such as double taxation issues and mutual agreement procedures.
The department administers various tax-related ordinances and regulations, ensuring compliance and enforcement of the tax laws in Hong Kong.
Territorial tax principle
Hong Kong follows a territorial tax principle, meaning that only income or profits derived from a Hong Kong source are subject to taxation. Profits generated outside Hong Kong may be eligible for tax exemptions via offshore tax claim.
This principle applies to the three main income categories — business profits (profits tax), property rental income (property tax), and employment income (salaries tax).
Let’s take ABC Electronics for example. This company sells electronic goods locally in Hong Kong and also exports to China. Under the territorial tax setup, ABC Electronics is taxed solely on profits from local sales, not those from China.
Are you eligible for offshore tax claim?
Our Hong Kong Offshore Claim Tool helps you determine the tax status of your income types and ascertain your eligibility for making an offshore claim.
Hong Kong tax year
The tax year in Hong Kong, also known as the year of assessment, starts on April 1st and ends on March 31st of the following year. This timeframe is crucial for individuals and businesses as it sets the taxable period for various income taxes, such as salaries tax and profits tax.
While Hong Kong’s tax year aligns with the regular calendar, companies can opt for a different fiscal year if it suits their business operations better. For instance, if ABC Electronics prefers a tax year matching the calendar year (January 1st – December 31st), they can request an alternative basis period.
Tax filing obligation
In Hong Kong, the tax filing obligation refers to the submission of the tax return form, which is a mandatory annual compliance requirement.
Specifically, individuals and corporations must file tax returns to the IRD to report income, deductions, and tax liability every year.
Taxpayers are required to file tax returns and pay taxes separately by a specified deadline. Taxpayers need to be aware of the specific deadlines and requirements for filing tax returns and paying taxes in Hong Kong to avoid penalties and interest charges.
4 main types of taxes in Hong Kong
There are 4 main types of taxes and duties applicable under the Hong Kong tax system, including corporate income tax, salaries tax, property tax, and stamp duty.
Each of these taxes has its own rules and regulations that taxpayers must comply with.
Corporate income tax (CIT)
Corporate income tax (also known as “Profit tax”) is a direct tax imposed on income derived from trade, profession, or business operations within the territory, excluding income from capital asset sales.
Key obligations for CIT in Hong Kong include:
- Pay the tax payable amount by the specified due date.
- File the tax return accurately and by the specified deadline, including a balance sheet, auditor’s report, and a tax computation indicating how the assessable profits or adjusted losses have been calculated.
- Keep sufficient records in the English or Chinese language of the company’s income, expenditure, assets, and liabilities for 7 years.
The obligations above are crucial components of complying with CIT obligations in Hong Kong. Failure to meet these requirements can result in penalties and monetary charges.
Hong Kong’s CIT system utilizes a two-tiered tax rate structure:
|Assessable profits (HK$)
|Unincorporated businesses (sole proprietorships or partnerships)
The CIT calculation is as follows:
Tax payable = Assessable profits * Tax rate
Assessable profits = Taxable profit – Deducted expenses/amount – Loss (if any)
Salaries tax is a direct tax imposed on an individual’s income from employment, office, or pension in Hong Kong, irrespective of whether it has been taxed elsewhere.
In specific situations each year, taxpayers may be eligible to seek exemptions or reliefs for salaries tax.
Hong Kong’s salary tax rates operate on a progressive scale, ranging from 2% to 17%, with a maximum cap of 15% on assessable income (excluding any allowances).
|Net chargeable income (After allowances & reductions)
|Salaries tax rate
|For the first HK$50,000
|On the next HK$50,000
|On the next HK$50,000
|On the next HK$50,000
Chargeable income typically includes salaries, wages, director’s fees, commissions, bonuses, leave pay, allowances, perquisites, fringe benefits, termination payments, retirement benefits, pensions, stock awards, and share options.
The salary tax calculation is as follows:
Tax payable = Net chargeable income * Tax rate
Net chargeable income = Total income – Non-assessable income – Allowable deduction – Personal allowances
For a detailed explanation of salaries tax in Hong Kong, refer to our Salaries Tax Guide.
Property tax is a tax imposed annually on owners with rental income from properties in Hong Kong.
Taxed rental income may be exempt if it has already been taxed as part of the profits tax.
If you are liable for property tax, you must pay the tax payable amount by the specified due date and file the property tax return forms:
- Property Tax Return – Property Jointly Owned or Co-owned by Individuals or by Corporations (BIR57)
- Property Tax Return – Corporations and Bodies of Persons (BIR58)
Normally, these tax returns are provided by the IRD on the first working day of April in the following tax year. Ensure that you fill out and submit the returns by the 2nd of May.
As indicated in the property tax assessment, the initial payment is typically due before the end of November in the year of issuance, with the second installment falling due in April of the following year.
Under the Hong Kong tax system, companies that earn rental revenues are subject to profits tax; and thus not required to pay property tax on such earnings.
Property owners are taxed at a standard rate of 15% of the Net Assessable Value (NAV) of the property for the year of assessment.
The net assessable value of property includes:
- Gross rent received or receivable: This includes all payments received for the use of the property;
- Payment for the right of use of premises under license: If someone pays for the right to use a property under a license agreement, this is also included in the assessable value;
- Service charges or management fees paid to the owner: If the tenant pays service charges or management fees directly to the owner, these are considered part of the rental income;
- Owner’s expenditure borne by the tenant: If the tenant pays for expenditures that are normally the responsibility of the owner, these payments are treated as additional rent and are included in the assessable value;
- Sums previously deducted as irrecoverable rent and now recovered: If you previously deducted amounts as irrecoverable rent and you later recover these amounts, they are included in the assessable value in the year they are recovered;
- Lump sum premium: If you receive a lump sum premium for the lease, this is regarded as rent and is included in the assessable value.
The property tax calculation is as follows:
Tax payable = Net assessable value (NAV) * 15%
- Net assessable value (NAV) = Assessable value – Statutory allowance (20% of assessable value); and
- Assessable value = Rental Income – Irrecoverable Rent – Rates Paid by Owners
Stamp duty is a tax levied on documents and instruments that prove transactions involving the sale, transfer, or lease of properties and assets.
Purposes of stamp duty
- Regulating property transactions: Stamp duties are imposed by the government to regulate the real estate market, preventing property speculation and upholding market stability.
- Ensuring legality of documents: Stamp duty validates certain documents, making them legally recognized and enforceable in Hong Kong courts. This assurance offers legal clarity and safeguards the interests of parties in transactions like property sales, leases, and stock transfers.
Types of stamp duty
Stamp duty is categorized into several types based on the nature of the transactions:
- Ad Valorem Stamp Duty (AVD): This is chargeable on agreements for sale for the acquisition of any residential property.
- Special Stamp Duty (SSD): This applies to residential properties that are sold or transferred within a certain time frame after acquisition.
- Buyer’s Stamp Duty (BSD): This is imposed on any agreement for sale or conveyance on sale for the acquisition of any residential property executed on or after 27 October 2012.
- Stamp duty for tenancy agreement: Stamp duty for a tenancy agreement in Hong Kong is a tax imposed on the lease of immovable property.
In Hong Kong’s tax system, four key types of tax to consider are Profit tax, Salaries tax, Property tax, and Stamp duty. Any income not covered by these taxes, such as capital gains, interest income, dividends, and sales tax, is exempt from taxation in Hong Kong.
Hong Kong’s competitive tax environment attracts international talent and businesses, solidifying its position as one of the world’s most captivating destinations for entrepreneurship and relocation.
If you have any inquiries about Hong Kong’s tax laws or running a business in general, feel free to reach out to us at firstname.lastname@example.org or chat with us for tailored advice based on your circumstances.
Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.
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