Hong Kong Tax System

Hong Kong’s tax system is renowned for its simplicity, efficiency, and low tax rates, making it one of the most attractive jurisdictions for businesses and individuals. This article provides an in-depth look at the various aspects of the Hong Kong tax system, including its key features, major types of taxes, tax incentives, and compliance requirements.
The tax administration in Hong Kong is managed by the Inland Revenue Department (IRD), which is responsible for implementing and enforcing the various tax ordinances. This includes the Inland Revenue Ordinance (IRO), Business Registration Ordinance, Stamp Duty Ordinance, Tax Reserve Certificate Ordinance, and several others. The department is overseen by the Commissioner of Inland Revenue, supported by Deputy Commissioners, Assistant Commissioners, and Assessors.

Let’s explore the key features of Hong Kong’s tax system in detail below:

• Key features of the Hong Kong tax system
• Taxpayers’ return
• Major types of taxes in Hong Kong
• Conclusion

KEY FEATURES OF THE HONG KONG TAX SYSTEM

1. Territorial Principle: One of the fundamental principles of Hong Kong’s tax system is the territorial basis of taxation. This means that only income or profits sourced from Hong Kong are subject to tax. Income earned outside Hong Kong is not taxable, even if it is remitted to Hong Kong.
2. Low Tax Rates: Hong Kong boasts some of the lowest tax rates in the world. This is a major draw for businesses and individuals alike. The corporate tax rate is capped at 16.5%, while the highest marginal tax rate for individuals is 17%.
3. No Value-Added Tax (VAT): Unlike many other jurisdictions, Hong Kong does not impose VAT, Goods and Services Tax (GST), or sales tax. This simplifies the tax system and reduces the administrative burden on businesses.
4. No Capital Gains Tax: Hong Kong does not tax capital gains. This means that profits from the sale of investments, property, or other capital assets are not subject to tax.
5. No Withholding Tax on Dividends and Interest: There are no withholding taxes on dividends and interest, making Hong Kong an attractive destination for investors seeking to maximize their returns.

TAXPAYERS’ RETURN

Taxpayers are required to submit returns for property tax, salaries tax, or profits tax within a reasonable time, typically one month, as specified by an assessor. Submitting an incorrect return without a reasonable excuse is an offense under the IRO.

MAJOR TYPES OF TAXES IN HONG KONG

Profits Tax

Profits tax is the primary form of corporate tax in Hong Kong. It is levied on the assessable profits of businesses operating in Hong Kong. Profits tax returns must include:

• A certified copy of audited accounts.
• Tax computations with supporting schedules.
• Other documents and information as specified in the accompanying notes and instructions.

Exceptions to submitting audited accounts apply to:

• Companies incorporated outside Hong Kong without audit requirements.
• Dormant companies.
• Companies in liquidation.
• Small companies with gross income below HKD 2,000,000.

The deadlines for filing profits tax returns vary by the year-end accounting date:

• 1 April – 30 November: Due by 2 May (no extension).
• 1 December – 31 December: Due by 15 August (no extension).
• 1 January – 31 March: Due by 15 November, with extensions for loss cases until 31 January of the next year.

The key features of the profits tax include:

• Rate: The standard corporate tax rate is 16.5% on assessable profits. However, a two-tiered profits tax regime was introduced in 2018, where the first HKD 2 million of profits are taxed at a reduced rate of 8.25%, with the remaining profits taxed at the standard rate.
• Deductions and Allowances: Businesses can deduct expenses that are incurred in the production of assessable profits, including salaries, rent, and business expenses. Depreciation allowances are also available for capital assets.
• Loss Carryforward: Businesses can carry forward losses indefinitely to offset future profits, reducing their tax liability in profitable years.

Salaries Tax

Salaries tax is levied on the income of individuals from employment, office, or pension. Specific forms and deadlines for salaries tax returns include:

• Employers’ return of remuneration and pensions: Forms BIR 56A & 56B, due by 2 May (no extension).
• Employer’s return on commencement of employment: Form IR 56E, due three months from the employment start date.
• Employer’s return on cessation of employment: Form IR 56F, due one month before employment ends.
• Employer’s return for an employee leaving Hong Kong: Form IR 56G, due one month before departure.
• Individual tax return: Form BIR60, which individuals must file annually, typically within one month from the date of issue unless an extension is granted.

The key features of salaries tax include:

• Rates: Salaries tax is progressive, with rates ranging from 2% to 17%. The tax is calculated on a sliding scale, with different bands of income being taxed at different rates. The highest marginal rate of 17% applies to income above HKD 200,000.
• Deductions and Allowances: Individuals can claim various deductions and allowances to reduce their taxable income. These include deductions for self-education expenses, charitable donations, and contributions to retirement schemes. Personal allowances are also available for the taxpayer, their spouse, and dependents.

Property Tax

Property tax in Hong Kong is charged on the owner of land or buildings situated in Hong Kong. This tax is applied at the standard rate to the net assessable value of the property as per section 5(1) of the Inland Revenue Ordinance (IRO).
The assessable value is the amount of money or money’s worth payable for the right to use the land or buildings each year. This includes any consideration for services connected to the use of the property. However, expenses incurred by the landlord for managing the property are not deductible for property tax purposes.
Property tax is levied on the owners of properties in Hong Kong, based on the rental income received.
The key return forms and their deadlines related to property tax are as follows:

• Property Tax Return (Form BIR57/BIR58): These forms must be filed by property owners to report rental income received from their properties. The deadline for filing these returns is typically within one month of the date of issue unless an extension is granted.

The key features of property tax include:

• Rate: The standard rate of property tax is 15% on the net assessable value of the property, which is the rental income after deducting a standard allowance for repairs and maintenance.
• Exemptions: Corporations subject to profits tax on rental income can claim an exemption from property tax.

CONCLUSION

As discussed in the previous paragraphs, the Hong Kong tax system stands out for its simplicity, low tax rates, and territorial basis of taxation. These aspects, coupled with the absence of VAT, capital gains tax, and withholding taxes on dividends and interest, make Hong Kong one of the most appealing destinations for businesses and individuals. However, the specificities of tax compliance, incentives, and assessments can pose significant challenges. Seeking professional advisors, such as the experts at MyBusiness Asia, is crucial to effectively navigate and manage your tax obligations. This ensures not only compliance with Hong Kong’s tax regulations but also optimization of your tax position.

Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Always consult with a qualified tax advisor for specific guidance on your tax situation.