Tax System In Hong Kong: How It Works

Ah, Hong Kong!

Known for its dazzling skyline, mouth-watering dim sum, and… its tax system? Indeed!

Before you set your financial sails in this city, let’s decode Hong Kong’s unique tax landscape.

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What Is A Tax System In Hong Kong

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The tax system in Hong Kong is managed or controlled by the Inland Revenue Department (IRD). Hong Kong follows a low tax regime. Tax is mainly imposed in three areas, profit tax, salary tax, and property tax.

In Hong Kong, individuals are taxed not solely for their income but through different income taxes. For instance, profit tax covers business and trading profits, etc. 

Salary tax covers pay or income from any source of employment, through office or pension (if the individual has retired and is on pension). 

The property tax covers the rentals, etc. from the immovable properties of the individuals.

Due to its low tax system, it holds the position of having the 35th largest economy with a minimal GDP of $373 billion dollars. Its stock exchange is the 7th largest in the world. Moreover, it is the 8th largest entity in Exports and the 9th largest in imports.

Tax Jurisdiction In Hong Kong

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In Hong Kong, taxation is imposed on the basis of “territorial principal”. This means taxes are only applicable to the income that is derived or raised in Hong Kong and not to the income that is sourced outside of Hong Kong.

This tells that if a person is doing a business in Hong Kong but gains profits from outside of Hong Kong then that individual is not required to pay taxes on the gained profits.

Types Of Taxes In Hong Kong

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The tax system in Hong Kong is relatively simple and unique. Taxes are only applicable in the following sectors. 

  • Profits Tax: Profit tax is imposed on corporation business. The Tax rate on this sector was as low as 16.5% on assessable profits. However, no gain tax or dividend tax is imposed in Hong Kong.
  • Salary/Pay Tax: in Hong Kong, salary tax is imposed on the incomes of individuals. This tax is applicable on salary, wages, any kind of bonus, or any other form of compensation by the company. 

These tax rates are lower for low-income individuals and higher for highly paid individuals. The maximum rate is 17 % for high-income individuals.

  • Property Tax: In Hong Kong property tax is imposed on the owned properties. It depends on the net assessable value of the property. This tax rate was 15%.
  • Stamp Duty: In Hong Kong stamp duty tax is imposed on all kinds of transactions such as bank transactions, property transactions, stock exchange/transfers, etc. The stamp duty tax varies for each type of transaction.
  • Goods and Services Tax (GST) or Value-Added Tax (VAT): Hong Kong does not impose any GST or VAT tax. For now, in Hong Kong, there is no such system as GST or VAT. However, this might be introduced in the future.
  • Estate Duty: Hong Kong does not hold any estate duty tax. It abolished this tax system in 2006. That is why Hong Kong does not impose any tax on wealth inheritance or assets etc. Thus. making it a desirable place to live in.

Hong Kong’s low regime tax system attracts overseas investors, entrepreneurs, and the business community which helps Hong Kong in a progressive economy and financial stability. It also hosts the best high-tech and innovative companies.

Tax Rates In Hong Kong

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In Hong Kong, there are 2 tiers of profit tax regime. The table provides the Profit Tax rate charged for the first $2 million of assessable profits.

Corporations8.25%
Sold Proprietorship or Partnerships7.5%

However, in 2023 the tax rates for the corporate sector have changed and are currently at 16.5%. The maximum tax rate can go up to 17 % while the minimum tax rate can go down to 16 %.

For personal income or salary, tax rates are different ranging from 2% to 17%. The income is calculated as the net chargeable income, that is the assessable income after the deductions and allowances, and is charged at the progressive rate of 15 %

The table gives a general view of taxes on income/salaries.

INCOME/SALARYTAX IN %
0 – 50,000 HKD2 %
50,000 – 100,000 HKD6 %
100,000 – 150,0000 HKD10 %
150,000 – 200,000 HKD14 %
200,000 HKD17 %

Property tax in Hong Kong is imposed upon the land or building owners. Property tax is taken at the standard rate of 15 % of the net assessable value of property.

Non-Taxed Sectors Of Hong Kong

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In Hong Kong, there is no tax imposed on specific sectors which are as follows

  • No tax on capital gains.
  • No tax on dividends or dividend income.
  • No tax on estate duty.
  • No GST (goods and services tax).
  • No VAT (value-added tax).
  • No tax at any local, state, or provincial level.
  • No tax on exports.
  • No tax on general imports, except that of liquor, tobacco, hydrocarbon oil, or methyl alcohol. These are charged at the rate of per unit quantity.

The country has a free trade policy that provides free trade ports and easy customs procedures. Thus, making it a desirable place for entrepreneurs or other businesses because of its business-friendly tax systems.

Double Taxation Agreements (DTAs) In Hong Kong

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Hong Kong also holds a system/network of double taxation agreements with most of countries to avoid double taxation on incomes.

This situation of double taxation arises when income or profit is subjected to tax in two or more tax jurisdictions or tax laws. This means when the same item falls under two or more laws of taxation in Hong Kong.

To minimize the double taxation in HK companies doing business overseas or vice versa, Hong Kong has held double taxation arrangements and agreements with its trading partners. These agreements are of two types which are as follows:

  • Comprehensive Double Taxation Agreement: Up till now this agreement has been signed by 40 countries with Hong Kong. This agreement offers lower or concessionary withholding tax rates on technical fees, royalties, dividends, or interest, etc.
  • Limited Double Taxation Agreement: Hong Kong offers double taxation relief arrangements to its aviation and marine partners, on the airlines and shipment incomes. 

Hong Kong also follows the Multilateral Convention to Implement (MLI) tax treaty-related measures to avoid/prevent profit shifting and base erosion. Hong Kong does this to avoid any kind of tax treaty abuse and to improve the dispute resolution mechanisms.

Tax Filing In Hong Kong

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In Hong Kong, the tax year when tax is collected usually starts on 1st April and ends on 31st March of the coming/following year.

Usually, for salary-paid individuals, the deadline to file their taxes is the 1st of April while for corporative businesses the deadline is the 30th of November.

Salary-paid individuals and businesses or corporate companies are required to file their tax returns annually with IDR or Hong Kong’s Inland Revenue Department

Tax Administration In Hong Kong

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Tax administration is done at two levels i.e., individual tax returns and employer’s tax returns.

Individual’s Tax Return

Individuals receiving this are required to fill out this return, to notify IRD about their position regarding profit tax, salary tax, or property tax.

Usually, IRD issues salary tax returns to regular taxpayers on the 1st of May, annually. Individuals are required to submit this return within a month.

Employer’s Tax Returns

Employers are required to file this within a month from the issuance date, to notify IRD regarding the wages, salaries, or other funds/bonuses, etc., paid to their employees.

For employees receiving HK$ 120,000 or less during the assessment year, no employer’s return is required.

Conclusion

Now, with a clearer view of Hong Kong’s tax topography, you’re set to navigate with confidence. Whether you’re a budding entrepreneur or an expat, you’re ready to thrive in this financial hub.

Finance Forward!

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