Guide to Hong Kong's Tax Systems and Rates in 2024

Among the many benefits of setting up a business in Hong Kong, its tax regime and many tax incentives undoubtedly stand out as one of the most attractive reasons for entrepreneurs and investors. But while the tax framework itself is highly favourable, there’s more to it than meets the eye.

This guide will take you through the essentials of Hong Kong’s tax system and rates, covering everything from profits and salary taxes to key considerations that can help you leverage the tax advantages. Let’s begin by exploring how profits generated within and outside Hong Kong are taxed.

In Hong Kong, profit or income is taxed based on whether it is generated onshore or offshore:

• Onshore: Companies with business activities, including sales, services, and employees, in Hong Kong are taxed at the standard corporate tax rate (8.25% on the first HKD 2 million in profits; 16.5% on profits above that) on their profits.
• Offshore: Businesses registered in Hong Kong but whose income is generated outside the jurisdiction are generally exempt from profits tax, provided they meet the criteria set by the IRD.

You might have heard that Hong Kong offshore companies don’t have to pay taxes on profits. However, in practice, the term “offshore” actually refers to a tax status granted by the Hong Kong Inland Revenue Department (IRD). For a company to qualify, it must prove that it entirely operates and generates income outside Hong Kong. 

Incorporating a company in Hong Kong does not automatically grant your company an offshore status. It is a decision made by the authorities for a specific fiscal period, which generally comprises twelve months in Hong Kong. 

Any Hong Kong company with direct links to the Hong Kong market, such as selling goods or providing services, having employees present in the city, or even leasing an office, cannot obtain this special tax status, as these activities are considered part of an onshore business model. 

Before we move on to more details, let’s clarify that the authority that oversees tax matters in Hong Kong is the Inland Revenue Department. Additionally, the official and primary currency is the Hong Kong Dollar (HKD), which is different from the Renminbi (RMB) used in Mainland China. 

In this section, we will list the general aspects of the most well-known taxes charged in Hong Kong that business owners and individuals must know: 

• The tax for companies in Hong Kong is known as the Profit Tax, which is calculated at a flat rate, meaning that any profit made by a Hong Kong company will be taxed at the same percentage.
• Starting in 2018, the government introduced the option of a preferential rate on a set amount of profit, known as the two-tiered profit tax rate. This system applies a lower tax rate (8.25%) on the first HKD 2 million of profits and a standard rate (16.5%) on profits above that.
• The tax for individuals in Hong Kong is known as the Salaries Tax, which is calculated on a progressive basis. 
• A progressive basis means that the more an individual earns, the higher the tax rate they will pay. There is both a minimum and a maximum tax rate set.
• The Hong Kong tax authority considers twelve months, in most cases, to be the assessable fiscal period for both individuals and companies.
• Any income generated from operations in Hong Kong, including interest income, is considered taxable under the Profits Tax.
• The Value Added Tax (VAT) is not applicable to most items and services in Hong Kong. 
• Hong Kong generally does not tax capital gains (no capital gains tax). 
• Dividends generated in Hong Kong are not subject to withholding taxes. 
• Individuals who use properties or land that they own in Hong Kong to make profits must pay Property Tax. The current rate is set to 15% of the property's net assessable value. 
• In Hong Kong, shares, stocks, and property-related documents are subject to Stamp Duty. The rate of the tax varies depending on the value and the process. 

Now that we have covered the fundamental aspects of the Hong Kong tax system let's focus on the most relevant taxes for companies and individuals: Profit Tax and Salary Tax. 

As mentioned above, Hong Kong’s corporate tax system falls into the territorial system, where the taxes are based on profits that are derived from trade or business operations in Hong Kong.

The Profit Tax, or Corporate Tax, is calculated based on a specific fiscal period or exercise, which normally consists of twelve months. The profit made during this period is known as the accessible profit. 

Profit Tax Rates and Options

The Hong Kong Profit Tax rate is a fixed rate that does not increase based on the amount of profit; in other words, it is not proportional to the profits a company makes. Nevertheless, there are two options for companies to choose from when declaring their profits in Hong Kong:

• Single-tier: This rate is set at 16.5% for the assessable profit of Hong Kong companies and 15% for unincorporated businesses.
• Two-tier: For this option, the tax rate is reduced to 8.25% but only on the first HKD 2 million of assessable corporate income. Any profits above that are taxed at the standard rate of 16.5%.

You can get more details about the profit tax rates directly from the Hong Kong Inland Revenue website.

Provisional Profit Tax

On some occasions, the Hong Kong Inland Revenue Department may issue provisional assessments if a company is delayed in presenting its tax declarations. 

The calculations are based on previously presented Profit Tax Returns or market estimates, in which the authority will demand the payment of an established amount.

If it is determined that the company is paying more taxes than it should, a tax credit can be received by the company for the next fiscal period.

Exceptions for Hong Kong Companies

If a company considers that during a fiscal period, their operations were completely conducted outside of Hong Kong, they can apply for offshore tax status.  

The Inland Revenue will make an assessment and will have the final decision to grant the status, and if needed, the company must provide substantial evidence that no employee or transactions occurred inside the jurisdiction of Hong Kong. If the status is granted, the company will not need to pay the Profit Tax.

Contrary to the Profit Tax, which sits at a flat rate, the Salary Tax is progressive. The assessment period starts on the 1st of April and ends on the 31st of March of the following year.

Moreover, as we have previously mentioned, this tax has a minimum and a maximum cap for the total amount of net taxable income of an individual.

But then, what falls into the income category? Let's expand on this topic below.

Categories of Income for Individuals

If an individual performs the following activities, they must pay income tax, as these are deemed to be taxed:

• Having Hong Kong employment with a contract or agreement, including acting as a company director and receiving remuneration.
• Renting out a property in Hong Kong (earning rental income).
• Receiving a pension from a private fund managed in Hong Kong is also subject to tax liability.

Taxing Individuals — Progressive Tax Rate

The taxable income of an individual is comprised of the remaining amount after considering the allowances and deductions permitted in Hong Kong.

Income is taxed at a minimum rate of 2% on amounts up to HKD 50,000 and at a maximum rate of 17% on income exceeding HKD 200,000. 

For individuals with multiple sources of income, a personal assessment may be available, allowing taxpayers to potentially benefit from a lower tax rate based on their overall income. Certain investments, such as qualifying debt instruments, may also be eligible for tax exemptions.

The Hong Kong Inland Revenue Department issues tax notifications for individual taxpayers and registered Hong Kong companies. These notifications are typically sent to the taxpayer's registered or postal address. 

The notifications are typically issued in April each year, covering a full year of assessment. For newly incorporated companies, there is a grace period of eighteen months before receiving their first notification.

Alternatively, the Hong Kong authorities have developed platforms for users to make declarations online. The Hong Kong e-tax platform allows both individuals and companies to complete their tax filing and submit their returns online. 

However, for companies, there are specific requirements for online filing. In most cases, companies must file their returns based on the information provided in the official tax notification they receive. 

For first-time tax declarations, it may be helpful to seek assistance from tax advisors to ensure compliance with the Inland Revenue Ordinance (IRO). While the Hong Kong government offers various resources, the process can still be confusing for those unfamiliar with the system. For more information, you can visit the Hong Kong government website.

With its favourable tax regime and opportunities for profits, Hong Kong stands out as a prime destination for businesses looking to expand in Asia. Registered companies can take advantage of various tax exemptions and reduction schemes, especially for foreign-sourced income. By having a clear understanding of the tax system, businesses can maximise their growth potential and capitalise on the benefits Hong Kong has to offer.

Although seeking guidance from a tax expert may seem costly at first, the cost of avoiding mistakes and late penalty fees in the long run makes it a valuable investment.