Hong Kong Tax System and rates

Everything you need to know about Hong Kong Tax System and rates for companies and individuals.

The Complete Guide of Hong Kong Tax System and rates for companies and individuals

Attractive business practices and a simplified tax regime make Hong Kong a preferred choice for starting a business and expanding companies internationally.

Additionally, for entrepreneurs or expatriates looking to relocate for job opportunities or looking to take the next big step in their careers, the question of how much income they would be getting could be a decisive factor when evaluating their options.

Even though the taxes in Hong Kong might seem simpler than in other jurisdictions, it is crucial to understand how the profits and income are taxed to know how to declare your taxes and keep in check your responsibilities properly. 

Firstly, to start with some basic concepts, let's get into the principle of the Hong Kong tax system, which is territorial. This means that the income or profit generated within the territory of Hong Kong will be deemed taxable.

Therefore, the following point we will discuss becomes crucial when understanding how you can conduct business in Kong. 

Generating profits in Hong Kong

As in Hong Kong, the profit or income is taxed depending on the place where it was generated; let's analyze this concept based on an example.

In the following section, we will discuss the concept of business being inside and outside of Hong Kong.  

Being Offshore and Onshore in Hong Kong  

Let's begin with the most common misconception about doing business in Hong Kong.

Some people might have heard about Hong Kong Offshore companies and how they don't pay taxes on profits. However, in practice, the concept of Offshore is a tax status that is granted by the Hong Kong Inland Revenue Department. These Hong Kong companies must substantially prove that their operations and their profit were generated outside of Hong Kong. 

In simple words, incorporating a company in Hong Kong does not automatically grant the offshore status of your company. 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. This is what is considered an Onshore business model of operation. 

Now that we have clarified the basic principle of territoriality and what constitutes taxable income in Hong Kong, we can move into more details about the tax system as a whole. 

The Hong Kong Tax System —The overview

Before we start, it is essential to clarify that the authority that oversees tax matters in Hong Kong is the Inland Revenue Department. The official currency is the Hong Kong Dollar, which differs from the ones found in Mainland China. 

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

  • The taxes for companies in Hong Kong is known as the Profit tax, which is calculated on a flat-rate basis.
    A flat rate means that no matter the amount, any profit made by a company in Hong Kong will be taxed at the same amount. 
    Starting in 2018, the government introduced the option of having a preferential rate within a set amount of profit, known as the two-tier tax rate. 
  • The taxes 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 more taxes are going to be paid. There is a minimum and a maximum set tax rate. 
  • A Hong Kong tax authority considers twelve months, for most cases, as the assessable fiscal period both for individuals and companies.
  • Any income generated from operations in Hong Kong that generates income, known as interest income, is considered taxable under the Profits tax.
  • For most of the items and services in Hong Kong, the Value Added Tax (VAT) is not applicable
  • Capital gains in Hong Kong are not taxed (Capital gains tax).
  • Dividends generated in Hong Kong are not subject to withholding taxes. 
  • Individuals that use properties or land that they own in Hong Kong to make profits must pay the
    The current rate is set to 15% of the accessible value of the property. 
  • In Hong Kong, shares, stocks, and property-related documents are subject to Stamp Duty.
    The rate for the tax to be paid 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. 

The most relevant taxes in Hong Kong

In this section, we will discuss the Profit Tax and the Salaries Tax, which are among the most relevant taxes for companies and individuals in Hong Kong.

Hong Kong Profits Tax

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

The Profits 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. 

Taxing Companies - Flat tax rate

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

  • Single-tier: it is set to a rate of 16.5% for the accessible profit of Hong Kong companies. For other types of businesses in Hong Kong, such as unincorporated entities, the rate is set as 15%.
    Please see our article If you want to know more about the types of legal entities in Hong Kong.
  • Two-tier: for this option, the tax rate is lowered up to 8.25% but only for an amount of 2 million Hong Kong dollars on the assessable income.
  • If the profit of a company exceeds 2 million, the remaining amount will be taxed at a rate of 16.5%. The two-tier tax option came into effect for the period of 2018/19.

You can consult 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.

Hong Kong Salary Tax

Contrary to the Profit Tax, which sits at a flat rate, the Salary Tax gets a progressive rate. The assessment period starts on the 31st of March and until April 1st of the next 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 being the director and receiving the director’s fee. 
  • Renting a property in Hong Kong (rental income).
  • Having a pension from a private fund that is managed in Hong Kong is 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.

The income amount is taxed at a minimum rate of 2% starting from $0 up to $50,000 Hong Kong dollars, with a maximum rate of 17% for more than $200,000 Hong Kong dollars.    

For more information please see our dedicated article about Hong Kong Salaries Tax.

Filing the Tax Returns in Hong Kong

The Hong Kong Inland Revenue Department issues tax notifications for companies and individuals registered in Hong Kong. These notifications are normally received at the registered address or postal address of the tax subject.

Normally, these notifications will be accepted in April every year, and the tax year period is comprised of twelve months. For newly incorporated companies, there is a grace period of eighteen months to receive the 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 file their returns online.

However, for companies, there are specific requirements to file the return online; in most cases, it would need to be filled through submitting the original notification. 

For first-time declarations, it would be useful to learn the experience to request help from experts in tax matters. Although the Hong Kong government offers various helpful resources, it can seem a bit confusing for people getting familiar with the topic. For more information, you can consult the Hong Kong government web page.

Conclusion

Companies looking to maximize their profits and expand their operations, as well as individuals who seek to increase their experience and move forward with their projects, find the simple tax regime and the tax rate attractive, making Hong Kong a preferred choice.

Nevertheless, it is important to remember that complying with the deadlines and preparing in advance can be the key to avoiding penalties and receiving additional notifications.

Seeking guidance from a tax expert can seem expensive the first glance, but it can be more expensive to pay late penalty fees in the long run.

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