A Brief Guide to Hong Kong Taxes
Hong Kong is widely regarded as a tax friendly jurisdiction. Although it is an international business and financial centre, it shares many of the same characteristics as offshore tax havens. It has a low rate of tax and it only taxes income sourced in Hong Kong. At the same time, it has established a comprehensive international tax treaty network and complies with international standards to enhance tax transparency.
Overview of Hong Kong Taxes
Does Hong Kong Have Income Taxes?
No. Hong Kong operates what is known as a schedular tax system. Under this system, there is no universal income tax. Instead, Hong Kong imposes taxes on specific types of income. Income falling outside the types of income subject to tax are exempt from taxation.
What Taxes are Businesses Liable to Pay in Hong Kong?
Businesses earning income in Hong Kong may be liable to Hong Kong profits tax or Hong Kong property tax under the Inland Revenue Ordinance ("IRO"). Transfers of shares of Hong Kong companies and Hong Kong property are liable to Hong Kong stamp duty under the Stamp Duty Ordinance ("SDO"),
What Taxes are Employees Liable to Pay in Hong Kong?
Individuals earning income in Hong Hong may be liable to Hong Kong salaries tax.
Does Hong Kong Have Estate Duty?
No. Hong Kong abolished estate duty in 2006.
Does Hong Kong Have Sales Taxes?
No. There is no sales tax, value added tax ("VAT") or other taxes on goods and services ("GST").
Does Hong Kong Have Customs Duties?
Hong Kong is a free port and imposes no customs duties on imports except in relation to motor vehicles and four dutiable commodities. The dutiable commodities are liquor, tobacco, hydrocarbon oil and methyl alcohol. Motor vehicles are subject to First Registration tax.
Who is the Tax Authority in Hong Kong
The Inland Revenue Department ("IRD") administers the tax regime in Hong Kong. The Customs and Excise Department ("CED") is responsible for customs duties.
Profits Tax
Who is Liable for Hong Kong Profits Tax? Does Hong Kong Tax Foreign Income?
Under the Inland Revenue Ordinance, a person is liable to profits tax only if he meets 2 conditions. First, the person must carry on a trade or business in Hong Kong. Secondly, the person must earn profits from that trade or business which arise in or derive from Hong Kong. This latter requirement is often known as the territorial sourcing principle.
These 2 conditions are distinct and separate. For example, a company may establish an office in Hong Kong which employs staff. On this basis, it would meet the first condition, namely that it is carrying on a business in Hong Kong. However, if the company earned its profits by trading shares which are listed on the New York Stock Exchange, those profits would likely be regarded as arising in or derived from outside Hong Kong. As a result, even if the traders were based in that Hong Kong office, the company would likely not be liable to Hong Kong profits tax on those profits. Equally, if the company established branch operations outside of Hong Kong, income earned by those branches would likely not be subject to Hong Kong profits tax, even if that income were remitted back to Hong Kong.
What is the Rate of Hong Kong Profits Tax?
The rate of profits tax varies depending upon whether the taxpayer is a corporation or not.
For corporations, profits tax is charged at a rate of 16.5%. However, Hong Kong offers a concessionary rate of 8.25% for the first HK$2 million (approx. US$250,000) of profits. This concessionary rate is available on a group basis. This means that only one company in a group of connected companies is eligible for the concessionary rate. For example, if A Co. and B Co. are related, in any given year of assessment, either A Co. or B Co. may take advantage of the concessionary rate but not both.
For unincorporated businesses, profits tax is charged at a rate of 15%. As is the case for corporations, there is a concessionary rate but at 7.5% for the first HK$2 million of profits.
Hong Kong profits tax is a flat rate tax rather than a marginal tax. In other words, other than the concessionary rate described above, the rate of tax remains the same regardless of the level of income.
By global standards, the rate of profits tax in Hong Kong is considered low. As a result, historically, multinational businesses have often sought to locate income in Hong Kong to minimise overall global tax burdens.
Does Hong Kong Tax Capital Gains?
No, Hong Kong does not tax capital gains. Hong Kong’s profits tax specifically excludes profits arising from the sale of capital assets. Whether a profit arises from the sale of a capital asset is normally a question of the original intention when the asset was acquired. For example, where a company acquires inventory, the sale of that inventory would normally not be regarded as the sale of a capital asset as the inventory would have normally been acquired with the intention of resale.
Gains from the sale of stocks and other securities are not normally regarded as capital gains. This is because such securities are normally bought with the intention of resale.
Does Hong Kong Tax Dividends?
Where a company earns income in the form of a dividend, that income will not normally be subject to profits tax. The Inland Revenue Ordinance specifically excludes from profits tax any dividend from any company which is chargeable to profits tax. This means that if a Hong Kong company, A Co., pays a dividend to another Hong Kong company, B Co., on the basis that A Co. pays profits tax, B Co. would not include that dividend in the calculation of its profits tax.
Where a dividend is received from a company that is not chargeable to profits tax, the dividend typically falls outside the the profits tax regime because it is sourced outside of Hong Kong (i.e. it does not arise in or derive from Hong Kong). This is because typically, a company that is not chargeable to profits tax either does not carry on a business in Hong Kong or does not have profits that arise in or derive from Hong Kong.
Does Hong Kong Have Withholding Taxes?
With the exception of payments to non-resident entertainers and sportsmen, Hong Kong does not have withholding taxes.
What Deductions Can Be Made From Profits Tax?
A business' outgoings and expenses are generally deductible to the extent hey have been incurred in the production of chargeable profits. Capital expenditures and interest expenses are subject to special rules on deductibility.
What is the tax year for Hong Kong Profits Tax?
Profits tax is charged on an annual basis. The year of assessment for profits tax is defined as the period of 12 months from 1 April to 31 March. However, where the financial year of a company ends on day other than 31 March, the company may, in its first tax year, compute its taxes on a financial period coinciding with its financial year and may thereafter compute its taxes on a 12 month period, the last day of which coincides with the last day of its financial year as the IRD may direct.
International Tax Compliance
In recent years, governments around the world have introduced a number of initiatives to increase tax transparency. Hong Kong has opted to co-operate with these initiatives and has introduced legislation to bring into effect the Automatic Exchange of Financial Account Information ("AEOI") and measures to combat Base Erosion and Profit Shifting ("BEPS"). At the same time, Hong Kong has entered into a number of tax treaties. These tax treaties are mostly based on the model established by the Organisation for Economic Co-operation and Development ("OECD") and, amongst other things, provide greater certainty as to the allocation of income for tax purposes and facilitate the sharing of information for tax administration purposes.
Which Countries Have Tax Treaties with Hong Kong?
Hong Kong has tax treaties with trading partners around the world. Treaty partners include:
Americas:
Canada, Mexico
Europe:
Austria, Belgium, Czech, Finland, France, Ireland, Italy, Jersey, Liechtenstein, Luxembourg, Netherlands, Portugal, Spain, United Kingdom
Asia:
China, Japan, Korea, Malaysia, Thailand, Vietnam
Hong Kong has no tax treaty with Germany or the United States.
Salaries Tax
Who is Liable to Pay Salaries Tax?
Every person who receives income sourced in Hong Kong from an office, employment or a pension is subject to Hong Kong salaries tax.
What is the Rate of Salaries Tax?
Salaries tax is charged at the lower of 15% or the progressive rates. The progressive rates are as follows:
First HK$50,000 |
2% |
HK$50,001 - HK$100,000 |
6% |
HK$100,001 - HK$150,000 |
10% |
HK$150,001 - HK$200,000 |
14% |
Over HK$200,000 |
17% |
Stamp Duty
Under the Stamp Duty Ordinance, transfers of "Hong Kong stock" and "Hong Kong immovable property" are subject to stamp duty. "Hong Kong stock" includes shares of companies incorporated in Hong Kong. Shares of companies incorporated outside Hong Kong but be regarded as "Hong Kong stock" if those companies are required to maintain a share register in Hong Kong. For example, transfers of shares of companies listed on the Hong Kong Stock Exchange are normally subject to stamp duty even if those companies are incorporated outside Hong Kong.
What is the Rate of Stamp Duty for Transfers of Hong Kong Stock?
The rate for ad valorem stamp duty payable by each of the buyer and seller of Hong Kong stock is 0.1% of the consideration or fair market value of the stock, whichever is higher. Because ad valorem stamp duty is payable by each of the buyer and the seller of the stock, the total rate of ad valorem stamp duty payable on a transaction is 0.2%.
The fair market value of the stock may differ from the purchase price and is normally based on the net asset value shown in a company's financial accounts. In calculating fair market value, the Inland Revenue Department may take into account value of immovable property (i.e. real estate) held.
In addition to ad valorem stamp duty, the buyer and seller will normally be liable to pay nominal stamp duty of HK$5 on each instrument of transfer executed
Are There Any Exemptions from Stamp Duty on the Transfer of Hong Kong Stock?
There are 2 main exemptions from Hong Kong stamp duty on the transfer of Hong Kong stock.
The first is for intra-group transfers of Hong Kong stock. Under this exemption, the stock must be transferred from one "associated body corporate" to another. Two companies are regarded as "associated" if one is the beneficial owner of not less than 90% of the issued share capital of the other (i.e. a parent company is regarded as associated with a subsidiary if it owns at least 90% of the issued share capital of the subsidiary) or a third owns not less than 90% of the issued share capital of each of those companies (i.e. two companies are regarded as associated if they are both subsidiaries of a common parent which owns at least 90% of the issued share capital of both companies).
The second exemption exempts from ad valorem stamp duty transfers where there is no change in beneficial ownership. This exemption may be used, for example, where a person places Hong Kong stock into a trust in which he remains the sole beneficial owner.
Additional Assistance
If you would like specific tax advice on your individual circumstances, contact us. We can help with tax compliance as well as with tax planning.