Guide to Hong Kong Income Tax Rates and Income Tax System – Attractive Tax System to Investors
Hong Kong’s attractive income tax system and income tax rates is among the many reasons why foreign investors continue to choose the country as their preferred business jurisdiction for company registration.
Other reasons why Hong Kong remains an ideal business hub for many foreign investors looking to expand into Asia include the ease of incorporating a company in Hong Kong, and its strategic location close to the mainland Chinese market.
Overview of the Governing Authority of Hong Kong Tax
Hong Kong’s tax system is governed by the Inland Revenue Ordinance and its subsidiary legislation, the Inland Revenue Rules. These authorities govern the corporate and individual taxation matters in Hong Kong.
Part of the Inland Revenue Department’s commitment is to collect revenue in Hong Kong in a manner which is cost-effective and efficient at the same time. Simultaneously, the authority is committed to promoting compliance through its rigorous law enforcement, education and publicity programmes.
The Commissioner of the Inland Revenue is also responsible for administering the following ordinances:
- Betting Duty Ordinance
- Inland Revenue Ordinance
- Estate Duty Ordinance
- Stamp Duty Ordinance
- Tax Reserve Certificates Ordinance
- Business Registration Ordinance
- Hotel Accommodation Tax Ordinance
Stamp duty and estate duty in Hong Kong is imposed under the Stamp Duty Ordinance and Estate Duty Ordinance.
A Brief History of Hong Kong’s Tax System
Here’s a brief overview of Hong Kong’s tax system and how it has evolved over the years:
- The Inland Revenue Ordinance (IRO) was enacted in 1947 to enforce income tax in Hong Kong. IRO was based on the legislative packaged which was developed by the United Kingdom. It was intended to a temporary measure.
- There was no tax reform happening in 1945-1970 despite two committee reviews which were constituted in 1954 and 1967.
- 1970s saw Hong Kong growing into a modern city-state and a significant international trading and financial centre. There was a need for structural reforms because of this growth, but the colonial government did not adopt the new recommendations which were proposed. The tax system remained largely unchanged.
- 1997 saw the Hong Kong government issue a consultative document on the profits tax system. Following this, several other concessions were introduced in 1998.
- In 2002, a subsequent review committee was established. This committee suggested that the Goods and Services Tax (GST) be introduced. However, the idea was dismissed in 2006 because it received public opposition.
Hong Kong’s Attractive Tax System
Low personal income tax and corporate tax rates are one of Hong Kong’s biggest strengths. Additionally, there are no capital gains tax, value added tax, and no sales tax either. There are also no withholding taxes on any dividends or interest, or collection of social security benefits.
Hong Kong’s success is due to the remarkable job it has done to align its tax policy with its economic goals.
Quick Facts About Hong Kong Tax
Here are some other facts about Hong Kong’s tax:
- The Hong Kong Dollar is the 9th most traded currency in the world.
- Hong Kong dollar is closely pegged to the US dollar (1USD to 7.8KHD).
- Hong Kong has no foreign exchange controls
- Taxes are levied on income which is derived from or arise in Hong Kong.
- The country follows a single-tier tax system.
- There are no dividends tax.
- There is no capital gains tax in Hong Kong.
- Dividend income is not taxable (whether it is derived in Hong Kong or outside Hong Kong).
- Hong Kong has a low corporate tax rate of 16.5%.
- Personal taxes on individuals are tax at progressive rates on their net chargeable income.
- Royalties and fees paid to non-resident entertainers or sportsmen for their performances in Hong Kong are subject to withholding tax on their assessable profits.
- There is no VAT or sales tax imposed in Hong Kong.
- Hong Kong has 37 double tax treaty network which minimises double taxation.
- Hong Kong has adapted a Financial Reporting Standards (FRS) framework that has been modelled on International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB).
- Profits earned during an accounting year ending within the tax year will be deemed to be the profits for that tax year.
- Property tax is charged on the owners of land and/or buildings in Hong Kong and is computed at the standard rate of 15% on the net assessable value of the property (i.e. property’s rental income).
- There is no estate duty in Hong Kong.
- Fixed duties vary from HKD 3.00 to HKD 100 whereas ad valorem duties range from 0.1% to 4.25%.
- While there is no tariff on general imports, there is duty on liquors, tobacco, hydrocarbon oil and methyl alcohol.
- Hong Kong has waived the Hotel Accommodation Tax as of July 2008.
Overview of Hong Kong Tax Rates
Currently the tax rates for companies in Hong Kong are:
- 5% for corporations
- 0% for capital gains
- 0% for shareholder dividends
- 0% for foreign-sourced income.
Current Hong Kong tax rates for individuals are:
- 2% for 1-40,000 HKD
- 7% for 40,000-80,000 HKD
- 12% for 8,001 – 120,000 HKD
- 17% for anything above 120,000 HKD
- 0% for capital gains tax
- 0% for income earned overseas
- 0% for tax dividends from a Hong Kong company