Tax in Hong Kong | Overview Of Hong Kong Taxation
A prime business hub located strategically within the Asian region, Hong Kong is a country that has caught the eye of many international business investors. In aligning its tax laws with its goals for economic growth, Hong Kong has become one of the most ideal and preferred locations for global enterprises. The ease of setting up, geographic location, low tax in Hong Kong, are only a few of the advantages of starting a business here.
Hong Kong has a simple tax system with low tax rates and generous tax allowances. There are many things about the Hong Kong taxation system which appeal to investors. Hong Kong has:
- No capital gains tax
- No sales tax
- No withholding tax on dividends and interests
- No VAT
- No estate duty (also known as death tax or inheritance tax)
- Low personal tax rates
- Low corporate tax rates
To better understand the tax system in Hong Kong, here is a brief overview of the various taxes imposed here.
The corporate tax in Hong Kong also serves as the profit tax. It abides by a flat rate and territoriality principle. Therefore only income earned from conducting trade or profession in Hong Kong. This rule applies whether the company is a resident or not. So even if your company is a resident, your company profits from outside the country will not be subject to Hong Kong corporate tax.
The corporate tax in Hong Kong is assessed at 16.5%. Further, any profits and interest income from qualifying debt instruments can be taxed with a concessionary rate of 50% of the normal rate. This 50% concessionary rate can also be applied to the income of offshore businesses of reinsurance companies.
Hong Kong’s income tax system is inherently territorial, which means that profits derived outside of Hong Kong are exempt from tax. This exemption applies to a company’s foreign-sourced and offshore profits. However, it is important to note that offshore profits are only exempt if the company carries out its activities outside of Hong Kong.
Companies claiming the offshore tax exemption should include such claim together with their profits tax return (PTR) and audit report submission. The exemption claim processing can take up to months as the Inland Revenue Department thoroughly examines the documents and details. The examination for larger and public companies usually takes a longer time than others.
Goods and Services Tax (GST)
There is no goods and services tax, or any other similar sales tax in Hong Kong. One of the reasons for this is to encourage the supply of goods and services in the country. Hong Kong can also operate with very low taxes, and with no GST because its government has a huge fiscal reserve that can cover the country’s 12 months of expenditure.
Hong Kong has a unique system when it comes to taxing personal income. Unlike most countries, it does not impose income tax on the person’s total income. Instead, the three main types of income earned by an individual are taxed under different tax rates. Specifically, a person’s trading profits are subject to profits tax, income from employment is taxed under the salaries tax, and rental income is taxed under property tax.
The person’s residency and citizenship is generally not a factor in determining his salary tax liability. Because of the territoriality of Hong Kong’s tax system, all individuals, whether resident or non-resident, are subject to salary tax. The salary tax in Hong Kong is assessed in four brackets, 2%, 7%, 12% and 17%.
Further, a resident individual with many different types of income may also opt to elect the personal assessment of income. This option assesses a person’s income tax by his total income.
In contrast to other countries, Hong Kong does not impose withholding tax on rents, dividends, and interests. It imposes withholding tax only on payments made to a non-resident for services or works done in Hong Kong. For taxation purposes, non-resident individuals refer to foreigners who have stayed in Hong Kong for less than 180 days during the taxable year. The general withholding tax rate in Hong Kong is 16.5%.
Withholding tax is also imposed for royalty payments made to a non-resident company or individual for the use of intellectual property. The rate imposed on these payments varies depending on whether the non-resident payee is an affiliate or associate to a Hong Kong company or not. If the payee is an affiliate of a local company in Hong Kong, the entity shall pay for a 15% withholding tax on royalties. Payments to a non-affiliated non-resident entity are subject to a 4.5% withholding tax.
Stamp duties in Hong Kong primarily refer to the tax levied on the instrumentalities in buying properties. There are three main categories of stamp duties related to dealings with properties: the ad valorem, special and buyer’s stamp duties. These stamp duties are put up to work as measures in slowing down the increase in the prices of residential properties, which are sometimes affected by the demand for non-residential properties.
The ad valorem duty applies to first-time and non-first time homeowners. The special stamp duty is implemented to curb house flipping or the immediate reselling of properties. Finally, the buyer’s stamp duty (BSD) is an additional tax on non-permanent resident buyers, assessed at a fixed rate of 15%.
Tax Experts in Hong Kong
The tax system of Hong Kong is pretty straightforward. However, many would still be uncertain of what to do when filing for a tax incentive or when claiming exemptions. 3E Accounting is a top financial service firm in Hong Kong. Our expert tax practitioners are very well-experienced and knowledgeable of the ins and outs of the state’s tax system.
Do you need expert advice on certain tax issues and problems you’re having? Or perhaps you need a support team to process or file your taxes for you. We have the right expertise and support for you! Contact 3E Accounting Hong Kong today and get in touch with our tax experts.