How Does the Hong Kong Tax System Work?
Contributed by Hugill & Ip Solicitors
17 March, 2021
Hong Kong is an international city, geographically located next to the Mainland China market. The ease of setting up and operating a business in the territory is undeniable and, of course, all of this attracts entrepreneurs and business enterprises from around the globe.
Moreover, Hong Kong offers one of the lowest and friendly tax regimes for its citizens and residents. The territory is one of the main international destinations for foreign expatriates. Currently there are about 650,000 foreign residents in Hong Kong, in addition to 1 million residents originally from Mainland China that have made the territory their permanent home.
Q1: What's the guiding principle of taxation in Hong Kong?
Hong Kong relies on a territorial tax system, under which its residents - both corporate and individuals - are only taxed on their Hong Kong income. This means foreign-sourced income is not subject to Hong Kong tax.
Q2: When does the tax year run?
The official tax year (commonly known as the "year of assessment") runs from 1 April to 31 March. Taxpayers must submit tax returns after the end of the tax year: within one month from the tax return date for individuals and non-sole owners of an unincorporated business; within three months for sole owners. For delays in tax filing, penalties might be imposed.
Q3: What payment deadlines are there?
Salaries tax is generally paid in two instalments. The dates of payment usually are set between January and April of the following year, with precise deadlines clearly specified in the assessment notice. The Inland Revenue Ordinance, Cap 112 states that a surcharge not exceeding 5% on the amount of tax outstanding after the due date may be imposed and a further surcharge not exceeding 10% may be imposed on the amount remaining outstanding (including the tax and 5% surcharge already imposed) after six months from the due date.
In case of financial difficulties or other exceptional circumstances, both companies and individuals can apply to the Inland Revenue Department (IRD) for payment of tax by different instalments. Applicants need to provide valid reasons and up-to-date documentary evidence in support, before eventually getting approval from the IRD. The Department may also avoid imposing surcharges, provided that all payments are made on or before the agreed instalment dates.
Q4: How is tax liability determined?
Hong Kong has a simple tax regime. Income/profits are only taxed if sourced from Hong Kong.
Individuals are subject to salaries tax on any income arising in or derived from a business, employment or pension in Hong Kong. Salaries tax is levied at progressive rates on the net chargeable income and is capped at 17%. However, the total tax charged to an individual residing in the territory shall not exceed 15% of that person's net assessable income.
There is no distinction on tax treatments between residents and non-residents, a resident may derive profits from abroad without suffering tax; conversely, a non-resident may suffer tax on profits arising in Hong Kong.
For a company carrying on business in Hong Kong, generally the profits tax rate will be 8.25% on the first HK$2 million of profits and 16.5% on everything thereafter.
Q5: Can deductions be claimed?
There are different types of deductions that individuals may claim to deduct from the assessable income in any annual tax return:
- self-education expenses;
- concessionary deductions - e.g. approved charitable donations, MPF and ORSO contributions (both mandatory and voluntary), home loan interest, housing allowance, qualifying premiums paid under Voluntary Health Insurance Scheme, elderly residential care; and
- allowances - e.g. basic or for married couples, children and other dependents, single parent, disability.
Q6: How does domicile impact taxes?
Domicile is not relevant to determine tax liability in Hong Kong, unless that person is seeking relief from an applicable comprehensive double taxation agreement or arrangement. As highlighted before, Hong Kong adopts a territorial source principle of taxation.
Employers are required to notify the IRD if they end - or are about to end - an individual's employment in the territory. The notification should be submitted at least one month before the expected cessation date. Employers of an individual who is about to leave the territory must notify the IRD of the expected date of departure no later than one month before such date.
We have talked about the issue of domicile in our previous article "Domicile and Why it's More Than Just Where You Live".
Q7: How about taxes for temporary residents?
In general, a person spending less than 60 days in Hong Kong can obtain complete or partial exemption from tax related to a specific tax year. Directors' fees are excluded from this rule and other special treatments are afforded to certain categories of employment.
Non-residents are taxed on the same basis and rates as any Hong Kong resident.
If employment is located outside the territory, it will be regarded as being a non-Hong Kong-located employment and the liability to salaries tax will be limited to tax on income from services rendered in Hong Kong, plus the attributable leave. In such cases, the taxpayer commonly calculates his/her taxable income between the Hong Kong and non-Hong Kong services in proportion of how many days he/she has spent inside/outside Hong Kong.
Q8: Does Hong Kong have an inheritance tax?
Hong Kong abolished its inheritance tax for any deaths occurred on or after 11 February 2006. The territory has no wealth tax, no gift tax, and no estate tax. Even when inheritance tax existed, Hong Kong's territorial tax status applied to estates as well, hence foreign estates have always been exempted.
Many countries around the world have seen estate tax revenues dramatically fall because of proper estate planning and offshore structures, resulting in several jurisdictions totally repealing estate taxes in the past decades. These include Australia, New Zealand, Canada, Macau, Singapore, Portugal and Sweden.
Q9: What about stamp duty?
Stamp duty is tax to be paid to the government when buying a property in Hong Kong. This tax can dramatically alter the cost of buying a property.
Throughout the past decade the Hong Kong Government has implemented different cooling measures with new and additional stamp duties to curb the increase in property prices, mainly due to high demand from investors and foreign buyers.
There are three types of stamp duties related to selling or buying properties in Hong Kong:
1. Ad Valorem Stamp Duty (AVD) for residential property and non-residential property:
- ADV is for first-time home buyers who are Hong Kong permanent residents and are buying their first homes or switching homes (at the time of transaction there is no property registered under their names). People who are switching properties must sell their original and only property within six months after they sign the Conveyance on Sale, then apply to the IRD for the tax refund.
- AVD for non-first time home buyers, which is a flat rate of 15%.
- Hong Kong has passed legislation to abolish the Doubled Ad Valorem Stamp Duty applicable to non-residential property transactions with effect from 26 November 2020. This rate used to be twice as much as the one for residential property, hence it was commonly known as "Double Stamp Duty".
2. Special Stamp Duty (SSD) which is paid when selling property. Any properties resold within specific holding periods will be charged. This is only applicable for residential properties acquired on or after 27 October 2012.
3. Buyer's Stamp Duty (BSD) which is an additional upfront tax on non-permanent-resident buyers. A flat rate of 15% in addition to AVD for non-permanent-resident individual buyers and buyers who use a company to purchase real estate.
Q10: Are there additional taxes that individuals and companies need to take into consideration?
Hong Kong does not levy tax on capital gains, dividends and/or interest, and withholding taxes only apply to certain types of royalties (paid to non-residents for the use of intangible assets located in Hong Kong). There is no Value Added Tax (VAT) or Goods and Services Tax (GST).
To sum up, tax rates in Hong Kong are much lower than what most countries and territories impose.
For information purposes only. Its contents do not constitute legal advice and readers should not regard this as a substitute for detailed advice in individual instances.
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