Hong Kong is a gateway to world’s second largest economy of China, with the added advantages of having an English-speaking population, and operating under the English common law. Moreover, the city is an important part of country’s ambitious Belt and Road Initiative, and is poised to benefit from the ongoing development of the Guangdong-Hong Kong-Macao Bay Area. It is a Special Administrative Region following China’s One Country, Two Systems policy, which means that Hong Kong follows a free trade policy, enjoying:
- free movement of goods, information and capital
- a free port status, meaning no tariff on general imports and easy customs procedures
- sovereign (independent from China) participation in international forums
- no foreign ownership restrictions
To top it all, companies in Hong Kong benefit from one of the most tax-friendly jurisdictions in the world, which according to the World Bank’s Doing Business 2019 Report, is also the world’s lowest tax region.
Salient points about Taxation in Hong Kong
1. Not much taxation in Hong Kong
Hong Kong imposes:
- no estate tax
- no capital gains tax (note if real estate dealings are part of a profit-making business activity, the IRD may regard it as a business, and impose profits tax on such activities)
- no withholding tax
- no taxes on dividends
- no excise duty/tariffs on general imports
- no foreign exchange controls
- no Goods and Services Tax (GST), no Value Added Tax (VAT), no sales tax
2. Territorial Principle of Taxation
In Hong Kong, the territorial principle of taxation if followed, with no distinction between residents and non-residents.
Firstly, this means that companies, partnerships, or sole proprietorships, are charged tax on all profits, except that arising from any business activities carried outside of Hong Kong, even if those profits are remitted to Hong Kong.
Secondly, do note that a non-resident (in terms of taxation) may have to pay taxes if the concerned business activities are performed within the territorial boundaries of Hong Kong.
3. Year of assessment in Hong Kong
In Hong Kong, a year of assessment for taxation purposes runs from April 1, to March 31, of the following year. And the Inland Revenue Department (IRD) of the Government of the Hong Kong Special Administrative Region is the city’s tax regulator.
4. Filing of profits tax (corporate tax) returns in Hong Kong
For continuing businesses – the corporate tax returns are issued on the first working day of April every year.
For newly incorporated companies – they receive their first corporate tax return some 18 months after the date of company incorporation, or commencement of business.
It is important to note here the date of submission for tax returns is always specified on the tax returns sent to each company, which is normally within a time period of one month from the date of issue.
But not every company is sent tax returns forms by the IRD, as it may feel that some companies may not have had assessable profits to be taxed. However, if a company receives the tax returns forms, it must file those in time, even if there had been no profits in the year of assessment.
5. Tax treaties to avoid double taxation in Hong Kong
Hong Kong has entered into 41 Comprehensive Double Taxation Agreements (DTAs) with a number of jurisdictions, which are also referred to as tax treaties. These treaties help companies incorporated in Hong Kong avoid double taxation caused by overlapping tax jurisdictions.
Types of Taxes in Hong Kong
In Hong Kong, only three types of direct taxes are imposed on companies and individuals, which are detailed below:
1. Profits tax
In Hong Kong, corporate tax is known as profits tax, which is now two-tiered.
In March 2018, the Hong Kong Government enacted the Inland Revenue (Amendment) (No. 3) Ordinance 2018, which introduced two-tiered profits tax rates for companies and unincorporated businesses in Hong Kong. Among other things, it lowered the tax rate for the first $2 million of assessable profits for companies with effect from 2018/19.
As the profits tax rates stand now:
- For companies – 8.25% for the first HK$2 million of profits of companies; above this, profits are taxed at 16.5%.
- For unincorporated business (partnerships and sole proprietorships) – 7.5% for the first HK$2 million of profits; and 15% above this.
Moreover, entities and non-resident persons, must file the following forms to report their profits tax liability:
- Form BIR51 – for companies
- Form BIR52 – for persons other than companies
- Form BIR54 – for non-resident persons
The above must be filed along with the supplementary forms (BIRS1 to BIRS10) introduced this year. These have been introduced by the IRD to collect information on preferential tax regimes and tax incentives.
2. Salaries tax
In Hong Kong, tax on individual net chargeable income is known as salaries tax, which is progressive in nature – starting at 2% and ending at 17%, or at a standard rate of 15%; whichever is lower.
IRD sends Form BIR60 to individuals (normally on first working day of May each year), which must be filed in time even if there’s no income to report. This must be filed along with the three supplementary forms (BIRSP1 to BIRSP3) introduced this year. Do note that spouses can file joint tax returns in Hong Kong, but all the forms must be signed by both in such cases.
Rate (%) Tax ($) Standard
On the first 50,000 2 1,000
On the next 50,000 6 3,000 100,000 4,000 On the next 50,000 10 5,000 150,000 9,000 On the next 50,000 14 7,000 200,000 16,000 Remainder 17
3. Property tax
While the property tax rate is similar to standard salaries tax i.e. 15%, the forms to filled and submitted vary. (sent by the IRD normally on the first working day of April each year).
- Form BIR57: this form is to filled by property owners (including corporation and body of persons) who jointly own or co-own a property
- Form BIR58: this form is to filled by property owners (including corporation and body of persons) where there is no co- or joint ownership.
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