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  • Country: Hong Kong
  • Services: Tax - Accounting

Understanding the tax system is crucial for anyone, especially foreigners, operating in Hong Kong. The city offers several advantages and an attractive tax system characterized by low personal and corporate income tax rates. To help you earn many benefits that Hong Kong offers for foreign entrepreneurs, our article will present a comprehensive overview of the tax system in Hong Kong, offering extensive information about various forms of taxes.

1. 14 things to know about the Hong Kong tax and accounting system

Currency

Hong Kong's official currency is the Hong Kong Dollar (HKD), which ranks as the world's top-used currency in commerce. 

In June 2021, the Hong Kong Monetary Authority (HKMA) initiated Project e-HKD to explore the feasibility of a retail Central Bank Digital Currency (rCBDC) in Hong Kong. This project encompasses a comprehensive examination of both technical and policy-related aspects. You can read more about the wide-ranging study of other issues, including use cases, potential benefits, and challenges, as well as design and legal considerations for the introduction of e-HKD in the E-HKD: A policy and design perspective.

2. An Overview of the Inland Revenue Ordinance (IRD) 

2.1. 2 important Hong Kong tax authorities

  • The Inland Revenue Ordinance and Inland Revenue Code Compliance Agencies are government agencies that govern corporate and personal taxes in Hong Kong. Furthermore, stamp duty and estate duty are respectively imposed in compliance with the Stamp Duty Ordinance and the Estate Duty Ordinance. The Inland Revenue Department commits to collect revenue efficiently and cost-effectively to promote strict enforcement and compliance by businesses through regulatory, educational, and public programs.
  • The Inland Revenue Commissioners, who are also legal persons collecting sales taxes, property taxes, etc., are 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, and Hotel Accommodation Tax Ordinance.

2.2. A brief history of the development of the tax system in Hong Kong

The Inland Revenue Ordinance (IRO) was first established in 1947 to impose and collect income taxes in Hong Kong. This mechanism is based on the legislative package developed by the Kingdom of England for its colonies. Thus, the IRO Inland Revenue Ordinance bears great resemblance to the tax systems of the UK, Australia, South Africa, and other Commonwealth countries. When the tax system was first introduced in 1940, it was intended to be an interim measure - and to be replaced within a year or so, by a higher tax rate.

There was no tax reform in the period from 1945 to 1970, although two review committees were founded in 1954 and 1967. During the 1970s, Hong Kong developed rapidly and became a modernized city and eventually a country that stood out as an important financial and international trade center. That tremendous growth led to the need for structural reforms in the tax system to increase public expenditure and tax rates. Therefore, the Third Review Committee was established. However, the colonial government did not agree to the proposals. As a result, the tax system, although established in the 1940s, has stayed mainly unchanged.

In 1997, the Government issued advisory guidance on the profit tax system, calling forth proposals on how to improve Hong Kong's tax competitiveness and business environment. As a result of this initiative, several proposals were introduced in 1998. A follow-up review committee was established in 2002, which proposed the introduction of a Goods and Services Tax (GST). The government seriously considered introducing GST but rejected the proposal in December 2006 due to widespread public outcry.

3. How can we help you incorporate and manage your Hong Kong company successfully?

4. FAQs about the Hong Kong tax system

All companies can qualify for the two-tiered profits tax rates, except those with a connected entity that is nominated to be chargeable at the two-tiered rates. 

A connected company is defined as one of them has control over the other, both of them being under the control of the same entity; or in the case of the first entity being a natural person carrying on a sole proprietorship business – the other entity is the same person carrying on another sole proprietorship business.

An Employers' Return (ER) is a mandatory form that employers in Hong Kong must submit annually to the Inland Revenue Department (IRD). 

Only Profits Tax returns for the year of assessment 2022/23 issued to a corporation/business can be filed electronically under eTAX.

All companies can qualify for the two-tiered profits tax rates, except those with a connected entity that is nominated to be chargeable at the two-tiered rates. 

A connected company is defined as one of them has control over the other, both of them being under the control of the same entity; or in the case of the first entity being a natural person carrying on a sole proprietorship business – the other entity is the same person carrying on another sole proprietorship business.

An Employers' Return (ER) is a mandatory form that employers in Hong Kong must submit annually to the Inland Revenue Department (IRD). 

Only Profits Tax returns for the year of assessment 2022/23 issued to a corporation/business can be filed electronically under eTAX.


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