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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
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.
Hong Kong does not have foreign exchange controls in place. Hong Kong's lack of foreign exchange controls is a distinctive feature that sets it apart from many other jurisdictions. This means that individuals and businesses in Hong Kong enjoy the freedom to conduct cross-border transactions and manage funds without stringent restrictions.
There are no limitations on the movement of capital, making it an attractive destination for international businesses, investors, and expatriates.
Hong Kong follows a territorial tax system, meaning only income earned in or derived from Hong Kong is subject to taxation. Income earned outside Hong Kong is generally not taxed.
If a business or individual establishes a company in Hong Kong, but the profits are sourced from outside the territory, no tax obligations arise, irrespective of whether the profits are transacted to Hong Kong. This system applies uniformly to both residents and non-residents, eliminating distinctions based on residency and reinforcing Hong Kong's business-friendly environment.
For example:
If the individual is a Hong Kong permanent resident but the profits are earned from elsewhere, that person won’t have to pay any tax on that profit portion. Likewise, if someone does not live in Hong Kong but makes profits in Hong Kong territory, he/she will be obliged to pay tax on that Hong Kong profit portion.
Whether a business is operating in Hong Kong, or the profits sourcing from Hong Kong has always been the main concern of many businesses. However, a certain number of guidances can be found in cases resolved by Hong Kong Courts and in other common law countries.
Hong Kong applies a single-tier (or single-tiered) tax system and a two-tier (or two-tiered) tax system. These are two distinct approaches to taxing corporate entities.
In simple words, a single-tiered tax system means that Hong Kong applies a standard rate to corporations, unincorporated businesses, and non-resident entertainers and sportsmen regardless of the taxable income in HKD.
On the other hand, the two-tiered tax regime comprises two profit tax rates. In this system, the initial HK$2 million of a company's profits is subject to a lower profits tax rate of 8.25%, while any profits exceeding HK$2 million are taxed at the standard rate of 16.5%.
For more information on the different rates of profits tax applied, please refer to the HK government pages Tax Rates of Profits Tax.
Hong Kong imposes no capital gains tax for business. This unique characteristic contributes significantly to the city's appeal as a global financial and business hub.
Please note that gains on the disposal of assets may be subject to profits tax if this disposal constitutes a transaction in the nature of trade.
There are two methods to calculate personal income tax in Hong Kong:
- Method 1: Net chargeable income progressive tax rate (from 2% to 17%)
Net chargeable income = taxable income - deductions - allowances (social, health care, education welfare)
- Method 2: Net total income with a fixed tax rate of 15%
Net total income = taxable income - deduction (for family circumstances) (note: allowances are not deducted).
Whichever method gives the lower amount of tax payable, the Inland Revenue Department will apply that calculation.
Royalties and fees paid to non-resident artists and athletes for their performances in Hong Kong are subject to withholding tax on their taxable profits. Fortunately, there is no withholding tax on dividends and interest from a Hong Kong entity to a resident or non-resident.
One of the attractive features of Hong Kong's tax system is the absence of a value-added tax (VAT) or sales tax. This is its commitment to fostering a business-friendly environment.
A comprehensive avoidance of double taxation agreement ("CDTA") helps minimize double taxation by setting out the allocation of taxing rights between two jurisdictions and providing relief on tax rates on different types of income.
As of October 2023, Hong Kong has signed CDTAs with 47 jurisdictions and is in negotiations with 16 jurisdictions.
Hong Kong adopts Hong Kong Financial Reporting Standards (HKFRS), in compliance with International Financial Reporting Standards (IFRS) which is issued by the International Accounting Standards Board (IASB)
The tax year (or financial year/year of assessment) in Hong Kong is from April 1 to March 31 of the next year. Profit earned within that one year is calculated in taxable profit for that tax year.
Property tax is a tax levied on owners of land and buildings in Hong Kong. Property tax is calculated at the standard rate based on the net assessable value of the property for the relevant year of assessment. The assessment year spans from April 1 to March 31 of the subsequent year.
Please be mindful that the tax rate of property tax for different years of assessment can be different for each year. From 2009 onwards, the standard rate remains at 15%.
Stamp Duty is a tax imposed on certain papers and documents (related to securities, stocks, and real estate) as specified in the First Schedule to the Stamp Duty Ordinance, which stipulates fixed fees on certain documents and ad valorem duties on others. This flat fee varies from HK$3.00 to HK$100 while ad valorem duties, by value, range from 0.1% to 4.25%.
Hong Kong is a free port. Generally, there are no import duties on goods except for alcohol, tobacco, hydrocarbon oils, and methyl alcohol. For tobacco, hydrocarbon oils, and methyl alcohol, the tax is levied specifically per volume unit. For alcohol, taxes are levied on different percentages based on its alcohol content. There is no excise duty or export tax from Hong Kong.
This tax is imposed on hotel owners and accommodation providers. Since the 1st of July 2008, the Government abolished HAT. The tax rate is reduced to 0% (the tax rate was 3% for the time until 30 June 2008) on all accommodation expenses.
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.
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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.
We offer a comprehensive range of accounting and tax services for US companies. Our services include:
- Tax Consulting .
- Monthly/Annual Tax Accounting services in accordance with HKFRS.
- QuickBooks Consulting and Licensing.
- Profits Tax Return Preparation.
- Offshore claim form Preparation.
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