Income Tax in Hong Kong
Taxes in Hong Kong are levied on the “territorial principle”. In other words, taxes are only levied on income “derived from or arising in” Hong Kong and not on income sourced outside Hong Kong. In simple terms, this means that a person who carries on a business in Hong Kong but derives profits from another place is not required to pay tax in Hong Kong on those profits. No tax is levied on profits arising abroad, even if they are remitted to Hong Kong. Hong Kong follows a single-tier tax system i.e. there is no dividend tax. There is no capital gains tax in Hong Kong. Capital loss expenses are correspondingly not allowed as deductions. The tax year in Hong Kong is 1 April – 31 March. Profits earned during an accounting year ending within the tax year will be deemed to be the profits for that tax year.
Hong Kong Tax Governing Authority:
The Inland Revenue Ordinance and its subsidiary legislation the Inland Revenue Rules is the governing statute regarding corporate and individual taxation matters in Hong Kong. Furthermore, stamp duty and estate duty are imposed under the Stamp Duty Ordinance and Estate Duty Ordinance respectively.
The Inland Revenue Department is committed to collecting revenue in an efficient and cost-effective manner and aims at promoting compliance through rigorous enforcement of law, education and publicity programmes. The Commissioner of Inland Revenue, who also holds the statutory appointments of Collector of Stamp Revenue and Estate Duty Commissioner, is responsible for the administration of 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.
Personal Income Tax Rates:
The progressive rates of tax imposed on an individual’s net chargeable income in Hong Kong are as follows:
Net Chargeable Income (in HKD currency)
0 – 40,000
40,001 – 80,000
80,001 – 120,000
Calculating Net Chargeable Income:
Less: Non-Assessable Income
Less: Allowable Deductions
Net Assessable Income
Less: Personal Allowances
Net Chargeable Income
Whereas total income includes:
· Salaries, wages and director’s fees
· Commissions, bonuses, leave pay and end-of-contract gratuities
· Allowances, perquisites and fringe benefits such as cash allowances, convertible benefits, education benefits and holiday journey benefits
· Termination payments and retirement benefits including accrued benefits received from recognized occupational retirement schemes or mandatory provident fund schemes
· Back pay, gratuities, deferred pay and pay-in-arrears
· Stock awards and share options obtained from holding an office or employment
· Tips received from your employer or any other person
· Rental value of a place of residence that has been provided by the employer
Non-assessable income includes:
· Payment received in lieu of notice from the employer in accordance with the Employment Contract terms or the Employment Ordinance Provisions. This income does not relate to a service provided by an employee and is therefore not taxable. However, if sufficient notice of termination is given and the employee works during the notice period, the salary received for the duration of notice period worked is a normal reward for service rendered and is taxable.
· Minimum severance payments and long service payments that are payable under the Employment Ordinance are not assessable income. However, any amount in excess of an employee’s entitlement under the Employment Ordinance is assessable to salaries tax.
Allowable deductions include:
· Qualified employment related expenses such as client entertainment expenses, certain business travel expenses, subscriptions to certain professional societies etc.
· Approved charitable donations
· Self-education expenses
· Home loan interest, subject to certain qualifying conditions
· Elderly residential care expenses
· Depreciation and capital allowances for plant and machinery that have been used to generate assessable income.
· Contributions to a Mandatory Provident Fund Scheme or Recognized Occupational Retirement Scheme
Personal allowances include:
· Basic allowance
· Married person s allowance
· Child allowance
· Dependent brother or dependent sister allowance
· Dependent parent or dependent grandparent allowance
· Single parent allowance
· Disabled dependant allowance
What Income is Considered “Earned in Hong Kong”?
Salaries tax is imposed on all employment income arising in or derived from Hong Kong. In other words, if your source of employment is in Hong Kong, i.e. you are employed by a Hong Kong company to work in Hong Kong; your full income is chargeable to salaries tax. However, you can claim full or partial exemption of income or tax relief, under the following circumstances:
· If all services are rendered outside Hong Kong during a year of assessment (unless you are a civil servant or a crew member of a ship or an aircraft) you are exempt from paying salaries tax for that particular year of assessment. Income from services rendered in Hong Kong during visits not exceeding a total of 60 days in the year is also exempt from tax. Whether the nature of a trip to Hong Kong is a “visit” or not is assessed by authorities on a case-by-case basis.
· If part of your income has already been charged to tax in another territory during the year of assessment, you can claim partial exemption of income from salaries tax in Hong Kong. However, you will have to furnish evidence of foreign tax payment.
If your source of employment is outside Hong Kong, i.e. you are employed by an overseas company but are assigned to work in Hong Kong for a few years by your overseas employer; you are only assessed on the income attributable to the services you render in Hong Kong.
Capital Gains Tax:
Capital gains refer to investment income that arises in relation to stocks, bonds or real estate. Hong Kong does not impose any capital gains tax.
Filing Personal Tax Return:
Every taxpayer has to file annual tax returns with the Inland Revenue Department (IRD). The year of assessment runs from April 1 through March 31 of the following year. IRD sends out individual tax returns by May 1. Tax returns normally have to be submitted within one month from the date of issue. Note that even if you do not have any income to report, you still need to declare zero income in your tax form. A married couple can elect to receive a joint assessment, if the single assessment based on their combined income results in a lesser tax liability.
If you are a sole-proprietor of a business, you can file the returns within 3 months from the date of issue.You can choose to file your returns online or by postal mail. After you have filed your returns, you will receive your ‘Notice of Assessment’ or tax bill from the Inland Revenue Department. The tax bill will indicate the amount of tax you are liable to pay for the given year of assessment. It will also state the provisional salaries tax payable for the succeeding year of assessment.
If you disagree with the tax bill, you need to inform the tax department within 30 days from the issue date of your tax bill and state your reasons for objection. Notwithstanding any notice of objection lodged by you, tax must be paid on or before the due date specified in the notice of assessment.
The Commissioner of Inland Revenue may impose penalties or issue an estimated assessment if there is a delay in filing the return.
Flat Corporate Tax Rate:
Hong Kong has a flat corporate tax rate of 16.5% on assessable profits. A concessionary tax rate at 50% of the normal profits tax rate will be applied to trading profits and interest income received or derived from qualifying debt instruments issued in Hong Kong, and to offshore business of professional reinsurance companies.
Territorial Corporate Tax System:
Hong Kong follows a territorial system of taxation. In other words, tax will be levied only on profits arising in or derived from carrying on a trade, business or profession in Hong Kong. Profits tax is not applicable to profits whose source is outside Hong Kong. Hence, if you carry on a business in Hong Kong but your profits are derived from elsewhere, you are not liable to pay profits tax, irrespective of whether the profits have been remitted to Hong Kong. The territorial principle does not distinguish between residents and non-residents. You may be a resident in Hong Kong but if your profits are derived elsewhere, you are not liable to pay any tax on those profits. Likewise, if a non-resident derives profits from Hong Kong, he will be liable to pay profits tax in Hong Kong.
The questions of whether a business is carried on in Hong Kong and whether profits are derived from Hong Kong are largely questions of fact. However some guidance on the principles applied can be found in cases which have been considered by the courts in Hong Kong and in other common law jurisdictions.
Single-Tier Corporate Tax System:
Hong Kong follows a single-tier tax system (sometime called the “STS”) because profits earned by companies are only taxed once, i.e. on the company that gained those profits. When that company declares dividends, the profits thus distributed are no longer taxable on the shareholders of the company.
Corporate Tax Filing Requirements and Deadlines:
The Inland Revenue Department (IRD) of Hong Kong generally issues the corporate profits tax returns on the 1st of April every year. Normally, businesses should file the profits tax return within 1 month from the date of issue. In the case of newly registered businesses, the Inland Revenue Department will issue the profits tax return 18 months after the date of commencement of business or the date of incorporation.
The company has to file a complete set of returns which includes the following:
· The specific profits tax return form as issued by the Inland Revenue Department
· A supplementary form as issued by the Inland Revenue Department for your tax data and financial data etc.
· A certified copy of the Balance Sheet, Auditor’s Report and Profit & Loss Account pertaining to the basis period
· A tax computation showing how the amount of Assessable Profits (or Adjusted Loss) has been arrived at.
Small corporations (defined as those corporations whose total gross income does not exceed HKD 500,000 for the basis period) only need to file their respective profits tax return form and supplementary form. It is not mandatory to submit the other supporting documents mentioned above.
Provisional Profits Tax:
Profits tax is payable on the assessable profits for a particular Year of Assessment. However, since it is possible to arrive at the assessable profits only at the end of the year concerned, an estimated tax based on the previous year’s figures will be issued. This estimated figure is the provisional profits tax, which is to be paid in two installments – the first installment is 75% of the liability and the remaining 25% is payable after three months. Once the final assessment based on the actual assessable profits is made, credit is given for the provisional tax paid. If any excess payment has been made or if there are any outstanding payments to be made, they will be subtracted or added from the first installment of the provisional profits tax for the following year.
Late or not filing a tax return is a serious offense leading to penalties and even prosecution.
Income Tax Basis Period:
Corporate income tax in Hong Kong is assessed in relation to a Year of Assessment (YA). The Year of Assessment is the year ended 31st March (i.e 1st April – 31st March).
Income Tax Audit Exemption Requirements:
The following are exemption requirements for companies for submitting audited accounts together with their profits tax return:
· Dormant companies as per the Companies Ordinance definition (defined as having “no relevant accounting transactions” during a financial year) are exempted from preparing audit only when they apply the official dormant status by filing the special resolution to the Company Registry
· Companies incorporated in a jurisdiction whose laws do not require accounts to be audited
· Hong Kong branch of a foreign company, provided that the following information is supplied together with the return:
o the place of incorporation of the foreign company
o whether the laws of that country require a statutory audit of the world-wide accounts of the company
o whether that audit has been conducted and
o a brief summary of the financial and accounting records maintained by the Hong Kong branch
o certified copy of the financial and accounting records
For small corporations (defined as those corporations whose total gross income does not exceed HKD 2,000,000 for the basis period), audit is still required but it is not necessary to file to the Tax Authority.
Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.