Introduction to tax in Hong Kong.

This tax guide is a basic introduction to Hong Kong taxation that you should know when engaging in business activities in Hong Kong.

Introduction to tax in Hong Kong

With Hong Kong’s highly attractive tax regime, Hong Kong has risen to be one of the countries many want to carry on business activities. Hong Kong has a two-tier tax regime with low tax rates and a relatively easily understood legislation, making it beneficial to small and medium-sized enterprises.

It also has a significant number of double tax treaties to reduce any double taxation between countries. Unlike other countries around the world, Hong Kong has no GST, VAT, capital gains tax or any sales tax.

Corporate/Profits income tax in Hong Kong

Year of assessment and corporate (profit) tax return

Year of assessment (YA) refers to the year that income is charged for companies. The YA in Hong Kong is 12 months, from 1 April to 31 March the following year.

The deadline is within one month after receiving the profit tax return (PTR). The Inland Revenue Department (IRD) will issue tax returns and you should file the profits tax return along with submitting the required documents to the IRD. If the company is a newly registered business, the IRD will issue PTR 18 months after the date of incorporation.

The company must file the following set of returns which include:

  • Profit tax return form issued by the IRD
  • Supplementary form from the IRD for your tax data and financial data
  • A certified copy of the auditor’s report, balance sheet and profit & loss account
  • A tax calculation showing how the amount of assessable profits has been arrived at

Small corporations are not required to submit supporting documents with the profit tax return if they are qualified as a small company defined by the IRD (has income for a basis period of not more than HKD 2 million). However, they should keep those documents and submit them if they are requested. A branch office in Hong Kong must file a profits tax return annually, and the IRD may request audited accounts of the foreign parent company to confirm the profit tax return of the branch office.

Tax rate and basis of taxation

There are two rates of tax for companies in Hong Kong. A rate of 8.25% applies to income up to HKD 2 million. Thereafter a rate of 16.5% is applicable. For unincorporated businesses, a rate of 7.5% applies to profits up to HKD 2 million. Thereafter, the rate is 15%.

In the year 2019/20, 100% of profits tax is waived, up to a maximum of HKD 20,000. This means that, effectively for a company, the first HKD 242,424 of income is exempt from tax (HKD 242,424 x 8.25% = HKD 20,000.

For an unincorporated business, the effective tax exemption is on your first HKD 266,667 of income (HKD 266,667 x 7.5% = HKD 20,000)

Profits

Corporations

Unincorporated business

First HKD 2 million

8.25%

7.5%

More than HKD 2 million

16.5%

15%

Hong Kong imposes tax based on a territorial system, meaning that only profits that have been generated in Hong Kong will be taxed. Profits that are sourced from outside of Hong Kong will not be taxable.

Tax incentives available

Hong Kong has tax incentives on specific industries, such as air services, financial services and shipping. Income from qualifying debt instruments (QDI) issued before 1 April 2018 are subject to a concessionary tax rate of 50% of the standard profit tax rates, which depends on the maturity period of the QDI. QDIs issued after 1 April 2018 are exempted regardless of its maturity period.

Corporate treasury centres qualify to pay tax at a concessionary tax rate of 50% of the standard profit tax rates under certain conditions. Profits from qualifying aircraft leasing activities and aircraft leasing management activities conducted in Hong Kong are subject to a profit tax of 50% of the profit tax rates.

Hong Kong has also introduced tax incentives for qualifying R&D expenditures. The Inland Revenue (Amendment) (No.7) Ordinance 2018 (the Amendment) identified two types of deductible R&D expenditures:

  • Type A – Qualified for 100% standard tax deduction
  • Type B – Qualified for an enhanced two-tiered tax deduction at 300% for the first HKD 2 million and 200% for the remaining amount.

Type A expenditures qualified for standard deduction

Type B expenditures qualified for enhanced deduction

Payments made to a college, university or a Designated Research Institution:

  • For an R&D activity related to the business; 
  • To conduct R&D activity related to the class of the business; or

Spending on any R&D activity associated with the taxpayer’s business, including capital expenditure except land or buildings.

Payments made to a Designated Local Research Institution:

  • For a qualifying R&D activity associated with the business; 
  • To undertake a qualifying R&D activity related to the business; or

Spending incurred:

  • Regarding an employee engaged directly in; or
  • On a consumable item used directly on a qualifying R&D activity relevant to the business.

Designated local research institution refers to a university or college in Hong Kong that conducts qualifying R&D activities that are specified by the Commissioner for Innovation and Technology (CIT).

R&D activity is an activity that:

  1. Is related to natural or applied sciences to increase knowledge;
  2. Is experimental, investigative or systematic, for study related to business, market or management research;
  3. Is an original and planned investigation undertaken to gain new scientific or technical understanding; or
  4. Applies research findings or other new knowledge to plans or designs for producing or improving devices, materials, products, processes or services before they are commercially made.

Qualifying R&D activity only applies to activities (1), (3) and (4) that are conducted in Hong Kong, and excludes any activities not related to science or technology.

Learn more

Double tax treaties in Hong Kong

Hong Kong currently has a total of 40 double taxation agreements which are categorised as:

  • Comprehensive DTAs
    • Belgium, China, Luxembourg, Thailand and Vietnam
  • Airline and shipping income treaties
    • Singapore and Sri Lanka
  • Airline income treaties
    • Bangladesh, Belgium, Canada, Croatia, Denmark, Estonia, Ethiopia, Fiji, Finland, Germany, Ireland, Israel, Jordan, Kenya, Korea, Kuwait, Laos, Macau, China, Maldives, Mauritius, Mexico, Netherlands, New Zealand, Norway, Russia, Seychelles, Sweden, Switzerland and the United Kingdom
  • Shipping income treaties
    • Denmark, Germany, Netherlands, Norway, United Kingdom and USA
  • Tax information exchange agreements
    • Denmark, Faroes, Greenland, Iceland, Norway, Sweden and the USA

If your Hong Kong company derives income from a country with which Hong Kong has concluded a double tax agreement, the DTA will prevent you from having to pay tax in two countries on the same income. The treaty also allows certain tax relief, reduced withholding tax rates and some tax exemptions.

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Withholding tax

If a Hong Kong resident individual or company makes payment(s) of a specific type (royalties and fees for non-resident entertainers or sportspeople) to a non-resident company or individual for services in Hong Kong, the payer must withhold a percentage of that payment and pay it to the Inland Revenue Department.

Withholding tax only applies to payments made to non-resident entities or individuals. Non-resident individuals are foreigners who have worked or stayed in Hong Kong for less than 180 days. Dividends, interests or rents are not subjected to withholding tax in Hong Kong.

Personal income tax in Hong Kong

Taxable income

Individuals are taxed on their income from employment in Hong Kong, and are taxed at rates on their net chargeable income at progressive rates, with the tax scale starting at 2%. The maximum is 17% (income after deductions and allowances), and 15% of net income after deductions only.

Taxable incomes include allowances, awards, bonuses, commissions, gratuities, salaries and other benefits from the company. Educational benefits for children of employees and benefits convertible to cash are taxable, some pensions are also taxable. Director’s fees received by directors are taxed regardless of where the director is residing. Hong Kong does not impose tax on dividends, interest or capital gains earned by individuals.

Individual tax returns will be issued by the IRD on 1 May, and individuals must file the tax returns within one month.

Personal income tax rate

Net chargeable income

Rate

0 – 50,000 HKD

2%

50,001 – 100,000 HKD

6%

100,001 – 150,000 HKD

10%

150,001 – 200,000 HKD

14%

Above 200,001 HKD

17%

Net total income (no allowances)

15%

Deductions

Employees can request for tax deductions if they are wholly and necessarily incurred in gaining income.

Deductions allowed include:

  • Self-education expenses – Deductible if costs reach HKD 100,000
  • Home loan interest – If fees are up to HKD 100,000
  • Elderly residential care – Deductible with costs up to HKD 100,000
  • Mandatory provident fund – contributions are deductible up to HKD 18,000 per annum
  • Donations – May be deductible when exceeding HKD 100

Learn more

Conclusion

Even though Hong Kong has low tax rates and may not impose tax on certain sales, it is important that you comply with the tax regulations and file your taxes on time to avoid any penalties. To stay up to date with your tax compliance, we recommend engaging Acclime. We have a skilled tax team that will help you stay compliant and notify you of any approaching deadlines.

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