The Inland Revenue Ordinance (IRO) imposes three separate types of direct taxes on company profits and income of partnerships and individuals. The three direct taxes levied are:
Based on the territorial concept, a liability to tax will arise only when the income has a source in Hong Kong. Income which arises or is derived from outside Hong
Kong will not be assessed for tax by the Hong Kong Inland Revenue Department. Under normal circumstances, the claim for exemption from Hong Kong tax needs to be lodged with, and agreed by, the Hong Kong Inland Revenue Department.
Provisional tax is payable for all three taxes and is usually based on the assessable income of the previous year.
Individuals and entities carrying on a trade, profession or business in Hong Kong are subject to profits tax if the source of profits arises in or is derived from Hong Kong from the carrying on of that trade, profession or business.
Whether a taxpayer is carrying on a trade, profession or business in Hong Kong is largely a matter of fact and will depend upon the circumstances of each case.
In broad terms, a trade, profession or business is being carried on or performed in Hong Kong if:
Dividend and bank interest income as well as capital gains are non-taxable in Hong Kong.
Profit tax losses can be carried forward indefinitely subject to the anti-avoidance rule on change of ownership. There is no group loss relief available.
Anti-avoidance legislation is also in place aiming at transfer pricing arrangements between overseas and Hong Kong entities who are closely connected.
Hong Kong has signed double tax treaties or double tax agreements with a number of countries including, inter alia, Belgium, Thailand, Vietnam, Indonesia, the
Netherlands, Luxembourg, Japan, France,
United Kingdom, Austria, Canada, Italy, Korea, South Africa and mainland China.
Most agreements concluded so far cover airline and shipping income although certain bilateral agreements provide relief from double tax on other types of income. Double tax agreements also seek to clarify on the rules for division of revenue between Hong Kong and the contracting countries.
In addition, Hong Kong has agreed to implement the OECD tax model of Common Reporting Standard with effect from 2018.
Profits tax rates in Hong Kong for the year of assessment 2017/18 are:
Incorporated businesses – 16.5%
Unincorporated businesses – 15%
Salaries tax is charged on every person in respect of his income arising in or derived from Hong Kong from any office, employment or pension. In order for the income to give rise to salaries tax, the duties must be rendered in Hong Kong and the number of days spent in Hong Kong by the individual should be over 60 days per year.
Income is deemed to include all wages, salary, leave pay, perquisites, bonuses and allowances. A common type of taxable benefits-in-kind is in respect of rent free accommodation provided to the employees by the employers (or associated entities). In general, the taxable amount of rent free accommodation is calculated at 10% of the assessable income derived from the employment.
Salaries tax is payable at:
Property tax is charged on rental income derived by persons owning buildings or land in Hong Kong.
However, rental income received by corporations is assessed as profits tax, instead of property tax, by bringing the rental income into charge for profits tax purpose.
The rate of property tax is 15% on the chargeable income for the year of assessment 2017/18. Property in Hong Kong is also subject to rates based on an assessed rateable value for each property.
Currently there are none of the following taxes in Hong Kong:
Wealth tax / Gift tax / VAT / Capital gains tax / Dividend income / Interest income /