Hong Kong's favorable tax regime and business-friendly environment have long been magnets for entrepreneurs and businesses worldwide. Understanding the various types of taxes in Hong Kong and exploring tax innovation can contribute to efficient financial management and strategic decision-making. Let's dive into the tax landscape for Hong Kong companies.
Types of Taxes in Hong Kong
Corporate Taxes
The corporate tax treatment varies depending on whether the taxable entity is a corporation or an incorporated business:
Profits Tax for Corporations (e.g. Limited Companies)
Profit Tax is one of the main taxes in Hong Kong. This duty is levied on a company’s net profits derived from Hong Kong. The current standard rate is 16.5% but starting from the fiscal year 2018/19, the Hong Kong government has introduced the Two-Tiered Rates that tax the first 2mln HK$ assessable profit at 8,25%, and the assessable profit over 2mln HK$ at 16,5%.
To make things clear, let’s make an example:
Imagine you own a Hong Kong limited company, and in a particular fiscal year, your company's assessable profits (profits derived from Hong Kong) amount to HKD 3 million.
Under the Two-Tiered Profit Tax system introduced by the Hong Kong government:
-
The first HKD 2 million of assessable profit is taxed at the lower rate of 8.25%.
- Tax on the first HKD 2 million: HKD 2,000,000 x 8.25% = HKD 165,000
-
The remaining HKD 1 million of assessable profit (over the initial HKD 2 million) is taxed at the standard rate of 16.5%.
- Tax on the remaining HKD 1 million: HKD 1,000,000 x 16.5% = HKD 165,000
So, for that fiscal year, your company would pay a total Profit Tax of HKD 330,000 on the assessable profit of HKD 3 million.
Please note that this is a very simple example, and doesn’t take into consideration any allowance or provisional payment.
Profit Tax for unincorporated business
Same concept of the one applied for corporations, but in this case the standard rate is at 15%. Starting from the fiscal year 2018/19 the rate is 7.5% on assessable profits up to $2,000,000; and 15% on any part of assessable profits over $2,000,000
In Hong Kong, there is NO TAX on capital gains, and no Value Added Tax (VAT).
Starting from January 2023, Hong Kong has introduce the Foreign Sourced Income Regime (FSIE Regime) to impose taxes on certain types of income (dividends included) to Multinational Enterprises (MNE) that don’t respect at least one of the below 3 main requirements:
- The Economic Substance Requirements;
- The Participation Exemption
- Nexus Requirements
To have more info, check the IRD website.
Individual Tax
The individual tax in Hong Kong, is called Salaries Tax. This duty is applied to income earned by individuals in employment or office. Rates are progressive, ranging from 2% to 17%, as per below tab:
|
|
Net chargeable Income |
Rate |
Tax |
|
|
$ |
|
$ |
|
On the First |
50,000 |
2% |
1,000 |
|
On the Next |
50,000 |
6% |
3,000 |
|
|
100,000 |
|
4,000 |
|
On the Next |
50,000 |
10% |
5,000 |
|
|
150,000 |
|
9,000 |
|
On the Next |
50,000 |
14% |
7,000 |
|
|
200,000 |
|
16,000 |
|
Remainder |
|
17% |
|
Together with the progressive rate, the Inland Revenue Department (IRD) may charge the individual at the Standard Rate of 15%. The IRD will charge the taxpayer based on the lower amount of tax to be paid, after calculating them with the progressive and standard rate.
Let’s make an example to simplify things:
Suppose you are an individual taxpayer in Hong Kong with an annual income of HKD 300,000. To determine your Salaries Tax liability, follow these steps:
- Calculate the tax under the progressive rates:
- On the first HKD 50,000 of your income (2% rate), you pay: HKD 50,000 x 2% = HKD 1,000
- On the next HKD 50,000 of your income (6% rate), you pay: HKD 50,000 x 6% = HKD 3,000
- On the next HKD 50,000 of your income (10% rate), you pay: HKD 50,000 x 10% = HKD 5,000
- On the next HKD 50,000 of your income (14% rate), you pay: HKD 50,000 x 14% = HKD 7,000
- On the remaining HKD 100,000 of your income (17% rate), you pay: HKD 100,000 x 17% = HKD 17,000
- Calculate the total tax under the progressive rates: Add up the tax amounts calculated for each income tier: HKD 1,000 + HKD 3,000 + HKD 5,000 + HKD 7,000 + HKD 17,000 = HKD 33,000
- Compare the tax calculated under the progressive rates to the standard rate (15%): Under the progressive rates, you owe HKD 33,000. Under the standard rate, you would owe HKD 300,000 x 15% = HKD 45,000.
The Inland Revenue Department (IRD) will charge you based on the lower amount between the two rates. In this case, you would pay HKD 33,000 in Salaries Tax.
Please note that this is a very simple example, that doesn’t take into consideration any allowance and provisional payment.
Other taxes
- Property Tax: Applicable to income from letting out real property in Hong Kong. The standard rate is 15%.
- Stamp Duty: Imposed on various transactions, including property transfers and stock transfers. Fixed duties vary from HK$ 3.00 to HK$ 100.00 whereas ad valorem duties range from 0.1% to 4.25%
- Customs and Excise Duties: Hong Kong is a free port, there are no tariff on general import. The only duties are for liquors, tobacco, hydrocarbon oil and methyl alcohol..
- Estate Duty: As of February 2006, estate duty has been abolished in Hong Kong.
- Hotel Accomodation Tax (HAT): starting from the 1st July 2008, the government waved the charged on HAT (before that the rate was at 3%)
Tax Innovation and Planning
- Tax-Efficient Structuring: Strategic structuring of business operations can optimize tax liability, such as considering the use of holding companies for regional expansion.
- Transfer Pricing: Ensuring fair pricing for transactions between related entities can mitigate transfer pricing challenges.
- Tax Incentives: Hong Kong offers various tax incentives, including deductions for research and development expenses, capital expenditures, and corporate treasury activities.
- Double Taxation Treaties: Exploiting double taxation agreements can prevent double taxation on income earned in multiple jurisdictions.
- Intellectual Property (IP) Planning: Leveraging IP structures can lead to reduced tax liabilities.
Innovation and Technology
Hong Kong's government is actively promoting innovation and technology. Initiatives include:
- Innovation and Technology Fund: Provides funding for projects that contribute to technological advancements.
- Dedicated Funds: Supporting innovation and technology projects across various sectors.
Conclusion
Navigating the tax landscape for Hong Kong companies involves understanding the types of taxes, exploring innovative strategies, and capitalizing on the government's initiatives for innovation and technology.
Contact us today to start your tax journey in Hong Kong.