Hong Kong Tax System – A Helpful General Guide For Entrepreneurs

Basically, with the comparatively low-rate tax regime, Hong Kong has remained one of the most popular markets in the Asia Pacific. Profits tax, Salaries tax, and Property tax are fundamentally chargeable according to the Hong Kong tax system’s income taxes.

Besides, Inland Revenue Department (IRD) does not impose Capital gains, Dividends, Interest incomes, Hotel accommodation (HAT), Sales, Value-added (VAT), or Withholdings taxes.

People are required to file Tax Returns with Hong Kong IRD every Year of Assessment (YA), a period of 12 months from the 1st of April to the 31st of March next year.

Profits tax in Hong Kong

What is profit tax?

Individuals, corporations, partnerships, and trustees are obliged by a territorial profits taxation of Hong Kong, regardless of being resident or non-resident.

Their incomes from trade, profession, or business arising in or derived from this territory are levied based on its two-tiered tax system.

Note

Profits derived from sources outside of Hong Kong can be exempted from taxes. Our Hong Kong Offshore Claim Tool helps you determine the tax status of your income types and ascertain your eligibility for making an offshore claim.

The profit tax rate in Hong Kong for the first 2 million HKD is 8.25 percent for corporates and 7.5 percent for unincorporated businesses (i.e sole proprietorships or partnerships). The remainder of the profit is payable at 16.5 percent and 15 percent for corporations and unincorporated businesses, respectively.

Remarkably, it is tax-free for the revenue coming from outside of Hong Kong.

Profits tax rate for the year of assessment of 2018/19 onwards

Besides, Inland Revenue Department (IRD) does not impose Capital gains, Dividends, Interest incomes, Hotel accommodation (HAT), Sales, Value-added (VAT), or Withholdings taxes.

People are required to file Tax Returns with Hong Kong IRD every Year of Assessment (YA), a period of 12 months from the 1st of April to the 31st of March next year.

How to calculate profit tax

Hong Kong Inland Revenue Department (IRD) issues profits tax returns on the first business days of April in the relevant year of assessment (YA), and the filing due date is May 2nd. Profits tax in Hong Kong must be paid from November to April of the next year.

Each type of taxpayer must file one of these forms:

• Profits Tax Return – Corporations (BIR51)
• Profits Tax Return – Persons Other Than Corporations (BIR52)
• Profits Tax Return – In Respect Of Non-Resident Persons (BIR54)

Assessable profits are derived from net profits in financial statements after adjustments to account for non-deductible expenses, allowable expenses, and non-assessable income.

Non-deductible expenses are comprised of:

• Expenses not incurred in the production of chargeable profits
• Expenses for domestic and private use
• Any disbursements and expenses paid for the proprietor, partner, or their spouses related to:
  • Remunerations/drawings
  • Interest paid for capital or loans
  • Contributions to mandatory provident fund scheme (MPF) in excess of allowable amount under the Inland Revenue Ordinance and any contributions to MPFs for their spouse.
  • Rent and other benefits
• Penalties and fines
• All taxes paid/payable other than salaries tax with respect to employee’s remuneration
• Cost of properties/assets improvements

Incomes exempt from Profits tax typically include:

• Dividends received from a corporation
• Profits already included in assessable profits of other persons, corporations, or partnership
• Interest income from the following sources:
  • Deposit accounts in Hong Kong from authorized institutions
  • Hong Kong Tax reserve certificate
  • Bonds issued under the loans ordinance or the loans (government bonds) ordinance

Losses are allowed to be carried forward to offset against profits in subsequent years with no time limit.

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Salaries tax in Hong Kong

What is salaries tax?

Hong Kong adopts a progressive regime for salary taxation. The tax rates in Hong Kong increase from 2%, 6%, 10%, 14%, and 17% per every 50,000 HKD of net chargeable income.

However, people are only levied on the salaries earned inside of Hong Kong according to the territorial principles, the same as with profits tax.

The salaries tax rate for the year of assessment of 2018/19 onwards is as followed.

Total salaries contain the following, but are not exhaustive:

• Salaries, wages, and director’s fee
• Commissions, bonuses, leave pay
• Allowances, perquisites, and fringe benefits
• Termination payments and retirement benefits
• Pensions
• Stock awards and share options

How to calculate salaries tax

Obliged to IRD requirements, individuals must submit Salaries Tax Return – Individuals (Form BIR60) by June 2nd of the relevant year for unrepresented cases and July 2nd for represented ones. The salaries tax payment is made up of two components:

• Salaries tax for the current year of assessment (i.e. 2018/19)
• Provisional salaries tax (PST) for the next assessment year (i.e. 2019/20)

The due date of tax settlement is stipulated in the assessment notice issued by IRD to taxpayers, typically between January and April of the next year.

There are two ways to conduct payable salaries tax in Hong Kong:

• Evaluating as personal assessment: Total incomes from all sources are taxed at a progressive rate. With its flexibility, taxpayers are able to carry losses among different income tax types. The personal assessment is efficient from the time it is selected. The previous payment is not refundable. Therefore, losses carried forward before the election of personal assessment offset for the same kind of income only.
• Calculating based on salaries tax: The assessable value for salaries tax is computed in one of the following formulas, whichever is lower:

Based on flat rate:

Based on progressive rates:

As mentioned in these following charts, personal allowances are composed of the:

• Basic allowance
• Married person’s allowance
• Child allowance
• Dependent parent/grandparent allowance
• Dependent brother/sister allowance
• Single-parent allowance
• Disabled dependent allowance
• Personal disability allowance

Deductions are the expenses wholly and exclusively incurred for producing assessable income, which might be:

• Self-education expenses
• Home loan interest
• Elderly residential care expenses
• Mandatory contributions to recognized retirement schemes
• Approved charitable donations

Taxpayers should choose a more profitable way to handle their salaries tax in Hong Kong based on their circumstances. The flat rate (15%) benefits its payers, who gain high net incomes, more than the progressive rates do (2% to 17% marginally).

Three months after hiring staff, the employer must notify to IRD by submitting Form IR56E. This report should consist of the staff’s full name, address, marital status, date of commencement, and terms of employment.

In addition to the flexibility to choose a calculation method that benefits them most, taxpayers are also eligible for a tax reduction of 75% tax payable with a maximum of HK$20,000 per case under personal assessment.

This is believed to raise the attractiveness of Hong Kong to foreign professionals and talents as a desirable relocation destination.

Property tax in Hong Kong

What is property tax?

Profits gained from renting lands and buildings located in Hong Kong are chargeable for the property tax.

Property owners are taxed at a flat rate of 15 percent from the net assessable value of rental incomes, which include:

• Gross rent received or receivable;
• Payment for the right of use of premises under license;
• Service charges or management fees paid to the owner;
• Owner’s expenditure borne by the tenant;
• Sums previously deducted as irrecoverable rent and now recovered;
• Lump sum premium.

How to calculate property tax

15 percent of property tax is calculated by the net assessable value (NAV) which is computed as below:

In the situation that tenants are unable to pay on time, the receivable income will be subject to property tax. It is not listed as irrecoverable just because the payment is late.

If irrecoverable rent exceeds assessable value (AV), the deduction for the remainder will be conducted next year.

When you recover any irrecoverable rent, the retrieved amount must be included in the AV of the recovery year.

If you are liable for property tax, you must complete the Tax Return:

• Property Tax Return – Property Jointly Owned or Co-owned by Individuals or by Corporations (BIR57)
• Property Tax Return – Corporations and Bodies of Persons (BIR58)

Normally, they are issued by IRD on the first working day of April in the following year of assessment. Then they should be filed on or before the 2nd of May.

As noticed in the property tax assessment, the first payment must be made typically before the end of November in the year of issue, and the second installment falls in April of the next year.

Rental revenues of Hong Kong companies are levied as profits tax. Therefore, they should apply for a property tax exemption.

Government and consular properties are not taxable.

Hong Kong tax system & key payment methods

Generally, Hong Kong tax payments tend to be made in person at the collection places such as post offices, convenience stores, Business Registration offices, and Stamp offices. Additionally, taxpayers in Hong Kong have more options than that:

• Through Post: sending a crossed cheque and payment document to the applicable postal addresses of Commissioners of Inland Revenue. Cash and post-dated cheque should not be dispatched via mailing.
• Through Bank ATM: bringing bills or account numbers to ATM at HSBC, Hang Seng Bank, or JETCO ATM networks and choosing “Bill Payment”.
• Through Internet: using an internet banking account to pay tax to the bank account of Hong Kong IRD. Payment made before the due date is considered on time.
• By Telephone: utilizing a PPS account that is registered with the proper bill. Call 18011 for registration and 18031 for tax settlement.
• From Overseas: paying with crossed cheques or internet banking with a bank account in Hong Kong. Otherwise, IRD accepts bank drafts, crossed cheques, or telegraphic transfers from abroad banks.

People are advised to keep receipts, regardless of which type, as payment proofs. In addition to an advanced tax system, it is a bonus for Hong Kong that there is a variety of comfortable ways to arrange tax payments.

Conclusion

Under the Hong Kong tax system, three popular types of tax that should be taken into account include Profit tax, Salaries tax, and Property tax. Any income that falls outside the scope of those three types of tax is not subject to tax in Hong Kong – i.e., capital gains, interest income, dividend, and sales tax.

The competitiveness of tax in Hong Kong enlightens its temptation to overseas talents and corporations. That is how Hong Kong remains standing at the top of the world’s most fascinating business and relocation countries.

In case of any concerns regarding Hong Kong tax regimes or running a business in general, don’t hesitate to drop us a message via service@bbcincorp.com or type in the chatbox for more specific advice on your conditions!