Taxation on income in Hong Kong is imposed by the Inland Revenue Ordinance ("IRO"). There are three separate types of tax - Profits Tax, Salaries Tax and Property Tax.
Liability to tax will arise, as a general rule, when certain types of income have their source within Hong Kong. In general, income which arises or is derived from outside Hong Kong will not be assessed to tax by the Hong Kong Inland Revenue Department.
2. Principal Taxes
Profits Tax is charged on every person or company carrying on a trade, profession or business in Hong Kong in respect of assessable profits arising in or derived from Hong Kong from the carrying on of that trade, profession or business in Hong Kong. For a Profits Tax liability to arise, a person has to carry on business in Hong Kong and have a source of profits arising in or derived from Hong Kong. Certain sums are deemed as sums arising in or derived from Hong Kong (for example, payments for use in Hong Kong of trademarks and patents or overseas interest income paid to a financial institution carrying on business in Hong Kong). A tax payer is entitled to deduct from gross income all expenditure incurred in the production of assessable profits. Also deductible are certain depreciation allowances for industrial buildings and structures and plant and machinery. Losses may be carried forward without limit.
Salaries Tax is charged on every person in respect of that person's income arising in or derived from Hong Kong from any office or employment of profit. Income includes all wages, bonus, allowances and leave pay but does not include income derived from services rendered entirely outside Hong Kong. Income also includes the rental value of a residence provided by an employer to the employee and the value is deemed to be 10% of the total income paid by the employer to the employee.
Property Tax is charged on every person who owns any building or land situated in Hong Kong and is computed on the rent payable in respect of such land and buildings for each year of assessment. Any company owning property may apply for an exemption from Property Tax. In such a case, the income earned in respect of the property is brought into charge for Profits Tax purposes unless the company itself occupies the property for the purpose of producing profits which are assessable to Profits Tax.
3. Current Rates of Taxation
Profits Tax: The Profits Tax rate is 16.5% in the case of limited liability companies and 15% in the case of partnerships and sole proprietors.
Salaries Tax: Salaries Tax is calculated on a sliding scale from 2% to 20% on net chargeable income but subject to the proviso that total tax cannot exceed 15% of the assessable income before deduction of allowances.
Property Tax: Property Tax is charged at a rate of 15% less an allowance of 20% of the rent for repairs and maintenance.
4. Tax Treaties and Foreign Taxes
Hong Kong has no double taxation treaties with any other country and Hong Kong sourced profits are taxable in Hong Kong whether or not overseas tax has been paid. Limited credits are given for certain Commonwealth income taxes.
5. Tax Administration and Compliance
The tax system prescribed by the IRO is administered by the Inland Revenue Department ("IRD"), which issues tax returns and raises assessments based on the information filed. Assessments show the amount assessed, the tax payable and the due date for payment. There are no prescribed due dates for payment of tax; taxpayers are notified of the due dates in their own assessments.
The Hong Kong fiscal year-end is 31st March but liability to Profits Tax is based on the results of the accounting year ending in that year of assessment rather than on profits arising during the actual fiscal year.
Taxes not paid on the prescribed due dates are subject to an immediate 5% surcharge (10% if the failure extends to more than six months).
6. Other Taxes
6.1 Stamp Duty
Stamp Duty has limited application and is levied primarily on assignments of immoveable property in Hong Kong and transfers of Hong Kong shares. The rate of duty on property transfers is calculated on a sliding scale, the top rate of which is 2.75% of the higher of the value of the property and the price paid on the transfer where the value/price paid exceeds HK$3 million. The rate of duty on share transfers is 0.3% of the higher of the value of the shares and the price paid on the transfer.
6.2 Capital Duty
Capital duty is payable to the Companies Registry on the creation of authorised capital of a company (whether or not it is issued) at the rate of HK$6 per HK$1,000.
6.3 Business Registration Tax
Every business carried on in Hong Kong is required to be registered with the Business Registration Office. The annual registration fee is HK$2,250 for a principal office and HK$316 for any other office.
Rates are levied on land and buildings on the basis of assessed rateable value for each property.
6.5 Import and Excise Duty
Hong Kong is a free port and has no general tariff on imported goods. However certain goods, for example, alcoholic liquors, tobacco, cosmetics, certain hydrocarbons and methyl alcohol are subject to duty if they are imported or manufactured in Hong Kong for local consumption.
6.6 Estate Duty
Estate Duty is imposed on the value of property situated in Hong Kong which passes on the death of an individual and in respect of certain lifetime gifts of Hong Kong property made within three years prior to death. Estate duty is payable whether or not the deceased is resident or non-resident in Hong Kong. Estate duty is payable on estates exceeding HK$5,500,000 in value. The top rate is 18%.
NOTE: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
If you would like further advice please contact: David Ellis, Johnson Stokes & Master, 16th Floor, Princes Building, 10 Chater Road, Hong Kong; Tel 2843 4226; Fax no. : 2845 9121. Alternatively do a text search "Johnson Stokes and Master" and "Business Monitor"