Hong Kong has aligned its tax policy with its growth-oriented economic goals to become one of the most tax friendly environments in the world, with just three direct taxes, capped at between 15% and 16.5%, with further allowances and deductions possible.
That, and the lack of taxes for VAT, dividends, estate, capital gains and withholding, is why Hong Kong has emerged as one of the preferred locations for most global entrepreneurs. The jurisdiction has also made submitting business tax returns a straightforward process. However, with the vast number of tax incentives implemented in recent years, having local support is essential to ensure tax benefits are maximised.
Recent domestic tax changes
2018 is bringing a change to profit tax rates to ensure the jurisdiction is a competitive and alluring investment destination. The proposed changes include a two-tier escalating arrangement, with the first HK $2 mil (US $0.256 mil) of profits taxed at 8.25% and profits above that amount continue to be subject to 16.5%. However, the tax rates will be 7.5% and 15% respectively for unincorporated businesses that are partnerships and sole proprietorships.
New Research and Development tax deduction incentives provide a 300% tax deduction on the first HK $2 mil of expenditure and the remaining expenditure with 200% deduction.
Timings, process and compliance
Corporate profits tax returns are issued annually by Hong Kong's Inland Revenue Department (IRD) on 1 April, with an expected file date within one month. For newly registered businesses, the profits tax return is issued 18 months after the date of commencement of business or the date of incorporation.
Having a company with local tax and accounting knowledge to facilitate the completion of the four documents the IRD require (such as their specific profits tax return form and their supplementary form for financial and tax data), would be beneficial.
Hong Kong's profits tax is currently a flat rate of 16.5% of assessable profits, subject to the above-mentioned proposal to lower the tax rate for profits of the first HK $2 mil to 8.25%. Tax on foreign sourced income is zero, due to Hong Kong operating a territorial system of taxation.
Hong Kong has no sales tax or VAT.
Salary taxes and social security
Salary tax is your personal taxation and is either taxed at a progressive rate on your net chargeable income, starting at 2% and ending at 17%; or at a standard rate of 15% on net income, whichever is lower. In Hong Kong, individuals are taxed only on income that has been earned in the city.
Capital gains and real estate
Property tax is 15%, calculated on the net assessable value of the property, however there is no capital gains tax. For capital expenditure on refurbishment of business premises, it is possible to write it off over a five-year assessment period. For plant and machinery, an initial 60% deduction is allowed for the capital expenditure, whereas, 20% of the written down value can be deducted for each year. 100% deduction is allowed for computer hardware and software, while 20% deduction each for five consecutive years is allowed for refurbishment expenses.
There is zero tax on dividends, as Hong Kong operates as a single-tier tax system, only taxing businesses once, when they gain the profits, not when they are distributed as dividends.
Customs and excise duty
Hong Kong is known for its easy customs procedures and free port status, both when importing or exporting, with duty paid on very few products. Duty is paid, for example, on liquors and tobacco. In the last few years, duty was dropped for the import of wine and beer, encouraging a thriving wine import, export and storage business.
Contact our local TMF Group experts
TMF Group has the local knowledge to help you identify the relevant tax and accountancy aspects in Hong Kong, and face any challenge or opportunity they may pose for your business. Whether you want to set up in Hong Kong or want to streamline your Hong Kong operations, we have the local knowledge to help. Talk to us today.
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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.