Hong Kong Income Tax and Taxation System Explained

Did you know that residence is not a determining factor in imposing tax liabilities in Hong Kong? It is for this one reason that many foreign investors and business owners chose to expand their business operations in Hong Kong. 

This article offers an overview of the Hong Kong tax system, so you will know how the system works with determining your income tax liability.

Table of Contents

The Territorial Basis of Taxation

Under the territorial basis of taxation, tax liabilities are determined based on the source of income regardless of citizenship or residential status. On this premise, even a non-resident in Hong Kong is liable to pay taxes for profits gained from profession, trade, or business carried in Hong kong.

Moreover, the Hong Kong government does not impose income taxes on the total income of each individual. Rather, it classifies income taxes under three main categories, which are a) profits tax is imposed on business profits, b) salaries tax on employment income, office or pension, and c) property tax on rental income derived from immovable properties.

Hong Kong Income Tax for Foreigners

Are you required to pay taxes if you’re a foreigner living in Hong Kong?

As per Hong Kong’s territorial source principle of taxation, only the profits generated within HK are taxable. This means that you are required to pay taxes for profits derived from the exercise of your profession, trade or business carried in Hong Kong.

Pre-conditions that make you liable to pay taxes

Here are the preconditions that make you liable to pay taxes under Hong Kong’s Ordinance:

• you exercise your profession or carry your trade or business in Hong Kong
• you derive profit from such profession, trade, or business, and
• the profits are generated within Hong Kong

In line with these preconditions, how does+ the Inland Revenue Department determine the source of these profits?

The authoritative courts in Hong Kong presented these determining factors:

Matter of Fact

Determining whether a profit should be considered to be derived from a certain jurisdiction is a practical matter of fact. Classifying an income as something derived within Hong Kong requires examining the nature of the transactions associated with such profits.

For example, the Hong Kong Inland Revenue Department generally considers remuneration paid within Hong Kong as taxable on the basis that this explicitly denotes employment in Hong Kong.

The Operations Test

Under the operations test, the principle is to examine how the taxpayer derived the profit. This includes looking into the operations that generated the profits in question.

Note that to determine tax liability, it is important to establish that the operations of the taxpayer gave rise to the profit.

Antecedent or incidental activities

The geographical location of the profit-generating activities is the determining factor, rather than the activities that are antecedent or incidental to the event.

Place where the decision is made

While this is not the primary deciding factor in establishing tax liability, it helps to consider the place where business decisions and investments are made.

Gross profit transactions

Examining the gross profits arising from specific transactions helps in distinguishing whether a profit is taxable in Hong Kong.

Business presence overseas

Profits tax is chargeable in Hong Kong in instances where the business does not have a business presence overseas and its principal place of operation is in Hong Kong. However, the absence of a business presence overseas does not automatically mean that all the profits of a business in Hong Kong are generated within the HK SAR.

Bonus tips for foreign companies

In recent years Hong Kong government have increased deductions and allowances. Many incentives encourage investment. Hong Kong’s taxation system has long been an effective, competitive, and efficient system for both locals and foreigners. Even foreign companies can request assistance from the Chamber of Commerce or international grants etc. The taxation of assessable profits for corporations is 16.5%. There exist several tax incentives that are available for particular businesses such as tax exemption for income generated from foreign money or profits generated from the operation of ships in Hong Kong.

Hong Kong Capital Gains Tax

The tax laws of every city or country are unique to its government. One thing that differentiates the tax law of Hong Kong SAR is that its government does not impose capital gains tax.

Capital gains tax refers to taxes charged on income derived from an investment that arises from the disposal of real estate, stocks, and bonds.

Hong Kong does not impose capital gains tax based on the premise that HK favors a simple tax structure. The idea is to minimize taxes imposed on individuals and businesses to maximize economic efficiency. Hong Kong is known as an international trade hub for its policy that supports minimal taxation.

Since the 19th century, Hong Kong was an attractive trade center because of its non-existent tax policy. It was only after the Second World War that a temporary taxation system was put in place as an essential mechanism to raise funds.

The Inland Revenue Ordinance was established in 1947 to strengthen the income tax system. Mirrored on the tax map developed by Britain for its colonies, income tax in Hong Kong was capped at 10 percent. It was also during this time that Hong Kong gained its status as a modern metropolis that caters to international trade.

To this day, HK’s tax policy created in 1947 remains largely the same.

Gains from the disposal of assets

While Hong Kong SAR does not impose taxes on capital gains, you are obliged to pay taxes on gains derived from the disposal of assets in Hong Kong.

So, how do you distinguish a capital gain from a business income?

Here are the factors to keep consider:

• if the gain arises from the normal course of business, then most likely it is a business income
• if the nature of the transaction frequently occurs, then the gain is most likely a business income
• the nature of the business is another factor to consider to determine whether the gain should be taxed or not.

Determining liability of trading firms

The profits of trading firms are taxable under the provisions of the IRD if the contracts for purchase and sale are effected in Hong Kong.

A transaction is “effected” means that the terms of the contract are legally negotiated, executed, and concluded in Hong Kong. According to the Inland Revenue Department, the proper way to look at the profits of trading firms is to examine all the relevant operations performed to earn the profit, rather than simply considering the location of purchase and sale of the goods.

How do you determine relevant facts?

Determining the relevant facts includes examining the nature and quality of events that gave rise to the profit.

Here are the general practice in deciding whether a profit is taxable in Hong Kong:

• Generally, a profit is taxable if purchases and sales are effected in Hong Kong. However, the transactions are still subject to examination to determine the actual source of profits;
• Where the sales transaction is made with a Hong Kong customer, the sale is considered as having been carried out in Hong Kong;
• A profit is taxable if it is carried out within Hong Kong, even by the use of electronic messaging. This is, however, provided that the transaction does not require traveling outside HK;
• Profit is not taxable if purchase and sale are effected outside of HK’s jurisdiction.

Determining tax liability of manufacturing businesses

Still based on the territorial principle of taxation, the net chargeable income of manufacturing businesses is taxable based on where the goods are manufactured. This means that profits tax is computed on income from the sale of goods manufactured in Hong Kong.

Treatment of other profits

Here are some of the tests you can use to determine the taxability of a specific profit in Hong Kong:

Inland Revenue Department

The Hong Kong SAR recognizes that taxpayers play a significant role in HK’s economic growth. To enhance Hong Kong’s growth and economic development, the Inland Revenue Department was established to promote a high standard of tax administration in Hong Kong.

The Inland Revenue Department’s core functions include the following:

• ensure tax compliance in Hong Kong through the enforcement of proper tax laws, public education, and programs for the masses
• create and maintain an effective and efficient tax collection system in Hong Kong
• equip the IRD staff with the required skills, experience, and knowledge to carry out their duties and responsibilities
• Serve Hong Kong taxpayers, specifically in relation to challenges associated with Hong Kong taxes.

And should you have tax-related issues in Hong Kong, we at Reachtop KSHK CPA are always willing to help. You can expect us to provide excellent tax solutions in accordance with Hong Kong tax laws.

Salaries Tax

If you are a foreigner coming to work in Hong Kong, you will need to learn about the salary tax rate, tax allowances, deductions allowed for employees, tax benefits for employers, and the documents required in filing tax returns.

The charge to salaries tax

The Hong Kong salaries tax is assessed each year on net income derived from employment. As per the IRD rulings, a year of assessment starts from 1 April to 31 March of the succeeding year.

The net chargeable income tax of an employed individual in Hong Kong depends on the following factors:

• net assessable income in a tax year, and this includes salaries, commissions, bonuses, personal allowances, leave pay, gratuities, and non-cash benefits such as stock-based remunerations.
• allowed tax allowances
• deductions for approved charitable donations, and education expenses
• if you are a company director, you are liable to pay Hong Kong tax depending on whether you work in an HK office or a non-Hong Kong office
• if you work as an employee, you are liable t pay Hong Kong salary tax depending on whether you are HK employed or non-HK employed.

You can expect to pay salary tax rates at progressive rates based on your net chargeable income. Note that there are 5 marginal tax brackets in Hong Kong for 2018/19 onwards:

• 2%: 0-50,000 Hong Kong dollar
• 6%: 50,001-100,000 HKD
• 10%: 100,001-150,000 HKD
• 14%: 150,001-200,000 HKD
• 17%: 200,001 HKD

How do you calculate the amount of tax you should pay?

The amount of tax you have to pay is the lower between the tax computed on your net chargeable income and the tax charged at the standard rate of your net total income.

To calculate your net chargeable income:

Total income – deductions – allowances = Net chargeable income

Your net chargeable income is charged with the progressive rates to come up with your tax liability for the assessed year.

To calculate your net total income:

Total assessable income – deductions= Net total income

Note that the standard rate to compute for the tax payable is 15%. In fact, the maximum tax payable is limited to 15% of the total income less allowable deductions, and charitable donations such as a contribution made to a mandatory provident fund scheme.

The Revenue Department provided a simple tax calculator for taxpayers to perform personal assessments and compute their tax liabilities.

How to use the IRD tax calculator to compute personal income tax

Remember that the tax calculator will simply provide an estimate of your profits tax for the tax year. Its accuracy depends largely on the correctness of your input, such as your income figure, deductions, allowances, marital status, and a number of dependents.

Here are the steps to compute your Hong Kong salaries tax:

1. Click on this link to the tax calculator;
2. Select the link for the year of assessment under question;
3. Select your marital status;
4. Input your total income and other relevant information on the input page;
5. Click the “Compute” button;
6. Expect to be directed to another page that will show your estimated tax payable.

How to treat employer benefits for tax purposes in Hong Kong

All monetary and non-monetary benefits you receive with respect to your employment are subject to personal income tax.

Some of these benefits include:

• accommodation and housing
• education benefits
• car provided by the company
• travel allowances
• Share options

How to file your personal tax return

As a gainfully employed individual in Hong Kong, you are required to file your annual tax return with the IRD. You can expect to receive individual tax returns from the IRD on or before May 1 and have a month to fill out and submit the form from the issue date.

One thing to remember, as per the IRD, you are still required to fill out and send back your tax return regardless of whether you earned an income or not.

Option for separate taxation or joint assessment is available to married couples. You can elect for a joint assessment if you think a single assessment of your combined income will result in reduced income tax.

FAQs

I work in the US under an American company. My employer assigned me to work for our company’s branch in Hong Kong as a full-time employee. How would I be taxed for my services rendered in the HK branch?

As you are assigned as a full-time employee in Hong Kong, you are considered under Hong Kong employment and will be liable to pay salary tax on your full income.

Was it always the policy of Hong Kong to impose minimal taxes?

Individuals and businesses in Hong Kong enjoy low taxes. This privilege is partly because of HK SAR’s sufficient fiscal reserves that earn interest enough to generate income for the government and keep taxes low.

What is a provisional tax?

Taxpayers are required to pay income taxes on their assessable income for a specific year of assessment.

Since the amount of assessable profit is available only by the end of the tax year, an estimated tax amount based on the previous tax year will be used.

The estimated tax liability is referred to as provisional profits tax to be paid in two installments.

Every taxpayer in Hong Kong is required to pay provisional tax. The only exemption is if you opt for a personal assessment of your tax, or if you have lodged and succeeded in applying for a holding over of your provisional tax.

Why do I need to secure a tax clearance in Hong Kong?

The Ordinance of Hong Kong requires taxpayers who intend to leave HK to secure a tax clearance before leaving.

Does Hong Kong tax worldwide income?

No. Hong Kong SAR follows the territorial basis of taxation, which means it does not impose taxes on profits derived overseas. Even Hong Kong resident corporations are not obliged to pay taxes on their income derived abroad.

Do foreigners pay taxes in Hong Kong?

Yes. Hong Kong imposes taxes on individuals and businesses, including foreign individuals and businesses.

What are the types of income considered “earned in Hong Kong”?

Your full employment income is subject to salaries tax if you are employed to render services for a Hong Kong company in Hong Kong.

However, there are instances when you can claim for either a full or partial tax relief on your employment income.

For example, you are exempt from paying employment income tax if you rendered your services outside of Hong Kong during the year of assessment under question.

Hong Kong has a favorable tax system that prevents double taxation. For instance, you can claim a partial tax exemption if you have already paid tax on your income in another jurisdiction during the year of assessment.

If you work for an overseas company but are assigned to work in HK, you are only obliged to pay taxes on income attributed to the services rendered in Hong Kong.

Is Hong Kong a tax-free country?

Hong Kong is not a tax-free country but is considered a tax haven for its efficient tax system and minimal taxes imposed on individuals and businesses.

It is an attractive business center that does not impose capital gains tax, withholding tax, estate tax, dividend tax, sales tax, and interest income tax.

What is the Hong Kong 60-days rule?

The general rule is that any person who derives income in Hong Kong is obliged to pay tax. In line with the territorial system of taxation, even a non-Hong Kong resident is liable to pay tax on income derived from services rendered within HK SAR.

The 60-days rule, however, presents that a non-Hong Kong resident who visits HK for 60 days or less in a tax year is exempted from paying salaries tax on the entire employment income.

Note that the 60-day rule is applicable only to individuals who receive employment income and does not apply to director’s fees.

Wrap Up

If you are a foreigner working in Hong Kong, you will find that the tax system is different from what you are used to in your home country.

We at Reachtop KSHK CPA understand that filing and paying your tax can be overwhelming.

Feel free to call and schedule a free consultation with us.

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