Hong Kong is a tax-free port. As such, in general, there is no Hong Kong tax on goods except for alcohol and tobacco. However, all retail businesses in Hong Kong will charge a minimum levy of HK$0.50 for each plastic shopping bag provided to customers in order to reduce waste. Here is an overview of Hong Kong Tax System.
Hong Kong imposes tax on a territorial basis and can be generally classified as: (i) direct tax – including Salaries Tax, Property Tax and Profits Tax; and (ii) indirect tax – including Stamp Duty and Betting Duty.
Hong Kong’s low tax rates along with good infrastructure, freedom from government interference and substantial available capital make it attractive to potential investors, and thus competitive with other countries in the region.
Having said that, although the tax rate in Hong Kong is relatively lower in comparison to other OECD countries. However, Hong Kong’s tax rate is still considered to be higher than those countries with the tax haven status. In addition, Hong Kong tax system is much more transparent in comparison to tax haven countries. As such, Hong Kong is not a tax haven.
The main legislations governing Hong Kong tax are the Inland Revenue Ordinance and Stamp Duty Ordinance. In addition, there are other tax legislations that makes up Hong Kong tax, such as Hotel Accommodation Tax Ordinance, Betting Duty Ordinance and Tax Reserve Certificates Ordinance.
The Hong Kong tax department is called the Inland Revenue Department, and is responsible for the administration of :
- Betting Duty Ordinance
- Inland Revenue Ordinance
- Stamp Duty Ordinance,
- Tax Reserve Certificates Ordinance
- Business Registration Ordinance
- Hotel Accommodation Tax Ordinance.
Hong Kong imposes income tax on a territorial basis. The Hong Kong Inland Revenue law charges income from an office, an employment or a pension for salaries tax purposes, profits from a trade or business to profits tax and income from real estate to property tax, Any income that is not within any one of these categories or is derived outside Hong Kong is not subject to Hong Kong tax.
There are three types of tax return in Hong Kong, namely, (i) individual tax return, (ii) profits tax return, and (iii) property tax return. The tax returns are issued annually. Upon receipt of the tax returns, the taxpayers are required to report its relevant tax obligations in the tax returns by a specified deadline stipulated in the tax returns.
A tax year (year of assessment) for the purpose of Hong Kong Salaries Tax is a period of 12 months, from 1 April to the 31 March of the following year. Therefore, a tax year for the purpose of Hong Kong Profits Tax is a period of 12 months based on the company’s calendar year or the fiscal year.
Hong Kong Inland Revenue Department does not issue TIN, instead the IRD uses Hong Kong identity numbers (for individual taxpayers) and business registration (for corporate taxpayers) as the TIN.
Individuals are taxed at progressive rates on their net chargeable income at 2%, 6%, 10%, 14% and 17%, or at a standard rate of 15% on net income, whichever is lower.
From year of assessment 2018/19 and onwards the Hong Kong tax brackets for individuals are:
- First 50,000 @ 2%
- Next 50,000 @ 6%
- Next 50,000 @ 10%
- Next 50,000 @ 14%
- Remainder @ 17%
From year of assessment 2018/19 and onwards the Hong Kong tax brackets for Corporations (under the two-tiered rates) are:
- Up to HK$2,000,000 @ 8.25%
- Any profits over HK$2,000,000 @ 16.5%
From year of assessment 2018/19 and onwards the Hong Kong tax brackets for unincorporated business (under the two-tiered rates) are:
- Up to HK$2,000,000 @ 7.5%
- Any profits over HK$2,000,000 @ 15%
Further, due to the fact that Hong Kong tax is considered as one of the lowest taxes in the world, there is no tax-free threshold. Having said that, taxpayer is only required to pay 2% tax on first HK$50,000 net chargeable income.
Hong Kong Salaries Tax payable is calculated at progressive rates on the net chargeable income or at a standard rate on the net income, whichever is lower. For the purpose of Hong Kong Salaries Tax payable, net chargeable income equals total income minus deductions and allowances. Whereas, net income equals total income minus deductions.
Hong Kong Profits Tax payable is calculated at standard rate on the assessable profits. For the purpose of Hong Kong Profits Tax payable, assessable profits equals net profits less various adjustments.
Hong Kong provisional tax is an estimated tax charged for the ensuring year that is likely to be owed by a taxpayer for a year of assessment. Any taxpayer is chargeable to tax must pay provisional tax as demanded, unless the taxpayer has elected for personal assessment or has successfully applied for holdover of provisional tax.
Taxpayers anticipating a drop in their income or profits or facing financial difficulties in settling their tax bills may apply for holding over of provisional tax or payment of tax by instalments. If there is an anticipated drop in the income, the drop must be less than 90% of the income for the year proceeding the year of assessment.
Assessment demanding final tax and notice for payment of provisional tax, also known as, demand note, tax assessment, is the official document issued by the Hong Kong Inland Revenue Department to the taxpayers for the amount of tax to be paid for the relevant period, after relevant tax return is filed. The demand note/tax assessment, in general, contains brief description of the basis of the assessment, total amount of tax payable and the respective amounts payable under the 1st and 2nd instalments, the due date, tax computation, and standard assessor’s notes.
Upon receipt of the tax demand note (tax assessment), the taxpayers have within one month to make an objection if they are unsatisfied with the demand note/tax assessment. If no objection is made within one month time limit, the demand note/tax assessment will become final and conclusive.
The tax payable will depend on the taxpayers’ chargeable income. The amount of tax payable and the due date are stipulated in the tax assessment issued by the Hong Kong Inland Revenue Department. The tax payable is usually divided into two instalments.
Under the Hong Kong tax law, any person chargeable of tax and intending to leave Hong Kong shall notify the Inland Revenue Department not later than one month before the expected date of departure. Upon receipt of the notification, the Inland Revenue Department will then decide whether the person leaving is require to settle all tax liabilities prior to departure.
In general, tax overpaid will not be refunded to taxpayers unless, it is the final year where the taxpayers clear all their tax obligations. Instead of a tax refund, any tax overpaid in a year will be used to offset any tax payable in the preceding year.