In the following article we will explore the information about Taxation system of Hong Kong that is need to be known before doing business in Hong Kong. The discussion will throw light on the types of tax, monetary and fiscal policy of Hong Kong and last but not least the taxation features of Hong Kong.
Types of Tax
There are different types of tax associated with earning, income and property etc. of an individual or a company. It is better to have access to this information to avoid any legal inconvenience after starting a business in Hong Kong. These tax mainly include salaries tax, profits tax, property tax and stamp duty. Income taxes are applied on the income of an individual or company while profits tax is associated with the profits of individual or company above some predefined threshold from tax department. Property tax is imposed under Inland Revenue Ordinance (IRO) while tax on documents known as stamp duty is imposed under Stamp Duty Ordinance (SDO). Total applicable tax rates on salaries, profits and income would be discussed in subsequent articles. There were also some additional taxes as interest tax and estate duty, that were abandoned later by the Government. The interest tax was eliminated from 1 April 1989 with effect from the given date. While, estate tax was eliminated from the deaths occurring after 11 February 2006.
Hong Kong Fiscal Policy
The fundamental law of Hong Kong Special Administrative Region aka (HKSAR) of People’s Republic of China (PRC) follows the basic principal of ‘One Country, Two Systems’. So under this principal the basic law of Hong Kong Special Administrative Region states clearly:
The HKSR shall have independent finance.….. …….taxes in HKSAR. (Article 106)
An independent taxation system will be practice by HKSAR. As unification is being done in tax laws and regulations and after complete unification, regulations and tax laws that are made in Mainland of China would not be applicable to Hong Kong.
Main Features of Hong Kong Taxation
For some individual or corporation to open company in HK, it is necessary to get familiar with main features of Hong Kong Taxation System. In this section we will discuss these features that are key parts of Hong Kong Taxation System.
Source Concept of Territory
As in many other countries in world, to charge Income taxes on different means of income like salaries, profits, and property etc. the source of income should belong to that country. So, in Hong Kong Income taxes are also applicable to only those incomes which have Hong Kong source. Instruments are subjected to stamp duty if these are related to assets of Hong Kong. There is no discrimination in the form of residence status that effects tax liability of taxpayer. But there are also some special cases where it may affect like election for self-evaluation and owners of ship or aircraft etc.
System of Scheduler Tax
As stated earlier, income tax is imposed under separate headings and include salaries tax, profit tax and property tax.
There can be the scenarios where a taxpayer individual can have more than one sources of income. In that case he/she has option of personal assessment in which he/she can have all assessable income from all sources aggregated together as whole. So, instead of applying tax on each individual resource it is applicable on aggregated incomes/profits.
Direct Assessment of Taxes
There are some taxes that are collected from the taxpayer directly without involvement of an external agent but for some of taxes there is relaxation for taxpayer to submit it personally or by having the services of agent. Income taxes that are levied under the Inland Revenue Ordinance (IRO) are assessed and demanded directly from concerned taxpayer. There are some profits tax on certain income of non-residents where tax can be collected by taxpayer directly or through agent like in case of royalties or income received from an agent.
Standard Rate Limitation
As far as tax rates are concerned, taxes on profits and property are not charged beyond a fixed standard rate. Tax rates are calculated and applied on progressive basis in cases of salaries tax and personal assessment, but there is a defined standard rate on the net assessable income hence overall tax before deduction of personal allowances cannot exceed that standard rate.
Low Rates of Tax
Tax rates are not same for each assessment year and are reviewed if necessary. It is key point to note here that tax rates are usually kept low in Hong Kong like for the assessment year 2015/2016 the standard rate was 15% and corporation profit tax rate was 16.5% and these rates are relatively low as compared with the other developed countries.
Capital Gains Inapplicable Tax
The tax that is charged on the clearance of capital asset or profit on sale is regarded as Capital gains tax. There are many countries (e.g. UK, Canada and Australia) that impose capital gain tax, but as stated earlier in introduction, Hong Kong does not impose this tax. So, doing business in Hong Kong saves your company’s capital from capital gains tax.
Tax Free Dividend Income
Profit tax is not applicable on the income that is to be distributed among the shareholders.
The business registration certificate Hong Kong is necessary for a business to get registered with Tax department. Business would only be legal if it would have that certificate
Inland Revenue Ordinance (IRO) Basic Terms
Explained below are, some basic terms that are associated and used exclusively with Inland Revenue Ordinance.
Year of Assessment (YA)
The year of assessment (YA) also called monetary year, starts on 1 April of each year while ends on 31 March of next year. For example, the assessment year 2017/2018 started on 1 April 2017 and will end on 31 March 2018, from 1 April 2018 onward assessment year 2018/2019 would be started.
Basic Period (bp)
Basic period is usually determined on the income or the profits of year for which accounting is done. For basic period of time an individual or company pays tax. Basic period (bp) is same as YA by excluding the profits tax.
Chargeable or Taxable Persons
The persons that are responsible to pay tax are regarded as chargeable persons. As there are three types of income tax (property, salaries and profits) so chargeable persons of these taxes are discussed below.
Chargeable persons for property tax are those who own land or buildings in Hong Kong.
Chargeable persons for salaries tax are those who earns from employment, office or derive pension from Hong Kong.
Chargeable persons for profits tax are those who carries on commerce, business or profession as a mean of earning in Hong Kong.
Person
In terms of Inland Revenue Organization (IRO) world ‘person’ is not as simple as in common term as it may include a firm, partnership, administrator or body of persons. An administrator or trustee can be an unincorporated person or corporation.
Personal Allowances
Inland Revenue Authority prescribes a specific amount that are exclusively allowed to be charged from taxable income of a married couple under salaries tax, an individual and personal evaluation for purpose of tax estimation.
Tax
The title represents any tax that is imposed by Inland Revenue Authority (IRO) on the taxpayers. But on the other hand some additional taxes do not fall under this category. These additional taxes would be described later in subsequent sections.
Tax Rates
Three types of tax rates are usually applied on the taxable income and one have to familiar with these before open company in HK.
Given below is the brief description of all three described tax rates.
Standard Tax Rate
This standard rate for tax deduction is applied to
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Progressive Tax Rates
Salaries tax and personal statements are usually subjected to the progressive tax as there can be increment in the salary of an individual or sources of income also may change.
Assessment years | % of reduction | Involvement of final tax | Maximum amount deducted |
2006/07 | 50% | Personal statements and tax on salaries | $15,000 per case |
2007/08 | 75% | Personal statements, salaries tax, profits tax and personal tax | $25,000 per case |
2008/09 | 100% | Personal statements and tax on salaries | $8,000 per case |
2009/10 | 75% | Personal statements and tax on salaries | $6,000 per case |
2010/11 | 75% | Personal statements and tax on salaries | $6,000 per case |
2011/12 | 75% | Personal statements, tax on salaries and profits tax | $12,000 per case |
2012/13 & 2013/14 | 75% | Personal statements, tax on salaries and profits tax | $10,000 per case |
2014/15 | 75% | Personal statements, tax on salaries and profits tax | $20,000 per case |
Given below is table that demonstrate the comparison of progressive tax rates for different assessment years. For some year’s assessment there were also reduction to final payable tax.
Tax Rate on Corporation Profits
In order to calculate the profits tax, the corporation profits tax is just applicable to a corporation’s net assessable profits.
Given below is table that demonstrate the comparison of corporation profits tax rate for different assessment years.
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Judicial and Administrative Organizations
Administration of income tax in Hong Kong is managed by involvement of some bodies that are responsible directly for managing this department of state.
Given below is the brief discussion on the authorities of these administrative organizations.
Inland Revenue Department (IRD)
Functions of Inland Revenue Department (IRD) are given below:
IRD is responsible for collecting different types of taxes and fees that include duty on betting, tax on hotel accommodations, tax on profits, stamp duty, property tax and salaries tax.
IRD is managed by a commissioner, known as commissioner of Inland Revenue (CIR). Deputy commissioners of Inland Revenue Department (dCIR), assistant commissioners, chief assessors, senior assessors and assessors all provide assistance to the commissioner. All of these officers are appointed directly by chief executive. Other than these officers there are also technical officers like inspector and taxation officers.
As this is very sensitive department due to its duty to collect tax from the state so official secrecy is insured in order to keep the privacy of taxpayers.
It is duty of person who is appointed under the IRO or the one who has been appointed in carrying out or assisting someone to carry out the provisions of IRO, to preserve the secrecy of all the matters related to affairs of any individual or company that were exposed to him during his/her duties under IRO.
Board of Review (BoR)
Chief executive is again responsible for appointing a panel for board of review that includes chairman, a number of deputy chairmen and other members. There can be no more than 150 members excluding chairman and deputy chairmen. It is mandatory for chief executive to appoint the member of panels for a term of at least three years. Members of panel should be eligible for re-appointment.
Functions of board of review (BoR) are given below:
Board of Inland Revenue (BIR)
All the members of BIR are also appointed by the chief executive. Panel for BIR comprises of 5 members including financial secretary and four other members. Commissioner Inland Revenue (CIR) is also a member of BIR while deputy commissioners is the secretary of BIR.
Functions of board of review (BIR) are discussed below:
Other than primary responsibilities, BIR may perform some other functions like, to prescribe that what procedure need to be followed while applying for refunds and consolation etc. through application.
