In this blog we will explore that under what circumstances a corporation or group of people owning a land and / or business in Hong Kong is exempted from the property and profits tax under Hong Kong tax law. Then we will be seeing, when property tax is applicable to the resident of Hong Kong in actual and the obligation of property owners in term of completing the tax returns. We will be starting with an example.
Considering an example, the assessment of property tax for the assessment year 2014 to 15 has to be calculated according to the procedure given below:
Assessment year 2014 to 15 (revised)
Basic period: 1 April 2014 to 31 March 2015
Assessable value (12 * $ 15,000) $ 180,000
Less: rates paid by Mr. Wong $ (4,000)
Bad debt $ (45,000)
Less: Statutory deductions (20 % * $ 131,000) $ (26,200)
Net assessable value $ 104,800
Property tax thereon (15 % * $ 104,800) $ 15,720
Net Assessable Value
Under the Section 5 (1A) (b) (ii) of Hong Kong tax law, a statutory deduction for outgoings and repairs of 20 % is to be deducted from the assessment if the assessment value is positive after deduction of rates (if applicable) and bet debts that are eligible (if applicable) to reach at net assessable value. Under the property tax no other deduction of any type is allowed.
In a case D 46/12 it was observed that, a deduction was claimed by T for the purpose of government tax, management fees and repairs under property tax for Hong Kong holding company formation or any other purposes. It was the stance of T that, under Section 5, 20 % statutory deduction is only applicable to landlords that are of ordinary class. So according to him it would be unfair to apply such deductions on landlords like him, whose properties were situated in buildings which had gone through major repairs. The appeal of T was dismissed by board of revenue as the Inland Revenue department have right to follow the statutory provisions of 20 % allowance.
Property Tax or Profit Tax
In case of profit tax, it would be implemented on the rental income from buildings and lands if the income is carried on by recipient that is received as a consequence of business or trade.
The amounts as discussed below, to the carrying on of a business or trade:
In the situation discussed above, all the recipients of rent other than those discussed in second category may have been required to pay tax on property. Although the consideration leasing is allowed to tax on profits.
After the allowance of an exemption, CIR must be notified by the corporation within the 30 days after change of ownership or in case any other conditions that effected the exemption under Section 5 (2) (c). Any property tax that is paid against the profit tax that is payable can be set-off by a corporation if no exemption has been asked given that any one of two conditions for exemption from such property tax is satisfied under Section 25.
In a case of Harley Development Inc. it was observed that, in consideration of a once-and-for all premium having worth of $ 119 million, the lease was granted by taxpayer Company for 30 years to HSBC. The sum to profits tax was assessed by the Inland Revenue department but finally it was agreed that these sum to profit tax was not allowable to salary tax probably due to the reason that it was capital in nature, so sum was assessed for property tax. Under the Section 5 (2) (a), the company applied for judicial review and main reason behind it, was that sum should be exempt from property tax. It was observed from the case that a sum having capital nature and thus exempted from tax on profits that allowed to property tax.
In a case D 84/04 it was observed that, a telecommunication company was granted the access by a club to use its sites to install the equipment for the sake of doing business in Hong Kong in the field of communication technologies. The considerations that were received by the club as a result of leasing its premises were allowed to property tax, as the club was part of a corporation. Under Section 24 (1), the club was exempted from the profits tax. It was ruled by board of revenue department that the exemption was not allowed for the club under Section 5 (2) and it was chargeable to profits tax.
Partnerships and Sole Proprietors
From the profits tax payable, the property tax payable or paid can be deducted if:
The excess will be refunded in the case if paid property tax exceeds the liability of profit tax.
The Section 25 allows setting-off, not to be exempted. It is still required by the owner to pay tax on property first and then to claim a refund or set-off.
Discussing an example to understand such situation, a company named as J Ltd. It was incorporating its business in Japan. A warehouse was purchased by that company in Hong Kong and an unrelated property agent was appointed by that company to look for the tenants and to collect the rent from those tenants on behalf of the company. In respect of the leasing total rental income of worth $ 2,000,000 was received by the company during the year ended 31 March 2016. There were no other business activities of J Ltd. in Hong Kong but under Section 2, it was seen of carrying a business in Hong Kong. This consideration was due to the fact that company had let a non-moveable property in Hong Kong for rental income. For the assessment year 2015 to 16 J. Ltd. was liable to pay the tax on profits in respect of its warehouse in Hong Kong. It was not realized by J. Ltd. that it can claim the exemption from the property tax under Section 5 (2) (a), so it paid the property tax of amount $ 240,000 i.e. (80 % * 15 % * $ 2,000,000) for the assessment year 2015 to 16.
It was incurred by J. Ltd. that its allowable business expenses were $ 800,000 that also included the commission which paid to property agent for the year ended 31 March 2016. For the assessment year 2015 to 16 J. Ltd. was payable to profits tax of $ 198,000 i.e. (16.5 % * ($ 2,000,000 - $ 800,000)). Set-off of property tax that was paid against the tax on profits payable under Section 25 can be claimed by J Ltd. such that refund of an amount of $ 42,000 (i.e. $ 240,000 - $ 198,000) can be claimed by it.
Responsibilities of Property Owners
It is required by a property owner to: