Taxation in Hong Kong
An attractive Tax System
The major attractions of Hong Kong's tax system to foreign investors and businessmen - and in turn major reasons for their increasing presence and contribution here - are the following:
- The low rate of tax on profits
- The fact that only income and profits derived from Hong Kong are subject to tax
- That there is no tax on capital gain, dividends or interest
- The generous capital allowance
The current profits tax rate is 17.5% for corporations and 15.5% for non-corporate taxpayers. Personal tax is therefore also among the lowest in the world.
Hong Kong has a simple schedular system of tax, in which only specified types of income, namely profits, salaries and property rental income, are taxable. This is different from an income tax system, under which a person is subject to tax on his aggregate income from all sources.
Territorial Source Concept
Taxation in Hong Kong is based on the territorial source principle. Hong Kong companies only pay tax on profits sourced in Hong Kong and the rate of taxation currently is 17.5% on assessable profits. A company pays no tax in Hong Kong on income derived from outside Hong Kong. To enhance certainty in the operation of the territorial source concept, there is also the possibility to obtain an advance ruling on source of profits.
Hong Kong companies are therefore ideal vehicles for international trading or consulting activities which are not sourced in Hong Kong and therefore can be conducted free of tax. The same is true for companies holding real estate which is located outside Hong Kong.
Salaries tax is also only charged on Hong Kong sourced salaries. Expatriate employees who visit the territory for less than 61 days in a tax year are not liable to salaries tax. Employees who have paid tax of substantially the same nature as Hong Kong salaries tax in any territory outside Hong Kong are also exempt in respect of their foreign service income.
However, withholding tax on royalties does apply, currently at 30% of the usual tax rate, i.e. at an effective tax rate of 5.25%, and is only imposed on royalties paid to non-resident recipients not related to the payers. If they are related parties then a tax rate of 17.5% is applicable.
The Hong Kong tax system is also attractive because many taxes present in other jurisdictions are absent: gains from the sale of capital assets are not subject to tax; there is no withholding tax on dividends paid by Hong Kong companies; interest tax was abolished on 1 April 1989.
Generally all expenses, to the extent to which they have been incurred by a taxpayer in the production of chargeable profits, are allowed as deductions. Examples include interest on borrowed funds and repairs for plant and machinery used in producing profits. Losses can be carried forward and set off against future profits of that business. A corporation carrying on more than one trade may have losses in one trade offset against profits of the other. Generous capital allowances are given in respect of capital expenditure incurred on the construction of industrial and commercial buildings and structures and capital expenditure incurred for the purposes of producing chargeable profits. In the case of capital expenditure on the acquisition of plant and machinery, generous depreciation allowances are also provided.
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