Low taxes, an easy-to-follow tax regime, generous tax allowances and no capital gains tax make Hong Kong one of the most attractive tax regimes in the region. There are no withholding taxes and profits can be remitted anywhere in the world. The Hong Kong dollar is freely convertible.
THE TAXATION SYSTEM OF HONG KONG
Hong Kong operates a territorial basis of taxation under which taxes are imposed only on profits or income with a Hong Kong source.
The principal direct taxes are profits tax, salaries tax and property tax. The Inland Revenue Department is responsible for taxation matters in Hong Kong.
- Profits Tax
- Salaries Tax
- Profits tax is charged on profits arising in or derived from Hong Kong by means of a trade, profession or business in Hong Kong.
- Profits tax is charged on corporations at 17.5%
- It is charged on persons other than corporations at a standard rate of 16% (for 2004/05).
- There is no withholding tax on dividends paid by corporations
- Dividends received from corporations are exempt from profits tax
- There are no taxes on capital gains
- Interest income from deposits placed locally with authorised banking institutions by corporations and individuals, other than financial institutions, are exempt from profits tax
- Concessionary rate of 8% for profits from qualifying debt instruments issued in Hong Kong
- Concessionary rate of 8% for the profits of professional reinsurance companies authorised in Hong Kong from the business of reinsurance of offshore risks
Losses may be carried forward indefinitely for tax deduction
- For capital expenditure incurred on the construction of industrial buildings and structures, an initial allowance of 20% of such capital expenditure is made in the year of expenditure, with an additional 4% annually thereafter until the total expenditure is written off
- There is also depreciation allowance for commercial buildings at an annual rate of 4%
- Capital expenditure on refurbishment and redecoration of buildings and structures is amortised over five years, based on a 20% straight-line annual write-off
Where it is owned by the end user, an immediate 100% write-off is allowed for expenditure on plant and machinery specifically related to manufacturing, and for computer hardware, software and development costs
Other deductible items
- Interest on borrowed funds
- Rent for buildings and land occupied
- Bad debts incurred
- Trademark and patent registration fees
- Scientific research expenditures
- Payments for technical education (subject to rules)
- Contributions to employee retirement schemes (up to 15% of an employee's salary during the assessment period)
Payments for acquisition of patent rights
From 1 April 1998, the scope for deductions for expenditure on scientific research was expanded to cover capital expenditure incurred on market research, feasibility studies and other research activities related to business and management sciences.
- Salaries tax is charged on income arising in or derived from Hong Kong from any office or employment
- Taxable income includes commissions, bonuses, awards, gratuities, allowances (including those for education) and other 'perks'
- Income derived from services rendered in Hong Kong and any pensions is also subject to taxation.
- Tax payable is calculated on a sliding scale which progresses from 2-20% (in 2004/05). No one pays a rate higher than 15.5% of his total income
Foreign nationals who spend less than 60 days in Hong Kong in any year of assessment are exempt from salaries tax
Property tax is charged at a standard rate of 16% on rentals (for 2004/05, net of rates) received less an allowance of 20% for repairs and maintenance. However, corporations that pay profits tax on their rental income are not subject to property tax