Hong Kong is one of the world’s most significant financial centers, with the highest Financial Development Index score and consistently ranks as the world’s most competitive and freest economic entity. As the world’s 8th largest trading entity, its legal tender, the Hong Kong dollar, is the world’s 13th most traded currency. And also is a member of the World Trade Organization (WTO) and the Asia-Pacific Economic Cooperation (APEC).
Hong Kong’s tertiary sector dominated economy is characterized by simple taxation with a competitive level of corporate tax and supported by its independent judiciary system. However, while Hong Kong has one of the highest per capita incomes in the world, it suffers from severe income inequality.
As one of the world’s leading internationalfinancial centers, Hong Kong has a major capitalist service economy characterized by low taxation and free trade.
From the second half of the 19th century and continuing into the first half of the 20th century, Hong Kong operated as a key command center for the allocation of Asian capital in its broadest form.
Hong Kong stature as an International Financial center (IFC), gradually developed from the 1950s to become a key component of the island’s economy. It is an important center for international finance and trade, with one of the greatest concentrations of corporate headquarters in the Asia-Pacific region.
Under Article 108 of the Basic Law of Hong Kong, the taxation system in Hong Kong is independent and different from the taxation system in China. In addition, under Article 106 of the Hong Kong Basic Law, Hong Kong enjoys independent public finance, and no tax revenue is handed over to the Central Government in China.
The taxation system in Hong Kong is generally considered to be simple, transparent and straightforward among jurisdictions in the world. Taxes are collected through the Inland Revenue Department (IRD).
Since the Common Law System is applied in Hong Kong, judgments by the Courts and Boards of Review in tax law cases are resorted to assist the interpretation of taxation rules and concepts. Furthermore, the Inland Revenue Department also issues Departmental Interpretation and Practice Notes (DIPNs) from time to time to clarify and elaborate on the tax rules and to smooth the tax collection process.
Taxes collected in Hong Kong can be generally classified as:
1. Direct tax – including Salaries Tax, Property Tax and Profits Tax. The guiding statue is Inland Revenue Ordinance;
2. Indirect tax – including Stamps Duty, Betting Duty, Estate Duty and others.
In the fiscal year 2013/14, Profits tax, an income tax on corporations constituted the largest source of tax collected by the government, followed by Salaries Tax, an income tax on individuals.
Income Tax
Unlike most countries which apply both residential jurisdiction and territorial jurisdiction in determining the tax liability of a person, Hong Kong uses only the territorial source jurisdiction and disregards the concept of residence. Thus, only profits sourced in Hong Kong would be taxable whereas a person’s overseas income will not be taxable.
Profits Tax
Hong Kong Profits Tax is a tax levied on the net profits on business. Companies and individuals carrying out business in Hong Kong will be liable to Profits Tax provided that the profits are sourced in Hong Kong.
The source of profits is one of the most controversial topics in the context of Hong Kong taxation. Principally, it is guided by an established set of tests and judgments in court cases.
The Departmental Interpretation and Practice Notes provide viewpoints from IRD’s perspective but these are subject to revision if major inconsistencies with court judgments are subsequently found. Certain kinds of deemed trading receipts are taxed irrespective of the source rule.
Tax on these deemed trading receipts are collected by agents or other persons on withholding basis. Tax liability may be measured by reference to gross income or turnover for deemed trading receipts and in case where profits cannot reliably ascertained. Capital gain is out of the scope of Hong Kong Profits Tax. However, whether a gain is in capital nature is debatable.
Property Tax
Property Tax is levied on the income from the letting of immovable property in Hong Kong. Property tax carries an immaterial proportion of the revenue of the government. For the year of assessment 2013/14, property tax amounts to 0.01% of the total revenue. The tax rules are straightforward and simple.
Both, individuals or corporate owners (including joint tenants) are liable to Properties Tax. However, corporate owners who carry out business in Hong Kong may either:
- Apply for exemption of Property tax;
- Utilize the Property Tax paid to deduct Profits Tax.
- The tax is paid on 15% of the net assessable value, equal to assessable value minus deductions. Assessable Value includes:
- Rental income payable to the owner during the year of assessment;
- Other considerations not specifically attributable to a particular year of assessment. The amount will be spread over the tenancy period and subject for a maximum of 36 months. For illustration purpose, key money of HK$60,000 paid for the tenancy from 1 April 2014 to 31 March 2016 will be assessed as: HK$60,000 for the year of assessment 2014/15 and HK$60,000 for the year of assessment 2015/16. Deductions include:
- Standard deduction: 20% allowance on the assessable value less deducted rates, representing the repair expenses for the property;
- Other deductions: Rates paid by the owner of the property and irrecoverable rental income.