Tax Rates in Hong Kong

As the Global Financial Crisis rumbles on, with certain reduced growth rates on the horizon for Europe and the United States, multinationals are looking elsewhere to achieve their business goals. Asia, a region riddled with wars and ineffective economic policies for much of the past century, has finally stepped into the front line of global trade and commerce. Here we look at the taxes most applicable to foreign businesses and individuals in Hong Kong, i.e., corporate income tax, value-added tax, goods and service tax, standard tax on dividends and individual income tax. These rates are based on domestic laws and do not take into consideration reductions or exemptions provided by double tax treaties.

Corporate Income Tax

Hong Kong’s simple and business-friendly tax system is a major attraction for foreign investors.  Corporate income tax rates may differ slightly from year to year in Hong Kong. For 2010/11, the profits tax rate for corporations is 16.5 percent, and the profit tax rate for partnerships and sole traders is 15 percent.

Hong Kong adopts a territorial source principle of taxation, which means that only profits sourced in Hong Kong are taxable in Hong Kong. There is no distinction made between residents and non-residents, which means that residents can derive profits from abroad without being taxed, while non-residents may be taxed on profits arising in Hong Kong. Hong Kong regulations also allow companies to claim offshore status, enabling them total tax exemption on profits sourced outside of Hong Kong.

All expenditures incurred in the generation of assessable profits, including most interest costs, rent for office and factory premises, bad debts, and salaries and payments to approved pension schemes, are deductible from gross income. Sums paid out on capital expenditures are not tax deductible. Losses can be carried forward without any limits.

VAT and Withholding Tax

Value-added tax (VAT) is non-existent in Hong Kong.

There is also no withholding tax in Hong Kong for profit repatriated back to the overseas parent company.

Salary Tax

There are two ways of calculating salary tax in Hong Kong for the individual taxpayers who have assessable income from employment:

(1) Progressive rate

Taken on a sliding scale (2-17 percent) against the taxpayer’s annual net chargeable income (i.e. less allowable deduction and personal allowances); and

(2) Standard rate

15 percent, based on the annual net income (i.e. less allowable deductions only).

The final payable income tax is the lower of the two tax liabilities. The maximum average tax rate in Hong Kong is thus 15 percent for the current tax year. Dividends received from any corporation enjoy a tax exemption.

Dezan Shira & Associates is a specialized foreign direct investment practice, providing business and legal advisory, tax, accounting, payroll and due diligence service to multinationals investing in the emerging markets of Asia. Established in 1992, the firm is a leading regional practice in Asia with twenty offices in five jurisdictions, employing over 170 business advisory and tax professionals. For information or advice on establishing business operations in Hong Kong, please contact Dezan Shira & Associates at info@dezshira.com or visit www.dezshira.com.