Direct Income Tax In Hong Kong: Profits Tax, Salaries Tax, And Property Tax

Hong Kong is a lucrative place for investors and entrepreneurs to step up a company and start doing business operations. Its ease of doing business environment and low tax rates make it better than most of the businesses hub of the world.

Hong Kong aligned and drafted its tax policy by keeping the economic goal-oriented growth. It results in low tax rates, good infrastructure, freedom of doing business, less government interference, and substantial available capital, making it a favorite destination for investors and entrepreneurs.

Although Hong Kong has no capital gains tax and has low tax rates in the region than most countries, it is not a tax heaven country like other countries with no tax liability. But because it’s a major business hub and a port, it distinguishes itself from its competitors.

Hong Kong also has proximity to the Chinese market. He has a highly attractive tax regime, low personal and corporate taxes, no capital gains tax, no value-added tax or sales tax, no withholding tax on dividends and interests.

Income Taxes in Hong Kong

Apart from low-income tax rates than most countries, hong kong still has three types of income taxes that are must and payable by any business entity and working individuals. The three types are:

• Salaries Tax
• Profits Tax
• Property Tax

Other than these income taxes, other governments also need to be taken care of, including frees, rates, duties, etc., but they are not much overall and won’t put any extra burden on the business.

Hong Kong Tax Legislation Governing Body:

Along with other tax legislation that makes Hong Kong tax, the main legislations governing Hong kong Tax are the inland revenue ordinance. Hong Kong imposes income tax on a territorial basis.

The Hong Kong inland revenue law charges and deducts tax on income from salaries of a salaried person and pensions as salaries tax. If you are running a business in Hong Kong, you have to pay tax on the trading profits as profits tax, and in the case of income generated from real estate, property tax is applicable.

All these taxes are applicable and implemented on income generated inside hong Kong, any income generated outside of Hong Kong is not subjected to any taxes.

Three basic tax returns need to be filed annually in Hong Kong. They are Individual Tax returns (income tax), profits tax returns, and property tax returns.

Profits Tax:

Scope:

Profits tax payable by persons, including corporations, partnerships, trustees, and bodies of the person doing any trade, profession, or business in Hong Kong. They are chargeable for all profits arising from Hong Kong from such trade, profession, or business. A resident of Hong Kong who arises or drives profits from outside/abroad is not charged tax; on the other hand, a non-resident person who arises or drives profits in Hong Kong is chargeable to Profits Tax.

Tax Percentage:

According to the inland revenue department, the profits tax rates for corporations and unincorporated businesses are 16.5% and 15%, respectively. Still, to make Hong Kong a more business-friendly port nation, as per the year of assessment 2018/19, the tax rates for the first 2 million hong kong dollar profits for corporations and unincorporated businesses are reduced to 8.25% and 7.5%, respectively. If the profits surpass the 2 million hong kong dollar threshold, then a tax rate of 16.5% and 15% for corporate and incorporated businesses are applied.

Assessment:

The tax assessment is done on the assessable profits derived from the assessable income for the assessment year. The assessable profits are calculated by accounting for annual profits made by the business at the end of the assessment year. In the case of cessation of a business, the tax periods starting from the end of the previous year of assessment to the date of cessation; if the business made any profit between this period, then it has to pay the profits tax for that particular period.

Rules and Regulations for Non-Resident/ Resident:

Although it doesn’t matter whether you are a resident or non-resident of Hong Kong, profits tax applies to you if you have earned, arisen, or driven profits by doing business in Hong Kong. The non-resident is either charged directly or in their agent’s name if they arise or drive profits in hong kong. If the profits of the non-resident person from trade or business are not uncertain, then their tax may compute on their annual turnover.

Exemption and Deductions:

Certain income-derived areas got an exemption from profits tax like dividends received from a corporation subject to Hong Kong profits tax. Also, amounts already included in the measurable profits are excluded from the profits of the recipient. Moreover, other deductions including in the chargeable profits are:

• Interest on funds borrowed or any rental income.
• Any recovery of bad and doubtful debts is treated as income and subject to tax deductions.
• Any plant, machinery, premises, and articles repairs used in producing profits.
• Any expenditure made for registration of a trademark, design, or patent used in the production of profits.
• Any expenditure on intellectual property rights for use in the production of chargeable profits.
• The expenditures made for Research and development, including market management & business research, and payments for technical education subjects. The first 2 million HKD is eligible for a 300% tax deduction, and the amount of more than 2 million HKD is eligible for a 200% deduction.
• Any charitable donations of aggregate not less than 100 HKD made to charities shall not exceed 35%of the adjusted assessable profits.

While computing the assessable profits, deductions are prohibited in the following cases:

• Any expenses made private or domestic are not for making/producing profits.
• Any loss or withdrawal of capital cost for making improvements and any capital expenditure.
• Any recoverable insurance claim or contract of indemnity.
• If the rent of the premises is not used for making profits, then it is also exempted from tax deductions.
• Taxes payable under the Inland revenue ordinance except for salaries tax for employee’s remuneration.

Tax Incentives:

The government of Hong Kong has incentivized certain areas to enhance their growth and compete with other regional factors; these areas include:

• Any expenditure made on plant and machinery for manufacturing. Computer hardware and software.
• Any capital spending on the refurbishment of business premises must be allowed and written off for over five years.
• Tax concessions for certain debt instruments and assessable profits derived from onshore or offshore risks reinsurance.
• Similarly, any interest derived from any deposit placed with an authorization institution is exempted.
• Tax exemption offshore funds
• Capital expenditure on any environment-friendly facilities is eligible for tax incentives.
• Electric vehicles have 100% tax incentive coverage.
• Different tax incentives for ships related businesses.

Depreciation allowances:

In addition to tax incentives, depreciation allowances are offered for eligible businesses.

Industrial Buildings and Structures:

A special allowance of 20% up to 24% is given for capital expenditure on the construction of industrial buildings and structures used in certain trades like transport, dock, water and electricity undertakings, manufacturing, processing, and storage of goods, mills, and factories farming.

Commercial Buildings and Structures:

Any building structure other than industrial that can be used for trade purposes can qualify for the annual commercial building allowance of 4% of the capital expenditure used for the construction of such building or structure.

Plant and Machinery:

Any capital expenditure mn providing plant and machinery to produce chargeable profits also qualifies for the tax allowance.

• An initial allowance of 60% on the cost of plant and machinery.
• Allowances on the annual reducing value of plant and machinery as prescribed by the board of inland revenue department. It can be 10, 20, or 30% per the working life of plant and machinery.

Books and Records:

For the persons doing business in Hong Kong, it is mandatory to keep sufficient records in English or Chinese of their income and expenditures and make them readily available for profits valuation. There are statutory requirements to record certain specified details of every business transaction. Last but not least, it is advisable to retain the transaction records for at least seven years after the completion of a transaction. If a person fails to maintain a good record, he is subjected to a fine of 100K HKD.

Salaries Tax:

Scope:

As clear from its name, this type of tax is imposed on income derived or generated from an office, employment, or a person in Hong Kong. While deciding whether the income is derived or arises from hong kong, it is necessary to locate the source of income.

The inland revenue ordinance provides special provisions to crews of ships or aircraft that visit hong kong for a short span, and persons who pay a substantial amount of tax outside the hong kong territory are also have special leverage provisions.

Income from any office or employment includes all kinds of income, and prerequisites awards of shares and shares are also chargeable income. Similarly, the share option gain is taxable whenever it exercises, even if it is exercised after the employee has ceased employment.

Moreover, if the employer has provided a residence to its employee, then the rental value is assessed at 10% of the total income; in the case of a hotel, hostel, or boarding house, the rental value is 8% or 4% of the total income after appropriate deductions.

Assessment:

The salaries tax assessment is based on the chargeable income of the year of assessment, but the total income is not measurable until the next year is past. Therefore, the inland revenue ordinance first demands the provisional salaries tax payment during the assessment year, then makes adjustments in the following year.

If any provisional tax is paid for the year assessment, then it’s firstly applied against the salaries tax payable on the income of that yea. If the amount is in excess, it is applied to next year’s provisional tax liability. One important thing to consider is that taxpayers can claim deductions and allowances under salaries tax.

For Married Couple:

The married person is responsible for their salaries, tax affairs, return filing, and payment of tax assessed. If a couple’s total tax liability under separate assessments is greater than their collective tax aggregate, they may elect to be jointly assessed.

Deductions:

The following deductions are allowed for salaries tax.

Expenses, wholly, exclusively, and necessarily made in the production of assessable income, do not include any other private domestic and capital expenditure.

Approved charitable donations are paid to charities if the amount is not less than 100 HKD and the amount is not exceeded 35% of the total income after the allowable expenses.

Expenses paid for self-education, including tuition and examination fees, in connection with a prescribed course of education or fees set by education providers, trade professionals,s or business associations. The course should be beneficial for gaining or maintaining qualifications for use in employment.

Expenses made for elderly home care, the person or spouse, parents or grandparents. The older person should be at least 60 years old or above at any time in the assessment year or under 60 years but is entitled to claim an allowance under the government’s disability allowance scheme.

The residential care facility should be located in hong kong and be licensed or exempted from licensing under the residential care home’s ordinance. If an elderly home care allowance is awarded to a person’s parent/grandparent, then they are not entitled to claim dependent parent/Grandparent allowance for the same parent/grandparent for the same year of assessment.

A taxpayer can also claim deductions for home loan interest paid on a home loan for the acquisition of property; similarly, in addition to a home loan, a taxpayer can also claim home loan interest paid for acquiring parking space. However, the parking space should be located in the same vicinity and claimed in the same year of assessment and must be used by the owner.

For any contributions paid to the mandatory provident fund scheme by taxpayers as an employee, the maximum deductible amount should not exceed the limit prescribed by the Inland revenue ordinance.

Contributions paid to a recognized retirement scheme should be less than the actual amount contributed to the recognized occupational retirement scheme and the maximum deductible amount prescribed by IRO.

Property Tax:

Scope:

Property tax is the most known tax after income tax; everyone knows it is charged to landowners or buildings. In Hong Kong, anyone who owns land or a building is charged with property tax. It is computed at the standard rate on the net assessable value of the property. Hong Kong has a standard rate of 15% from the 2014/15 onwards assessment year.

Assessment:

The assessable value is computed by talking about the actual consideration payable to the owner regarding the proper use of the property.

Properties for Owner’s Business Use:

If the property owner is using its property as an office for their corporation and doing business, then profits tax is also applicable to the profits of that particular business. But if the owner is paying profits tax for that particular property, then property tax will be straight off and is refundable. The property owner writes an application to the commissioner if its property tax is not exempted.

Allowances:

Apart from these taxes, if the person is assessed to salaries tax, they can claim various allowances if appropriate. Some of these allowances are as under:

Married Person’s Allowance:

A taxpayer can claim a married person allowance if married but living apart, not divorced but supporting and maintaining their spouse during the relevant year of assessment. If a couple is elected for joint assessment under salaries tax or the couple has elected for personal assessment jointly.

Child Allowance:

The child allowance is granted to taxpayer unmarried children under 18 during the assessment year or over 18 but under 25 receiving full-time education at a university, college, or similar educational establishment. Moreover, in the case of a child’s physical or mental disability, a child allowance is granted to the taxpayer or spouse. An additional one child allowance is granted for the newborn when the child is born.

Dependent Brother or Dependant Sister Allowance:

A dependent brother or sister allowance is granted to the taxpayers for maintaining their unmarried brother or sisters. After receiving a full-time university or college education, the sibling should be 18 years of age but not over 25 years. The Allowance is also claimable in case of physical or mental disability.

Dependent Parent or Dependent Grandparent Allowance:

This Allowance is for dependent parent/ dependent grandparent that is ordinarily resident in hong kong and fulfills the IRD requirements of elderly residential status.

Personal Disability allowance and Disabled Dependent Allowance

Taxi allowances are also granted to taxpayers; a personal disability allowance is granted if a person is eligible for a government disability allowance scheme.

Dependant allowance is granted if the dependant is eligible for a government disability allowance scheme, this is an additional allowance along with other allowances.

Closing Lines:

Whether you are a salaried individual or a corporation doing business in Hong Kong, deriving and arises income within the hong kong territory. You are liable to pay taxes as prescribed by the inland revenue department of Hong Kong.

There are three major taxes salaries tax on income arising from employment, profits tax derived from profits or income from a business, and the property tax for individuals who own any building or land in hong kong.

Apart from these major taxes, other tax legislation that makeup hong kong taxes are the

• Betting duty ordinance
• Inland revenue ordinance
• Stamp duty ordinance
• Hotel accommodation ordinance.

Conclusion

All these taxes are imposed on a territorial basis; income generated outside Hong Kong is exempted from any taxes. Along with other tax benefit, the Hong Kong government offers many allowances, and any ordinary resident of Hong Kong is eligible to claim them after meeting all the requirements.