Hong Kong is a premier global business hub, thanks to its simplified tax regulations, low-tax regime, and strategic position in Asia. The city’s taxation system is designed to support established businesses and new ventures with its business-friendly environment and various tax incentives.
However, navigating the Hong Kong tax and accounting landscape can seem daunting for established and emerging businesses. This comprehensive guide illuminates the intricacies of Hong Kong’s tax system, offering insights into corporate taxes, personal income taxes, and the available tax exemptions.
Whether you’re a multinational corporation or a startup, understanding these key components is crucial for optimising your tax strategy and ensuring compliance in this vibrant business hub.
Overview of Hong Kong’s Taxation System
Hong Kong adopts a territorial taxation system, where only income that arises in or is derived from Hong Kong is subject to tax. This principle applies equally to both residents and non-residents of Hong Kong, meaning that international income for Hong Kong residents is not taxed.
Conversely, non-residents earning from Hong Kong sources are liable for tax. The Inland Revenue Department (IRD) is the governing body responsible for tax collection and administration.
Types of Taxes in Hong Kong
Corporate Income Tax in Hong Kong
Hong Kong’s corporate tax rates are competitively low to encourage business development:
| Assessable Profits | Corporations | Unincorporated Businesses |
|---|---|---|
| First HK$2 million | 8.25% | 7.5% |
| Over HK$2 million | 16.5% | 15% |
Companies can choose their fiscal year-end, with many opting for December 31st or March 31st.
Personal Income Tax in Hong Kong
The Hong Kong 2024 budget introduced a two-tiered standard rates regime for salaries tax and tax under personal assessment beginning from the 2024-2025 assessment year.
| Net Income (Total Income – Deductions) (HKD) | Rate |
|---|---|
| 5,000,000 or below | 15% |
| Above 5,000,000 | First 5,000,000 = 15%
Amount Exceeding 5,000,000 = 16% |
Progressive Rates
| Income (HKD) | Rate |
|---|---|
| 0 – 50,000 | 2% |
| 50,001 – 100,000 | 6% |
| 100,001 – 150,000 | 10% |
| 150,001 – 200,000 | 14% |
| Above 200,001 | 17% |
Property Tax in Hong Kong
Property owners, except for government and consular properties, are subject to a standard rate of 15% on the net assessable value of properties.
Stamp Duty in Hong Kong
| Type of Stamp Duty | Rate |
|---|---|
| Ad Valorem Stamp Duty (AVD) (First Time Home Buyers) | Between HK$ 100 & 4.25% |
| AVD (Non-First Time Home Buyers) | 15% (between 5 November 2016 & October 2023)
7.5% (on or after 25 October 2023) |
| AVD (Non-Residential Properties) | Between HK$ 100 & 4.25% |
| Special Stamp Duty (SSD) | Abolished as of 28 February 2024 |
| Buyer’s Stamp Duty (BSD) | Abolished as of 28 February 2024 |
| Transfer of Hong Kong Stock | 0.1% (Contract Note for sale or purchase of any Hong Kong stock)
HK$ 5 (Transfer operating as a voluntary disposition inter vivos) + 0.2% of stock value HK$ 5 (Transfer of any kind) |
Other Types Of Tax
| Tax Type | Status In Hong Kong |
|---|---|
| Sales Tax/Value-Added Tax (VAT) | Not Imposed |
| Withholding Tax on Dividends and Interest | Not Imposed |
| Capital Gains Tax | Not Imposed |
| Tax On Dividends | Not Imposed |
| Estate Tax | Not Imposed |
| Customs/Excise Duty | Not imposed on exports. Duties imported on select imported goods. |
Tax Measures introduced in the 2024/25 Budget
The Financial Secretary laid out a comprehensive 2024/25 budget plan to refine the tax system to foster economic growth and alleviate financial burdens. The proposed measures include
- A reduction in profits tax, salaries tax, and tax under personal assessment for the assessment year 2023/24, aiming to lighten the tax load on individuals and businesses.
- The introduction of a two-tiered standard rates regime for salaries tax and tax under personal assessment, designed to make the tax system more progressive and equitable.
- The allowance of tax deductions for lease reinstatement costs provides businesses with financial relief at the end of their lease terms.
- Eliminating the time limit for claiming allowances on industrial and commercial buildings to enhance the investment appeal in these sectors.
- An increase in business registration fees coupled with a two-year waiver of the business registration levy, aiming to support businesses by reducing operational costs.
- The reinitiation of the hotel accommodation tax collection reflects a move towards stabilising the hospitality industry’s revenue streams.
- The removal of all demand-side management measures for residential properties aimed at revitalising the housing market.
- The exemption from stamp duties for the transfer of real estate investment trust units and the operations of option market-makers, aimed at invigorating the real estate and financial markets.
Also Read: How The Hong Kong Budget 2024 Will Affect Your Business
Hong Kong Tax Returns
Income derived from any profession, business, or as a non-resident person subject to a profits tax must be reported. If you meet these criteria, completing and submitting the profit tax return and any required documents to the Inland Revenue Department (IRD) by the specified deadline is mandatory.
Personal or Individual Tax Return
Taxation on personal or individual income in Hong Kong is based on income earned or derived within the territory. Employees of Hong Kong companies are liable for salary tax on their entire income.
However, income earned outside of Hong Kong typically qualifies for a salary tax exemption for the assessment year, except for civil servants or airline crew members.
An exemption may also apply to employees of a Hong Kong company who render services for fewer than 60 days, subject to the IRD’s assessment based on provided documentation.
Profits Tax Return for Corporations (PTR)
The IRD issues the corporation’s profits tax return annually in April, allowing a one-month period for filing post-receipt.
Companies can request an extension for PTR filing beyond their first financial year-end, starting from the second year onwards.
Newly incorporated companies may receive their first tax return 18 months post-incorporation.
The completed PTR must be submitted to the IRD within three months from the issue date. Late submissions may lead to the IRD enforcing stricter penalties for non-compliance with PTR filing requirements.
Hong Kong’s Accounting Standards: An Overview
Hong Kong, as a Special Administrative Region (SAR) of China, enjoys developing its own accounting standards independent of mainland China’s requirements.
The Hong Kong Institute of Certified Public Accountants (HKICPA) establishes and promotes these standards.
The Hong Kong Financial Reporting Standards (HKFRS)
The core of Hong Kong’s accounting standards is the Hong Kong Financial Reporting Standards (HKFRS), closely aligned with the International Financial Reporting Standards (IFRS). These standards apply to the financial statements and reports of all profit-oriented entities.
HKFRS encompasses a comprehensive set of principles designed for the accurate and consistent reporting of financial information. It includes specific standards for financial reporting, such as the presentation of financial statements, inventory accounting, revenue recognition, and more.
The Hong Kong Financial Reporting Standards (HKFRS) encompass 41 unique accounting standards, 15 financial reporting standards, and multiple interpretations, each dedicated to specific financial statement components such as presentation, inventory accounting, cash flow reporting, and income taxation.
The HKFRS Handbook, published by the Hong Kong Institute of Certified Public Accountants (HKICPA), compiles these standards. The following are some examples:
HKAS 1: Presentation of Financial Statements
HKAS 1 establishes the foundational principles for financial statement presentation, including their structure and the minimum requirements for their content.
It mandates that management evaluate an entity’s ability to continue as a going concern while preparing financial statements, except in cases where the entity plans to liquidate or cease operations.
Should the business fail to gather financial statements on a going concern basis, it has to reveal the fact, in addition to the concept on which the financial papers were put together and the issue as to why the business is not considered a going concern.
HKAS 2: Inventories
HKAS 2 outlines the accounting treatment for inventories, emphasising the recognition of cost as an asset to be carried forward until the related revenues are recognised.
It provides guidelines on cost determination, expense recognition, and write-down to net realisable value, including instructions for applying cost formulas to allocate costs to inventories. Key provisions include:
- Inventories should be valued at the lower of cost and net realisable value.
- Costs of inventories should encompass all purchase, conversion, and other costs incurred to bring the inventories to their present location and condition.
- Costs should be assigned using the first-in, first-out (FIFO) method or the weighted average cost formula.
HKAS 18: Revenue
HKAS 18 specifies the accounting treatment for revenue related to particular transactions and events, focusing on the timing of revenue recognition. Essential guidelines include:
Revenue is measured at the fair value of the consideration received or receivable.
Revenue from goods sales is recognised when significant risks and rewards of ownership transfer to the buyer, there is no continuing management involvement or control over the sold goods, the amount of revenue and associated costs can be reliably measured, and economic benefits will probably flow to the entity.
Hong Kong Accounting Standards (HKAS) for SMEs
The HKICPA has also introduced the SME Financial Reporting Framework and Financial Reporting Standard (SME-FRF & SME-FRS) to cater to the specific needs of small and medium-sized enterprises (SMEs).
This framework offers a simplified reporting process, focusing on the historical cost concept without valuing assets or liabilities at fair value or recognising deferred taxes.
Eligibility for reporting under the SME-FRF & SME-FRS is determined by size criteria, including annual revenue and total assets, and requires a minimum of 75% shareholder approval.
| Small Guarantee Company/Group | Small Private Company/Group | Larger (“Eligible”) Private Company/Group | |
|---|---|---|---|
| Annual Revenue | < HK$25 million | < HK$100 million | < HK$200 million |
| Total Assets | No Limit | < HK$100 million | < HK$200 million |
| Average Employees | No Limit | < HK$100 million | < HK$100 million |
Hong Kong companies limited by guarantee and private companies may be eligible for optional reporting exemptions.
SMEs are ineligible for these exemptions if:
- They are institutions authorised under the Banking Ordinance.
- They engage in any insurance business.
- They hold licenses for regulated business activities under Part V of the Securities and Futures Ordinance.
- They involve in accepting loans at interest or repayable at a premium within their operational framework.
It is important to highlight that Hong Kong companies are not obligated to present a true and fair view of their financial transactions as per the Framework and Standard requirements.
For simplified financial statements:
Companies have the option to prepare their financial statements in line with the Framework and Standard, bypassing the HKFRS.
Consequently, the financial statements for SMEs adhere to the historical cost concept, eschewing the valuation of assets or liabilities at fair value and the deferral of taxes
Moreover, the disclosure notes within these simplified financial statements offer less comprehensive insights into the entity’s activities than what is found in complete financial reports.
Where To Next?
Imagine the heights your business could reach if administrative tasks didn’t hold you back. Like many growing SMEs, the complexity of accurate accounting is a major hurdle.
InCorp Hong Kong’s tax and accounting experts can take this burden off your shoulders, allowing you to concentrate on what you do best – growing your business.
FAQs on Taxation and Accounting in Hong Kong
- The assessment period for profits tax spans from April 1 to March 31 of the following year.
- Tax returns are issued on April 1 each year, with deadlines varying by the company's financial year-end.
- No, dividends paid to shareholders are not taxed in Hong Kong.
- Hong Kong follows a territorial taxation system, taxing only income derived or arising within Hong Kong and exempting foreign-sourced income.
- Yes, all companies must file annual tax returns with the IRD, regardless of profit status.
- Business losses can be carried forward indefinitely to offset future profits. Losses from one trade can offset profits from another, but losses cannot be carried back or transferred between companies within the same group.
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