Hong Kong Tax Guide
HONG KONG TAX GUIDE
This guide explains how Hong Kong taxes income under the territorial source principle—what is taxed, how salaries and profits tax work in practice, and what employers and financial institutions need to know about compliance, reporting, and double taxation relief.
Use the sections below for detail on rates, deductions, offshore claims, transfer pricing, frequently asked questions, and how Zetland Tax can support your Hong Kong tax filings and advisory needs.
Overview
Unlike most countries, Hong Kong uses the territorial source tax regime and disregards the concept of residence or domicile. This means that income is taxed in Hong Kong only if it arises in or is derived from Hong Kong. As an exception, certain kinds of deemed trading receipts will be taxable even for non-residents.
The Inland Revenue Ordinance charges:
- Income from an office, an employment or pension to salaries tax
- Profits from a trade or business to profits tax
- Income from real estate to property tax
The practical application of the territorial source tax regime is defined by a large catalogue of case law and Inland Revenue Department (IRD) practice notes (DIPNs).
Non-Hong Kong Employment
The IRD will generally accept that an employment is a non-Hong Kong employment if all of the following three factors are met:
- Employment contract was negotiated, entered into, and is enforceable outside of Hong Kong;
- Employer is a resident outside Hong Kong; and
- Employee’s remuneration is paid outside Hong Kong
Offshore and Income Not Subject To Tax
Income from business activities entirely carried out outside of Hong Kong may qualify as “offshore income”, which is not subject to profits tax in Hong Kong. Apart from offshore income, this also includes income from other activities than carrying on a trade, business or profession. In other words, income from dividends, interest and capital gains are not subject to profits tax.
Year of Assessment
In general the tax year in Hong Kong runs from 1 April of a year to 31 March of the following year. The basis period of profits tax computation is the accounting year ended in the year of assessment.
Double Tax Agreements
Hong Kong has entered into double tax agreements (DTA) with following countries
| Austria | Belarus | Belgium |
| Brunei | Canada | Czech Republic |
| Finland | France | Guernsey |
| Hungary | India | Indonesia |
| Ireland | Italy | Japan |
| Jersey | Korea (South) | Kuwait |
| Latvia | Liechtenstein | Luxembourg |
| Mainland China | Malaysia | Malta |
| Mexico | The Netherlands | New Zealand |
| Pakistan | Portugal | Qatar |
| Romania | Russia | Saudi Arabia |
| South Africa | Spain | Switzerland |
| Thailand | UAE | United Kingdom |
| Vietnam | ||
The ones signed with Cambodia and Estonia will be effective from year 2020/21. The DTA agreement signed with Macao SAR is not yet effective.
Accounting principles / financial statements
Financial statements in Hong Kong must follow the issued Hong Kong Financial Reporting Standards (HKFRS). Private companies and SMEs can opt, subject to meeting the qualifying criteria, for relaxed accounting standards, the HKFRS for Private Entities and SME-FRF & SME-FRS respectively. The financial statements and audit report form part of the reporting information Directors are to present to shareholders. Moreover, the audited financial statements form the basis of the tax computation and are a required supporting document to tax return and must be submitted to the IRD if the company is not a small corporation.
Statutory obligations of employers under the Inland Revenue Ordinance (IRO)
There is no “pay-as-you-earn system” or payroll tax withholding mechanism in Hong Kong. Hence, employers are not required to deduct salaries tax from the payroll. Instead, the IRD imposes the following filing obligations on employers pursuant to the IRO:
- To make an annual return of remuneration paid to employees (Form BIR56A and IR56B);
- To report an employee’s commencement of employment in Hong Kong (Form IR56E);
- To report an employee’s cessation of employment in Hong Kong (Form IR56F);
- To report at least one month before the expected date of departure if the employee is about to leave Hong Kong permanently (Form IR56G) and withhold payments to the employee for one month or receiving confirmation of tax clearance, whichever occurs earlier. This requirement does not apply to an employee who is required to leave Hong Kong at frequent intervals for business purposes.
Common Reporting Standard (CRS)
The CRS is an information gathering and reporting requirement for financial institutions in participating countries/jurisdictions, to help fight against tax evasion and protect the integrity of tax systems.
In Hong Kong, all financial institutions (except those exempted) are required by law to implement the CRS framework. Information of the financial accounts held by residents of reportable countries is transmitted to the relevant tax authorities annually.
Salaries Tax
Who is liable?
In general, any individual earning income that arises in or is derived from a Hong Kong office or Hong Kong employment, or from services rendered in Hong Kong during visits of more than 60 days in any tax year, is subject to salaries tax.
Directors’ fees derived from a company that has its central management and control in Hong Kong are subject to salaries tax in Hong Kong.
Tax Rate
Salaries tax is levied on net chargeable income (assessable income less personal deductions and allowances) at progressive rates ranging from 2% to 17%, or at a maximum standard rate of 15% on assessable income less personal deductions, whichever calculation produces the lower tax liability. Following are the progressive rates for salaries tax for the period from 1 April 2019 to 31 March 2020 (i.e. year of assessment 2019/20 and onwards):
| Taxable Income (HK$) | Tax Rate |
|---|---|
| First 50,000 at | 2% |
| Next 50,000 at | 6% |
| Next 50,000 at | 10% |
| Next 50,000 at | 14% |
| On the remainder at | 17% |
Social Security
There is no social security tax in Hong Kong. Employers and employees are each required to contribute the lower of 5% of the employees’ salaries or HK$1,500 per month to an approved mandatory provident fund schemes unless the employees are covered by other recognized occupation retirement schemes.
Personal Deductions
To be deductible for the salaries tax purposes, expenses must be incurred wholly, exclusively and necessarily in the production of a taxpayer’s assessable income. In addition, the following concessionary deductions are available for year of assessment 2019/20 and onwards:
| Maximum deduction for amount paid for: | 2019/20 and onwards (in HK$) |
|---|---|
| Self-education expenses | 100,000 |
| Home loan interest | 100,000 |
| Elderly residential care expenses | 100,000 |
| Mandatory contributions to MPF/Contributions to other recognized retirement schemes | 18,000 |
| Voluntary contributions to MPF scheme | 60,000 |
| Qualifying premiums paid under the Voluntary Health Insurance Scheme | 8,000 per insured person |
| Approved charitable donations | Up to 35% of income |
Personal Allowances
Personal allowances are also available to individuals with an income level below the “break-even” point where the standard rate of 15% applies as being more beneficial to the taxpayer. For the 2019-20 year and onwards, the following are the personal allowances available.
| Personal Allowances | 2019/20 and onwards (in HK$) |
|---|---|
| Single Allowance | 132,000 |
| Married Person Allowance | 264,000 |
| Child Allowances | |
| 1st to 9th child (each) | 120,000 |
| Each child born during the year (additional) | 120,000 |
| Dependent Parent/Grandparent Allowance | |
| Aged 60 or above (residing with taxpayer) | 50,000 |
| Aged 60 or above (not residing with taxpayer) | 100,000 |
| Aged 55 to 59 (residing with taxpayer) | 50,000 |
| Aged 55 to 59 (not residing with taxpayer) | 25,000 |
| Dependent brother/sister allowance | 37,500 |
| Single parent allowance | 132,000 |
| Disabled dependent allowance | 75,000 |
| Personal disability allowance | 75,000 |
Double Tax Relief Claim
In general, employment income derived from services rendered outside Hong Kong is exempt from salaries tax if the person is chargeable to and has paid tax of the same nature as salaries tax with respect to that income.
Effective from the 2018-19 year of assessment, any relief from double tax is by way of a tax credit rather than an income exemption for the employment income derived in a territory that has entered into a double tax agreement with Hong Kong. The income exemption or tax credit allowable must not exceed the relief that would be allowed if the taxpayer had taken reasonable steps to minimize the foreign tax payable. Subsequently, if the relief is excessive, the taxpayer has an obligation to inform the Hong Kong tax authority to have the Hong Kong salaries tax correctly adjusted.
Profits Tax
As Hong Kong operates a territorial system of taxation, in general a person who carries on a trade, profession or business in Hong Kong is chargeable to the profits tax on the profits from that trade, profession or business that is sourced in Hong Kong. Foreign sourced income is outside the scope of Hong Kong’s profits tax charge.
The concept of tax residence of a company is generally irrelevant for profits tax purposes. However, it does have some importance in the application of other provisions, such as transfer pricing, offshore fund exemptions and DTA.
Offshore Profits Tax Exemption
Companies that earn income that falls outside the scope of the charge of profits tax, i.e. foreign sourced or offshore income, may file an offshore profits tax exemption to have such income excluded from the charge of profits tax. The question of source of profits is a practical, hard matter of fact and each case will need to be determined on its own facts and merit. Despite the number of landmark cases where the courts in Hong Kong reaffirmed the broad guiding principle of determining the source of profits, i.e. “what the taxpayer has done to earn the profit in question and where he has done it”, there are often cases of different views taken by the IRD and the taxpayer. From a practical perspective, the process of determining the source of profits can be categorized into three areas of focus: (1) Classification; a taxpayer should carefully classify the type of profits in question since the determination of the source of profits varies for different types of profits. The place where the contracts are effected, negotiated, concluded and enforceable would be vital in determining the source of trading profits whereas the location of services would be the key for defining the source of service income. (2) Identification of profit producing activities; profit producing activities that are carried out in Hong Kong are taxable while antecedent or incidental activities may not be. When assessing the source of trading profits, the IRD may have a tendency to focus on activities carried out in Hong Kong as profit producing activities which may be considered as antecedent or incidental from the view of the taxpayer. (3) Documentation; documentation involves the provision of evidence to support that the profit producing activities were carried out outside Hong Kong. The burden of proof rests with the taxpayer. Substantiating documentation often exceeds merely record-keeping files and includes additional operational documents including email, work plan, travel histories, meeting minutes and others.
An exemption claim can be made seeking an Advanced Ruling, or at the time of submission of the tax return. Unless such an exemption claim is made, it is the prevailing assumption that the profits of a company arise in or are derived from Hong Kong and are thus taxable. It should be expected that the IRD raise queries for the Company to substantiate the offshore tax exemption claim.
Tax Rate
A two-tiered profits tax regime applies effective from the year of assessment 2018/19 (i.e. from 1 April 2018) for both corporations and unincorporated businesses:
| Assessable Profits (HK$) | Tax Rate |
|---|---|
| Companies | |
| First $2,000,000 | 8.25% |
| On the remainder | 16.5% |
| Unincorporated businesses | |
| First $2,000,000 | 7.5% |
| On the remainder | 15% |
To avoid abuse of the two-tiered tax regime, each group of connected entities can nominate only one entity to benefit from the two-tiered tax rates.
Transfer Pricing (TP) Rules
In July 2018, Hong Kong enacted legislation to introduce TP rules and a three-tiered TP documentation requirement in Hong Kong.
The rules generally follow the OECD guidelines and require transactions with related parties to be on arm’s length terms. The rules allow the IRD to adjust the profits and losses of an enterprise where the transaction made or imposed between two related parties differs from what would have been agreed between independent persons, and the difference results in a tax advantage. The rules apply to related party transactions involving the sale, transfer and use of assets and the provision of services.
Transfer pricing documentation
The mandatory documentation requirements for the TP transactions will be based on the three-tiered approach recommended by the OECD, which consists of the Master File, Local File and Country-by-Country (CbC) report.
Master File and Local File
Two exemptions are available for the HK entities filing the Master File and Local File based on the size of the HK entity and the volume of its related party transactions.
Any HK entity that meets any two of the following three conditions is exempted from preparing the Master File and Local File:
- Total annual revenue of not more than HK$400 million;
- Total assets of not more than HK$300 million; and
- Average number of employees of not more than 100.
Local Files are not required for the following related-party transactions if the total amount of that type of transaction does not exceed the prescribed amounts (in HK$):
- For transfer of properties (other than financial assets and intangibles) – 220 million;
- For transactions in respect of financial assets – 110 million;
- For transfer of intangibles – 110 million;
- For any other transactions – 44 million.
If no local file is required to be prepared for all types of the related-party transactions specified above, the entity does not have to prepare the Master File.
Entities that do not meet any one of the above two exemptions are required to prepare a Master File and Local File for accounting periods starting on or after 1 April 2018. The Master File and Local File will need to be prepared within 9 months of the accounting year end date.
Country-by-Country (CbC) report
Pursuant to the OECD standards for the CbC reports preparation, any multinational enterprise group with an annual consolidated group revenue of EUR750 million (approximately HK$6.8 billion) or more and the ultimate parent entity (UPE) residing in Hong Kong has to file CbC returns in Hong Kong.
The CbC return requirement applies to accounting periods starting on or after 1 January 2018. The CbC return will need to be filed within 12 months after the end of the accounting period to which the return relates.
Tax audits
The IRD operates a computer-assisted “Assess First Audit Later” (AFAL) system in its tax assessment process. The AFAL system screens tax returns based on pre-set criteria and selects cases for post assessment desk audit, field audit and investigation. Tax returns containing the following features are more likely to be identified for further review:
- Abnormal fluctuation in financial performances/accounting ratios;
- Significant deviation from prior years or the industry norm;
- Utilization of brought forward tax losses from prior years of assessment;
- High volume of related party transactions;
- Change in tax filing basis;
- Significant one-off transactions;
- Long unsettled tax enquiries;
- Publically available information which is inconsistent with the taxpayer’s representations in the tax returns and replies; or
- Exchange of Information (EOI) and Common Reporting Standard (CRS).
Companies that face a higher tax audit risk are recommended to review their tax and transfer pricing positions and compliance history. to assess their tax audit risks, and to formulate the The outcome of a risk review should evolve into the formulation of a mitigation strategy and approach to prepare for defence before the IRD commences a tax audit, including the consideration of a voluntary disclosure. Companies may consider reshaping their transaction arrangement to enhance the tax defensive grounds from a tax and transfer pricing perspective.
If a company has already been targeted by the IRD for a tax audit, there next important steps to take are to identify the possible causes of the tax audit, ascertain the tax risk areas, quantify the tax exposure and seek professional advice to assist in handling the tax audit.
Frequently Asked Questions (FAQ)
Q1) I just set up a new business in Hong Kong. When will I receive my first year profits tax return?
A1) A newly registered business will receive its first profits tax return some 18 months after the date of commencement of business or the date of incorporation.
Q2) How do I know that my Company is chargeable to Hong Kong profits tax?
A2) In general, Hong Kong sourced income from trade, profession or business is chargeable to the profits tax. It is generally assumed that a business in Hong Kong is chargeable to profits tax. Any claim to the contrary must be stated and substantiated in its prescribed form.
Q3) When will I need to file my Company’s Hong Kong profits tax return?
A3) Generally, profits tax return and any required supplementary forms should be filed within 1 month from the date of issue. The compliance date of submission is specified on page 1 of the profits tax return.
The IRD may allow 3 months for the newly incorporated company to file their first year’s profits tax return.
Companies can, through their tax representative, avail of an automatic filing extension for 6 months.
Q4) Can I lodge an objection with the HKIRD if I disagree with the income assessed?
A4) Yes, to dispute the assessment an objection can be lodged within one month after the date of issue of the notice of assessment. The objection must be in writing and state precisely the grounds of the objection. In many cases an assessor may require further information or facts to be provided upon consideration of which a revision of the assessment or a proposed basis to revise the assessment may be issued. In cases where no agreement is possible, the objection will be referred to the Commissioner of Inland Revenue for determination. The Commissioner will consider the objection and may confirm, reduce, increase or annul the assessment. Notwithstanding any notice of objection or appeal lodged by you, you must pay the tax on or before the date(s) specified in the notice of assessment, unless the Commissioner orders that the payment of tax or any part of it be held over pending the result of such objection or appeal.
Q5) What if I disagree with the IRD’s position after an objection, what can I do?
A5) If you wish to appeal against the determination of the Commissioner, you should do so in writing to the Clerk to the Board of Review within 1 month after the transmission of the Commissioner’s written determination.
Our Services
Zetland Tax can provide:
- Accounting
- Audit Arrangement
- Profits Tax Compliance and Consulting
- Salaries Tax Compliance and Consulting
- Payroll Tax Reporting
- CRS compliance
- Transfer Pricing Evaluation
- Tax Dispute Mitigation
- International Tax Harmonization
ZETLAND TAX ADVISORS LIMITED - Hong Kong
8/F, On Hing Building, 1 On Hing Terrace, Central, Hong Kong
Tel: +852 3552 9085
Fax: +852 2140 6833
The content is current based on taxation laws and practices as of 1 April 2020 and we have no obligation to update the information as law and practices change. This guide has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please contact our Zetland Tax Team or your other advisors for specific advice.