Hong Kong has a relatively simple taxation system. Tax is levied on the territorial source principle, which means any income that is generated in Hong Kong may be taxable, even if your business is not based in Hong Kong. This also means that income generated outside of Hong Kong are not taxable in Hong Kong, even if your company is based in Hong Kong. (Although you may have to pay taxes elsewhere, but then again, you may not due to the Double Taxation Relief).
Taxes are calculated for each fiscal year (or financial year), which begins on the 1st April each year, and runs to the 31st March of the following year.
The two most important taxes is the profits tax, which apply to business, and salaries tax, which applies to individuals. There's also the property tax, which applies if your business generate income from property, which includes renting out immmovable properties as well as ships and aircrafts.
In the past years, the government has even implemented a tax reduction on both salaries and profits tax of 75%, effective since 2011/12, with a cap. For the year 2014/15, this cap is set at HK$20000, which means business and individuals who had to pay HK$80000 of tax only has to pay HK$20000 after the tax reduction. (Individuals who had to pay HK$90000 of tax only has to pay HK$30000)
Any business that generates assessable profits must pay a profits tax on those profits. Since 1 April 2008, this has been set at a rate of 16.5%.
Assessible profits is calculated by adding up all income, then deducting deductible expenses and tax-exempt incomes.
- Profits arising from the sale of capital assets
- Interest on deposits placed in authorised financial institutions
- Expenses paid by the taxpayer for the purpose of generating assessable profits. It excludes domestic or private expenses, capital expenditure, cost of improvements, and other taxes.
- Industrial and commercial buildings allowance. Since buildings are long-term assets, they are classified as capital expenditure. For industrial buildings, you can deduct 20% of the capital expenditure on the year the expense occurred; in subsequent years, you can deduct 4% each year for 20 years, until all expenses have been deducted. For Commercial buidlings, the deductable amount is 4% each year. Expenses incurred for improvements or renovations are deducted 20% each year, for five years.
- Plant and office equipment (including computer hardware and software)
- Corporate losses
More details on what can be deducted as well as the department's normal practices can be found in the document Departmental Interpretation and Practice Notes.
Any person obtaining income from work, employment and pension must pay salaries tax.
As a general rule, any income paid by the employer is taxable, regardless of whether the payment is made before, during, or after employment, or whether the income is in according to, or in excess, of the employment agreement.
The following types of income are taxable:
- Leave pay
- Directors fee
- Payment in lieu of notice
- Back Pay, Gratuities, Deferred Pay and Pay in Arrears
- Stock Awards and Share Options
- Tips paid by customers (e.g. to waiters, tour guides)
- Any allowances such as:
- Perquisite or fringe benefits
- Income received by employee outside Hong Kong
- Certain payments from Retirement Schemes (such as Mandatory Provident Fund)
- Salaries Tax paid by employer
The following types of income are not taxable:
- Compensation for injuries
- Payment in Lieu of Notice/Leave, Severance Payments and Long Service Payments
- Jury Fees
The chargeable amount is calculated as gross income - before contributions to the Mandatory Provident Fund is applied.
However, the government has allowances and deductions which means if you earn less than a certain amount, you won't have to pay salaries tax.
The Net Chargable Income is calculated as income minus deductions, minus allowances. (Deductions are subtracted first)
The following expenses are deductable up to a maximum (specified in brackets).
- Self-education expenses ($60,000)
- Mandatory contributions to recognised retirement schemes ($12,000)
- Home loan interest ($100,000)
- Elderly residential care expenses ($72,000)
Everyone is entitled to a basic allowance of HK$120000 (effective 2012/13). There are other allowances for dependent children/parents/grandparents/person with disability.
Married couples may also opt for a joint assessment, taking into account both their income. So if one person earned HK180000, while the other earned HK$60000, they would not have to pay tax because the Married Person's Allowance is HK$240000.
After deducting the applicable allowances and deductions, the remainder is taxable. There are two rates for salaries tax - standard rate and progressive rate; tax payable is the lower of the two.
- Standard Rate - 15%
- Progressive Rate - 2% on the first HK$40000, 7% for the next HK$40000, 12% for the next HK$40000, and 17% for the remainer.
This means that no individual would pay more than 15% of their post-deductable income to salaries tax.
Annual Financial Statement
Every company incorporated in Hong Kong must keep proper accounts and prepare its annual financial statement, which reports on the profits/losses of your company, as well as the profit tax that your company must pay.
The government provides a Sample Tax Return for your reference.
The financial statement must be audited by an independent auditor chartered under the Professional Accountants Ordinance. The report must then be presented to the shareholders in the company’s annual general meeting.
For newly-incorporated companies, this audit and annual general meeting must occur within 18 months of incorporation. Subsequently, the meetings must be held annually and the interval between AGM must not exceed 15 months.
For a newly-registered business, the IRD will send a profits tax return around the 18th month after the date of incorporation. In subsequent years, this will be sent on the 1st April. You need to complete the tax return and return it within 1 month.
You must also produce the following documents:
- Certified copy of your Statement of Financial Position / Balance Sheet
- Auditor's Report
- Statement of Comprehensive Income / Profit and Loss Account
- Tax computation with supporting schedules showing how the amount of Assessable Profits (or Adjusted Loss) has been arrived at
These documents must be supplied with the return if your corporation is NOT a SMALL corporation. The definition of SMALL CORPORATION is detailed in NOTE C3 of the Notes and Instructions. But generally, if your company's gross income does not exceed HK$2,000,000 (2 million), then it is usually deemed a small corporation.
If your company is a small corporation, you'd still need to produce those documents, but they do not have to be submitted with the tax return.
All figures must be in Hong Kong dollars. Income or expenditure in foreign currencies must be converted into Hong Kong dollars and state the conversion rate used. The government has provided information regarding Average Exchange Rates of Major Foreign Currencies for Salaries Tax Purposes
While the Annual Financial Statement is used to calculate the Profits Tax for your corporation, the Employer's Return is required to calculate the amount of Salaries Tax each employee must pay.
You can read more about in the article - Taxes in Hong Kong - Employment.