Hong Kong Tax system

I.                   Introduction to the tax system

The Inland Revenue Ordinance established the tax system of Hong Kong.  Taxation is administered by the Inland Revenue Department. Income taxes are charged on income which has a Hong Kong source.  Estate duty is charged on the principal value of property located in Hong Kong passing on the death of the deceased. Stamp duties are charged on instruments relating to Hong Kong assets.  The residence status of a taxpayer does not normally affect his tax liability except in special areas (ship or aircraft owners and election for personal assessment).

Income tax is levied under separate categories:  profits tax, salaries tax, and property tax.  An individual taxpayer can elect, under personal assessment, to have all his assessable income from all sources aggregated together.  Tax shall then be assessed on the aggregate income/profits. All income taxes are directly assessed except for certain types of income of non-residents, such as royalties and income received by agents.

For profits tax and property tax, the tax is levied at a fixed, standard rate.  It is only in the case of salaries tax and personal assessment that tax is calculated on a progressive basis, but the overall tax cannot exceed the standard rate on the net assessable income before deduction of personal allowances.

II.                Primary tax incentives

A.     Low tax rates

The standard tax rate of 15% and corporation profits tax rate of 16% are very low in comparison with rates levied in other developed countries.

B.     No Capital Gains Tax

C.     No taxation on dividend income

D.    No tax on holiday allowance/home leave!

E.     Simplicity!!

III.             Tax treaties

There is no tax treaty with the United States.  A treaty with the P.R.C. to avoid ?double taxation? is in effect.

IV.             Primary types of taxation

A.     Salaries Tax

Single persons are given an allowance of $HK108,000.  Married persons allowance is $HK216,000.  Deductions for first and second children are $HK30,000 each.  The third through ninth children create deductions of $HK15,000 each.  Progressive tax rates go to a maximum of 15% but in no case will salaries tax go over the standard rate of 15% maximum.  Housing benefit, regardless of the amount of housing expenses, is normally calculated at 10% of employment income.

B.     Profits Tax

Corporations are taxed at 16% of income.  Unincorporated businesses are taxed at 15%.  Hong Kong corporations must have a Hong Kong annual certified audit.  ?Foreign? corporations eligible to do business in Hong Kong are not subject to this requirement if the jurisdiction under which they were incorporated does not require a certified audit.

C.     Property Tax

This tax, known as ?Rates?, is the primary revenue producer in Hong Kong.  Rates were increased from 4.5% to 5% on April 1, 1999.

V.                 Other taxes

Estate Duty

Stamp Duty

Airport Departure Tax

Betting Duty

VI.               Additional deductions from Profits Tax

A 100% write off is permitted on plant and machinery expenses for manufacturing and computer hardware and for software and systems development;  A 4% annual allowance can be taken for qualifying expenditures for commercial buildings;  A 20% yearly Refurbishment Allowance is established for decoration and renovation expenditure.

Additional exemptions for Estate Duty

All life insurance proceeds are exempt from the estate duty irrespective of where these proceeds are paid.

The Mandatory Provident Fund

This is the introduction of a ?Social Security Tax.  It is Hong Kong?s first time to have a tax like this and it appears to be creating a whole new ?cottage industry? around it.