Hong Kong is known for having a simple tax regime with low tax rates, which explains why many are attracted to carry out business in Hong Kong. This article will help you understand (i) the territorial source principle of taxation; (ii) the different types of taxes; (iii) the double tax agreements/arrangements; and (iv) the relevant regulators and legislations.
Territorial Source Principle of Taxation
Rather than on the basis of residence, Hong Kong adopts a territorial source principle of taxation, meaning that only profits derived from a trade, profession or business carried on in Hong Kong are taxable. In other words, offshore income (i.e., non Hong Kong sourced) derived by a Hong Kong incorporated company is not subject to tax in Hong Kong.
Different types of taxes in Hong Kong
Taxes and duties collected in Hong Kong include profits tax, salaries tax and property tax. Duties include, for example, stamp duty, betting duty, customs and excise duty, hotel accommodation tax, first registration tax on vehicles, and air passenger departure tax.
Unlike many countries, Hong Kong does not impose a tax on capital gains or withhold tax on interests and dividends. Moreover, Hong Kong does not impose a gift tax, estate duties, net-worth taxes, public benefits taxes, sales tax, consumption tax or value-added tax. The list goes on.
Double tax arrangements
Due to Hong Kong’s territorial source principle of taxation, Hong Kong residents generally are not subject to double taxation, that is, to pay taxes in two or more tax jurisdictions on the same income. Despite this, the Hong Kong government has concluded double tax agreements/arrangements (DTA) with many trading partners, such as Canada, China, France, India, Japan, Korea, and UK. These agreements/arrangements provide certainty to investors that Hong Kong is a tax jurisdiction protected under a global tax regime.
Regulators & Legislation
The tax authority is the Inland Revenue Department. The main legislation governing taxation in Hong Kong are the Inland Revenue Ordinance and Stamp Duty Ordinance.
The Commissioner of Inland Revenue is responsible for administering these Ordinances and their Rules and Regulations.
Key Takeaways
- Taxes in Hong Kong can be categorised into direct and indirect taxes.
- The prevention of double taxation due to the territorial source principle of taxation in Hong Kong is governed by double tax agreements/arrangements.
- The Inland Revenue Department is responsible for regulating and collecting taxes.
References:
- Territorial principle of taxation: https://www.ird.gov.hk/eng/paf/bus_pft_tsp.htm
- Double tax agreements/arrangements trading partners: https://www.ird.gov.hk/eng/tax/dta_inc.htm
- Inland Revenue Ordinance
- Stamp Duty Ordinance