The structure of taxation in Hong Kong is relatively simple. Hong Kong imposes income tax on a territorial basis. This means that generally income is only taxed in Hong Kong if it arises in or derives from Hong Kong. There are three main direct taxes:-
Any income that is not within any one of these categories is not subject to tax. Hong Kong does not impose any payroll, turnover, sales, value-added or capital gains taxes.
A person who carries on a trade, profession or business in Hong Kong is chargeable to profits tax on the profits from that trade, profession or businesses which arise or are derived from Hong Kong. Profits Tax is currently levied at the rate of 16.5%. Expenses incurred in earning assessable profits may be deducted and there is a scheme of depreciation allowances for fixed assets.
The question of source is one of fact and there is a sizeable base of case law as to the basis giving rise to taxable income. For a Hong Kong company, care is required to be taken when structuring transactions. Advice must be sought on the circumstances of each case. To obtain certainty concerning this and other tax issues, taxpayers may apply to the Inland Revenue Department ("IRD") for advance rulings on the tax implications of a transaction, subject to payment of certain amounts and compliance with other regulations.
A substantial number of funds flowing through Hong Kong may be treated as offshore-sourced. A Hong Kong business is not subject to Profits Tax on profits sourced outside Hong Kong.
Salaries Tax is imposed on all income arising in or derived from Hong Kong from an office or employment. For individuals who visit Hong Kong for periods of less than 60 days, no salaries tax will fall due. For individuals who are based in Hong Kong but have earnings derived outside the territory, an apportionment may be used. It is recommended to obtain professional advice on complex situations.
Property Tax is charged on the owner of any land or buildings in Hong Kong at the standard rate of 15% on the net assessable value of such land or buildings.
Tax returns are issued to taxpayers by the IRD generally on 1 April, the day after the tax year ending on 31 March. Generally, a tax return should be completed and returned within one month of issue. Hong Kong does not operate a self assessment system.
A Profits Tax return for a corporation will not be complete unless submitted with accompanying audited financial statements. Generally, a taxpayer within the charge to Hong Kong tax should ask for a return to be issued within four months after the tax year to avoid the imposition of penalties.
Companies generally make two payments of profits tax during the tax year. The first payment consists of 75% of the provisional tax for the current year plus 100% of the final payment for the preceding year. The second payment equals 25% of the provisional tax for the current year. The timing of payments is determined by assessment notices rather than by set dates, generally during November to April of the tax year.
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