Hong Kong: Guide to Income Tax for Foreigners

10 minute read

An income tax return is a form filed with a taxing authority that reports income, expenses, and other pertinent tax information. Tax returns allow taxpayers to calculate their tax liability, schedule tax payments, or request refunds for the overpayment of taxes.

Most tax authorities in the world require taxpayers to file tax returns annually.

But, how does this work in Hong Kong? Seeing that the tax system in Hong Kong is different from the one in Mainland China, business owners should be familiar with it if they have any kind of business in Hong Kong. On top of that, Hong Kong is a heaven for foreigners when it comes to taxes.

Overview:

• Is There An Income Tax in Hong Kong?
• What is Provisional Tax in Hong Kong?
• Is Bank Interest Taxable in Hong Kong?
• Do I Need to Pay Tax in Hong Kong?
• Employers & Employees 
• Expats
• Freelancer / Self- Employed
• Taxes For Unemployed Individuals
• Bonus Tips For Foreign Companies

Is There An Income Tax In Hong Kong?

Sorry to burst your bubble, but the answer is yes. There is income tax for every individual in Hong Kong. Even foreigners have to pay taxes.

There are also differences between profits tax, income tax and property tax, with different requirements for each. However, Hong Kong indeed has one of the most attractive income tax rates of any of the first-world economies. Since Hong Kong really is a tax haven, the region’s income tax rates for foreigners, along with its corporate tax rates, help create an exceptional business environment.

Expatriate professionals and business owners can rest assured that their income tax burdens will be considerably lower in Hong Kong compared to most other countries in Europe and Asia. Royalties and/or fees paid to non-resident/overseas entertainers or sportsmen for their performances in Hong Kong are subjected to withholding tax on their assessable profits. There are no withholding taxes levied on dividends and interest.

Under the Comprehensive Arrangement, a Hong Kong resident working in the Mainland may be exempted from taxation in the Mainland on the basis that all 3 of the following conditions:

• Resident is present in the Mainland for a period or periods not exceeding in the aggregate 183 days in any 12-month period commencing or ending in the taxable year concerned
• The remuneration is paid by/on behalf of an employer who is not a Mainland resident
• The remuneration is not borne by a permanent establishment which the employer has in the Mainland

On top of that, there are no capital gains taxes and the region’s tax laws also offer various deductions and allowances. Also, they completely exempt income earned outside the region.

This is why foreigners find it attractive to start a business in Hong Kong!

What Is Provisional Tax In Hong Kong?

The provisional tax is charged by referring to the amount of a taxpayer’s net chargeable income for the preceding year of assessment. However, Hong Kong provisional salaries tax is not a prepayment. This is a rather common misconception, since many people believe that a taxpayer pays this tax on future employment income.

Provisional tax is payable in two instalments:

• 75% applies  in the last quarter of the year of assessment
• the remaining 25% shortly after the end of the year of assessment.

Is Bank Interest Taxable In Hong Kong?

Interest income sourced in Hong Kong which is received by a corporation that carries on a trade or business in the region is subject to profits tax.

An exemption pertains to interest income derived from any deposit placed in Hong Kong with a financial institution unless the deposit secures a borrowing where the interest expense is deductible.

However, this exemption does not apply to interest accruing to a financial institution.

Interest accruing to a bank or financial institution is deemed to be sourced and taxable in Hong Kong if the interest arises through or from the business conduct in Hong Kong by the bank or financial institution.

Interest income arising through or from the carrying on of an intra-group financing business in Hong Kong by a corporation will be deemed to be sourced and taxable in Hong Kong.

Do I Need To Pay Tax In Hong Kong?

Apart from the residents in Hong Kong, you are subjected to salary tax. This includes individuals that are  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. Hong Kong practices a territorial taxation rule – the concept of tax residency has no significance in determining tax liability (except in limited circumstances).

Tax rates imposed on individuals are progressive based on their net chargeable income (i.e. assessable income after deductions and allowances) which starts at 2% and is capped at 17%; or 15% of net income (i.e. income after deductions only).

Employers & Employees

Employers are not required to withhold tax for its employees, regardless of whether the employees are residents in Hong Kong. Unless it is a case of termination and/or employee wishes to leave Hong Kong within 1 month of ceasing employment, the employer will then have to send a form to the Inland Revenue Department (IRD) of the departure and must temporarily withhold ALL payment (including salary) due to the employee till the “Letter Of Release” is issued.

Find out more about departure from employment in Hong Kong here.

Expats

Hong Kong laws function under a territorial principle. This means that only income earned in Hong Kong is taxable in Hong Kong. But, income that has been taxed elsewhere could be exempt from the salary tax in Hong Kong, while income earned for work done outside of Hong Kong can also be considered outside the jurisdiction.

Income earned locally by visitors staying for fewer than 60 days is also exempt from Hong Kong salaries tax.

A general rule of thumb is that there is no separate ‘Hong Kong expatriate tax’ and tax rates, so calculation methods remain the same for everyone.  Most expatriates employed in Hong Kong will pay salaries tax in Hong Kong.

Freelancer/Self-Employed

If your income is derived from buying and selling of goods, or from providing professional or personal services, you are considered to be a self-employed entity conducting business.

A self-employed person may be either a sole proprietor or a partner of a partnership business. However, you need to register with the Inland Revenue Department (IRD) if you are an unincorporated company.

Every self-employed person is subject to profits tax on the assessable profits of your sole proprietorship or partnership business.

All self-employed individuals have the following responsibilities:

• Keep sufficient business records for at least 7 years.
• Prepare accounts based on your accounting records.
• Complete and submit a tax return for reporting business profits or losses.
• Notify the Inland Revenue Department in writing about your liability to tax unless you have already received the tax return from the Department.
• In addition, you need to notify the Inland Revenue Department about the potential cessation of your business and change of address.
• And, pay tax.

Taxes For Unemployed Individuals

Luckily and expectedly, there are no unemployment taxes in Hong Kong. Therefore, if you are not currently employed, there is no need to worry about paying taxes.

Bonus Tips For Foreign Companies

The Hong Kong authorities have expanded the scope of deductions and allowances in recent times. As a result, there are many incentives provided to continue driving investments.

Hong Kong’s tax system is still one of the most competitive and beneficial systems both for locals and expatriates. Even foreign companies can seek financial help from different chambers of commerce, ask for international grants, and so on.

Bear in mind that assessable profits of a corporation are taxed at the corporate tax rate of 16.5%. Various tax incentives exist for special business operations such as tax exemption for profits derived by offshore funds and profits derived from operating ships in Hong Kong.

Profits rendered from the business of reinsurance of offshore risks as a professional reinsurer and profits of a qualifying Corporate Treasury Centre are taxed at half of the corporate tax rate.

Wrap Up

Even though you need to pay income tax in Hong Kong, this is still is one of the most attractive places for entrepreneurs due to its great taxation system.

If you have more questions regarding foreigners income tax Hong Kong, feel free to contact Sleek!