Hong Kong, being a global financial hub, is preferred by entrepreneurs worldwide not only because of the bustling economy but also for its attractive tax regime. Hong Kong has a compelling environment for business planners with a territorial taxation system and competitive tax rates. Seems confusing? Or need more details on it. Let’s explore the Hong Kong Taxation and Tax planning execution steps to make business more profitable without breaking any law.

Types of taxes in Hong Kong

The tax system in Hong Kong has a two-tier tax regime with low rates and easily understood legislation. It has straightforward and business-friendly principles that are quick to file and easily get reflected. Here are a few details of all the tax systems that you should know about before you go into the formalities of filing a tax:

1. Profits Tax

It is calculated on the assessable profits of any trade, profession, or business which is carried on in Hong Kong. It can be both local and foreign companies that operate within the city. 

The standard tax rate for corporations is 16.5% on assessable profits. Assessable profits are the net profits of a business after deducting allowable expenses and any capital expenditure that cannot be claimed as a deduction. However, unincorporated businesses (e.g., sole proprietorships and partnerships) are subject to the same rate but calculated on their net assessable profits.

There are certain types of income that are exempt from Profits Tax, like:

• Dividends received from a subsidiary company.
• Capital gains on the sale of capital assets (e.g., shares and properties).
• Offshore profits not derived from Hong Kong.

2. Salaries Tax

Salaries Tax is calculated on income arising from any office, employment, or pension in Hong Kong. Whether you are a resident or a non-resident, the Salaries Tax is applicable on all Hong Kong sourced income. 

Salaries Tax rates are progressive, ranging from 2% to 17% for individuals. The tax is calculated based on net chargeable income after deductions and allowances. Chargeable income includes salaries, wages, bonuses, commissions, and other employment-related benefits.

However, Hong Kong offers allowances for personal, children, and dependent parent/grandparent allowances helping them to reduce taxable income while also providing 

Individuals are entitled to various allowances, such as personal allowances, child allowances, and dependent parent/grandparent allowances, which reduce their taxable income.

3. Property Tax

Property Tax is levied on the owners of land and buildings in Hong Kong. It applies to the rental income derived from properties situated within the city.

The standard tax rate for Property Tax is 15% of the net assessable value of the property. The net assessable value is determined after deducting allowable expenses related to property maintenance. The assessable value refers to the rental income derived from the property, including rent, service charges, and other payments.

However, individuals are also allowed to exempt certain properties like ones for charitable or agricultural purposes.

4. Stamp Duty

Stamp Duty is calculated on various transactions that involve immovable properties and stock transfers in Hong Kong. They basically apply to the following transactions: 

• Sale and purchase of properties.
• Leases and tenancy agreements.
• Transfer of shares and stocks.

However, these tax rates vary depending on the nature and value of the transaction. For example, the stamp duty on property conveyance ranges from 1.5% to 8.5% of the property value.

But intra-group transfers of shares and transfers involving charitable organizations are exempt from Stamp Duty

Importance of Professional Advice

Even though the taxation system in Hong Kong is easy to understand, there are a few mistakes that individuals generally make. This could be because of the local and foreign regulations being different, or new policies introduced frequently. But having a professional tax consultant like Buttar Associates can help you save your time and money effortlessly. Here are a few mistakes that Buttar can help in avoiding:

Incorrect classification of Income

Given that Hong Kong follows a territorial tax system, only income sourced within the city is taxable. So misclassifying offshore income as local income or vice versa can lead to either overpaying taxes or underreporting taxable income. A good way to avoid it is to seek professional advice to understand the source of income correctly.

Inadequate Record Keeping

Poor record-keeping can result in difficulties during tax filing, increased risk of errors, and potential penalties during tax audits. Hire a local accountancy agency that can take care of your financial records and review records to ensure that your data is accurate.

Failure to meet filing deadlines

Hong Kong's Inland Revenue Department (IRD) has specific deadlines for filing various tax returns, including Profits Tax, Salaries Tax, and Property Tax returns. Delays in late filing can lead to penalties and interest charges. A tax advisory service partner can set the reminder and ensure the timely submission of tax returns. 

Incorrect Deduction Claims

Overstating deductions or claiming non-deductible expenses can lead to tax audits and penalties for underreporting income, so it’s a safe option to seek expert tax consultancy.

Ignoring Double Taxation Agreements (DTAs)

Hong Kong, in current times, has signed Double Taxation Agreements (DTAs) with many countries to prevent double taxation on the same income. And if you are not aware of more such policies, it can lead to overpaying taxes and you might miss out on relief opportunities. If you have a professional tax consultant, they can help you save money here.

Regular consultations with Buttar Associates can help you avoid any common pitfalls, optimize your tax positions, and minimize the risk of penalties and legal issues ensuring that you are in compliance with Hong Kong's tax laws.