Property Tax

  • Calculation of property tax [read]

Salaries Tax

  • Tax computation of salaries tax, and personal assessment [read]
  • Allowances, deductions and tax rate table, and tax reductions for defferent years of assessment [read]
  • Tax reduction through the election of personal assessment [read]

Profits tax

  • Two-tiered profits tax rates (taxation at reduced tax rate)
    • Meaning of entity
    • Connected entity (including IRD guidelines)
    • Profits taxed at reduced tax rates
  • Reduction in Amount of Tax Payable
    • Prescribed percentage,
    • Prescribed amount, 
    • Tax reduction for different years of assessment [read]
    • Schedule 43, Inland Revenue Ordinance [read]
  • FAQ on profits tax
    • Arm's length services charge to the Hong Kong company
    • Transfer pricing between associated persons, incorporating the arm's length principle (effective from July 2019)
    • Taxation on director's remuneration

Stamp duty 

Inland Revenue Ordinance (Cap 112) [read]

Departmental Interpretation & Practice Notes [read]

 

 


 

 

 

Two-tiered profits tax rate

 

Tax rates on assessable profits

 

Fiscal period Before 2018.4.1.

Fiscal period on and after 2018.4.1.

 

Individual

15%

7.5

S14A, Schedule 8A

Company (up to 2 million)

16.5%

8.25%

 

S14A, Schedule 8B

Company (the portion over 2 million)

16.5%

16.5%

 

Section 14, Inland Revenue Ordinance

(1) Subject to the provisions of this Ordinance, profits tax shall be charged for each year of assessment on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business (excluding profits arising from the sale of capital assets) as ascertained in accordance with this Part. 

(2) For a person other than a corporation, the tax is to be charged on the assessable profits of the person—(a)for any year of assessment commencing before 1 April 2018—at the standard rate; or(b)for any year of assessment commencing on or after 1 April 2018—in accordance with section 2 of Schedule 8A. 

(3) For a corporation, the tax is to be charged, subject to subsections (4) and (5), on the assessable profits of the corporation—(a)for any year of assessment commencing before 1 April 2018—at the rate specified in Schedule 8; or(b)for any year of assessment commencing on or after 1 April 2018—in accordance with section 2(a) of Schedule 8B. [See further details on Section 14.]

 

 

Section 14AAC Charge of profits tax for connected entities

(1) This section applies to an entity in relation to any year of assessment commencing on or after 1 April 2018 (specified year of assessment) if, at the end of the basis period of the entity for that year of assessment, the entity has any connected entity.

(2) Section 14 applies to the entity subject to any applicable modifications specified in subsection (3).

(3) The modifications are—

(a) for an entity other than a corporation—the reference in section 14(2)(b) to "in accordance with section 2 of Schedule 8A" is taken to be a reference to "at the standard rate";

(b) for a corporation—the reference in section 14(3)(b) to "in accordance with section 2(a) of Schedule 8B" is taken to be a reference to "at the rate specified in Schedule 8"; and

(c) for a corporation that is a partner in a partnership—the reference in section 14(4)(b) to "in accordance with section 2(b) of Schedule 8B" is taken to be a reference to "at the rate specified in Schedule 8".

(4) However, the Commissioner may exempt an entity from subsection (2) for a specified year of assessment if the entity has elected in writing to be so exempted.

(5) The election, once made, is irrevocable.

(6) Subsection (4) does not apply to an entity (entity A) for a specified year of assessment if—

(a) entity A is a connected entity of another entity (entity B) at the end of the basis period of entity A for that year of assessment; and

(b) entity B has been exempted under that subsection for that year of assessment.

 

 

 

 

Section 14AAB Meaning of connected entity

 

(1) For the purposes of section 14AAC, an entity is a connected entity of another entity if—

(a) one of them has control over the other;

(b) both of them are under the control of the same entity; or

(c) in the case of the first entity being a natural person carrying on a sole proprietorship business—the other entity is the same person carrying on another sole proprietorship business.

(2) For the purposes of subsection (1), an entity (entity A) has control over another entity (entity B) if—

(a) in the case of entity B being a trust—entity A is entitled to a vested interest in more than 50% of the capital of the property of the trust—

(i) whether the interest is in possession or in remainder or reversion; and

(ii) whether the interest is defeasible or not; or

(b) in any other case—entity A has a specified interest in entity B.

(3) However, entity A does not have control over entity B if it falls within the description in subsection (2)(a) or (b) in respect of entity B solely by acting in the capacity of a trustee.

(4) For the purposes of subsection (2)(b), entity A has a specified interest in entity B if entity A, whether directly or indirectly through one or more than one other entity (interposed entity)—

(a) owns or controls more than 50% in aggregate of the issued share capital of entity B;

(b) is entitled to exercise or control the exercise of more than 50% in aggregate of the voting rights in entity B; or

(c) is entitled to more than 50% in aggregate of the capital or profits of entity B.

(5) For the purposes of subsection (4), the extent of any indirect interest of entity A in entity B is—

(a) if there is 1 interposed entity—the percentage arrived at by multiplying the percentage representing the extent of the direct interest of entity A in the interposed entity by the percentage representing the extent of the direct interest of the interposed entity in entity B; or

(b) if there is a series of 2 or more interposed entities—the percentage arrived at by multiplying the percentage representing the extent of the direct interest of entity A in the first interposed entity in the series by—

(i) the percentage representing the extent of the direct interest of each interposed entity (other than the last interposed entity) in the next interposed entity in the series; and

(ii) the percentage representing the extent of the direct interest of the last interposed entity in entity B.

(6) For the purposes of subsection (5), the extent of the direct interest of an entity in another entity is—

(a) in relation to issued share capital—the percentage of the issued share capital of the other entity directly owned or directly controlled by the first entity;

(b) in relation to voting rights—the percentage of the voting rights in the other entity that the first entity is directly entitled to exercise, or over which the first entity is directly entitled to control the exercise; or

(c) in relation to capital or profits—the percentage of the capital or profits of the other entity that the first entity is directly entitled to.

(7) For the purposes of this section, if an entity is a corporation, a reference to the exercise of the voting rights in the entity is to be construed as a reference to the exercise of the voting rights at general meetings of the entity.

 

See the IRD Guide - Illustrative examples on definition of "connected entity" under the two-tiered profits tax rates regime [read]

 

 

 

 

Section 14AA Interpretation

  1. In this section and sections 14AAB and 14AAC—

entity ( 實體 ) means—

(a) a natural person;

(b) a body of persons; or

(c) a legal arrangement, including—

(i) a corporation;

(ii) a partnership; and

(iii) a trust;

sole proprietorship business ( 獨資經營業務 ), in relation to a natural person, means a trade, profession or business carried on by the person as a sole proprietor.

(2) For the purposes of section 14AAB(1)(c), if a natural person carries on more than one sole proprietorship business, the person is taken to be a separate entity in relation to each sole proprietorship business.

 

 

Reduction in Amount of Tax Payable 

 

Section 100 of the Inland Revenue Ordinance provides tax reduction as follows:

Years of assessment

Rate of reduction

Maximum amount

Tax types applicable

2013/14

75%

10,000

Profits tax, salaries tax and tax under personal assessment

2014/15 to 2016/17

75%

20,000

Ditto

2017/18

75%

30,000

Ditto

2018/19

75%

20,000

Ditto

 

Section 100 - Reduction of taxes

 

S100(1) The amount of a person's salaries tax charged under Part 3 for a specified year of assessment is reduced by an amount equal to the lesser of —

  • (a) the prescribed percentage of the amount of the tax as computed under section 13(1) read together with section 13(2), as in force for the year of assessment; and
  • (b)the prescribed amount.

 

S100(2) The amount of a person's profits tax charged under Part 4 for a specified year of assessment is reduced by an amount equal to the lesser of —

  • (a) the prescribed percentage of the amount of the tax as computed under section 14(2) read together with sections 14A, 14B, 14D, 14H and 14J, as in force for the year of assessment; and
  • (b) the prescribed amount.

 

See "precribed percentage" and "prescribed amount" at Schedule 43 [here]

 


 

 

 

FAQ on Profits tax

 

Case on HK and non-HK source income, and the arm's length principle

 

Q1.  The Issue of arm's length principle

 

Q1. 1) If the holding company (which is located outside Hong Kong) charges the Hong Kong Subsidiaries (SUB-A & SUB-B) a management fee, are there any withholding tax & others tax incurred / to pay in Hong Kong by the holding company or SUB-B/SUB-A?
2) As the operation of SUB-A & SUB-B's were carried out outside Hong Kong, will any Hong Kong profit tax liabilities incur ?
A1

1) SUB-B is providing agency services outside Hong Kong

1. Hong Kong tax rules do not impose withholding tax on payments to non-residents in connection with service charge. The management fee is only deductible if the provision of management services is incurred for the production of Hong Kong source income. See section 16 of the Inland Revenue Ordinance.  Where the activities from which the profits arise take place outside Hong Kong, the profits are sourced from outside Hong Kong and not liable to tax in Hong Kong.

2. However, if the management services are provided by employees in Hong Kong, then the recipient of the management fee will be liable to HK profits tax.  Whether the provision of management services attracts Hong Kong tax liabilities is independent of the fact that Sub-B is earning non-Hong Kong source profits. The key point is that one looks to see what the taxpayer has done to earn the profit in question and where he has done it. See Commissioner of Inland Revenue v. Hang Seng Bank Ltd. [1991]

3. You should note whether the management is an arm's length amount. The management fee can be challenged by the Inland Revenue Department if the amount is not comparable with the management fee that would have been charged between independent parties under Part 8AA of the IRO (Transfer pricing rules), which came into operation as from 1st April 2018. 

2) SUB-A is selling properties located in China

If Sub-A's activities for the sale of PRC property are performed outside Hong Kong, SUB-A is earning non-HK source profits and not liable to HK tax. The management fee is deductible from sales income or charged to expenses in the income statement, without any HK tax implications. Note that if the management services are provided in HK, the recipient who delivers the services is liable to Hong Kong tax.

   

 

 

Q2.  Transfer pricing between associated persons

        See the IRD's Departmental Interpretation and Practice Note No. 59 on transfer pricing. [read]

 

 

Question on the taxable presence in Hong Kong: how to determine the tax liability of the director?

 

Q3. The director of a Hong Kong company works in the mainland of China for almost 365 days in a year. He gets paid in Hong Kong. Since he is performing duty outside Hong Kong, will he be exempted from salaries tax in Hong Kong?
A3.

In general, the HK tax rule looks at whether the employee has entered into employment contract with the HK Company. If yes, the employee is liable to HK salaries tax irrespective of where he works and where he receives the payment. The employee could be exempted from salaries tax under the following two situations:

(i) he has suffered and paid income tax outside Hong Kong. Section 8(1A) (c) of the Inland Revenue Ordinance (the IRO) refers [note: effective from 1st April 2018, the taxpayer has to use the credit method to avoid double taxation]; and

(ii) he works outside Hong Kong for the whole of the fiscal year, except that he visits Hong Kong for less than 60 days in the tax year. See section 8(1A) (b) of the IRO.

The director is a holder of office. The Hong Kong tax rule makes a difference between director's fee and salary income. The director is liable to Hong Kong salaries tax even if he stays outside Hong Kong for the whole of the fiscal year. This is so irrespective of where he works. Note that the Arrangement for the Avoidance of Double Taxation between Hong Kong and China provides that the director will be exempted from PRC income tax if he is a Hong Kong resident and he stays in China for less than 183 days in the tax year.

If the director of the HK company spends more than 183 days in China, he will be liable to both the individual income tax in China and salaries tax in Hong Kong. In that case, the double taxation can be avoided under the Double Tax Arrangement between the governments of Hong Kong and the the central government of China.

 

Q4. Given the same set of facts as above, what if the director holds the office with a BVI
company that is incorporated outside Hong Kong?
A4.

In this case, the director of the BVI Company will not be liable to Hong Kong salaries tax, with the exception that he performs his duty in Hong Kong for more than 60 days in the fiscal year. See section 8(1A)(a) of the Hong Kong Inland Revenue Ordinance. Note that where the director works in China for most part of the year, he is liable to PRC individual income tax.

 

 


 

 

 

 

Stamp Duty

 

 

 

Stamp Duty Ordinance (Cap 117) [read]