How Investments Are Taxed In Hong Kong
If you are interested in investing, you have to understand the tax implications of your investments in Hong Kong.
Most people would cringe at the word “tax” because it seems complicated and very confusing. The computation and the various rules surrounding it make people hesitant to pay their taxes.
In Hong Kong, employees are responsible for calculating and paying their own taxes. Unlike the other nations, it is not deducted from the income automatically. If you do not take the time to learn how to do it, you might pay the wrong amount and that could land you in trouble.
Fortunately, the tax rules in Hong Kong is quite simple. According to the data from InvestHK.gov, Hong Kong has a simple tax system. When compared to 189 economies, it is revealed that this region has a very tax-friendly economy.
There are only three direct taxes to pay: salaries tax, profits tax, and property tax. These three do not only have a straightforward process, it also has a lot of deductions that can reduce the taxes that you will pay.
When you have investments in Hong Kong, you do not have to worry about any sales tax, VAT, withholding tax, capital gains, dividend tax, and even estate tax. Believe it or not, this region does not impose any of that. Isn’t that great?
That does not mean you will not be taxed for your investments. As you may have already guessed, there are two ways for you to pay investment tax in Hong Kong.
Profits tax in Hong Kong
According to the information from the Inland Revenue Department website, these are the important things you need to know about the profits tax in Hong Kong.
What is it?
This is the tax imposed on any individual, corporation, partnership, trustee, or anyone who conducts any trade, profession or business within the jurisdiction of Hong Kong. All profits derived from that act, except any profit from a capital asset sale, will be taxed. Unless the property is sold for the purpose of profit-making, that will be considered a business transaction and thus will be imposed with profits tax.
Who is charged? The tax obligation is usually the same for residents and non-residents – as long as the profit is raised in Hong Kong. A resident can work abroad and not be taxed while a non-resident earning profit in Hong Kong will be taxed. In fact, a resident in Hong Kong who gets remittance from abroad will not be taxed.
How is it calculated?
There are three simple calculations to go through to calculate how much you need to pay on your profits tax.
Step 1: Calculate the assessable profit.
Assessable Profit = (Profit – Loss per financial account) + (Disallowable expenses – Non-taxable income) – Depreciation allowances – Qualified charitable donation
Step 2: Remove the loss to get the net assessable profit.
Net Assessable Profit = Assessable profit – (Loss brought forward + Loss transferred from the partnership)
Step 3: Get the profits tax.
Profits Tax = Net assessable profit x Profits tax standard rate
The standard rate as of 2016 is at 16.5%.
How is a profit defined as taxable?
There are a couple of tests involved in determining if a profit earned should be taxed. The test will depend on the type of profit that was earned.
- Operation test. This is for profits earned from trading or manufacturing. For trading, if the sale and purchase were done in Hong Kong, it will be fully taxable. If only one of the sale or purchase was done in Hong Kong, it will still be assumed to be taxable but it can still be subject to analysis. For manufacturing, if the operation is done in Hong Kong, it will be considered taxable. Hong Kong companies manufacturing in China may or may not be taxed – depending on the manufacturing process.
- Situs test. This is for profits gained from rental income or any sale of an immovable property. If the property is in Hong Kong, it will be considered taxable.
- Activity test. This is for profits earned from services rendered. If the service is done in Hong Kong, you will be taxed for it.
Property tax in Hong Kong
The other way that your investment in Hong Kong can be taxed will be through any property that you bought. According to the IRD information about property taxes, these are the important details that you need to know about this tax.
What is it?
This is an income that is derived from the lease of a property. The standard rate is 15% of the net assessed value. This is usually based on the income earned during the assessment period – which is usually from April 1 to March 31 of the succeeding year.
Who is charged?
This tax is imposed on property owners. They are expected to keep their own records to prove the amount of rent received and the lease agreements signed by the tenant. Any receipts connected to the property and its lease should also be filed and kept for reference (at least for 7 years).
How is it calculated?
There are three steps to calculate the property tax you will pay in Hong Kong.
Step 1: Calculate the assessable value.
Assessable Value = Gross rental income + Premium – Irrecoverable rent – Rates paid by the owner
Step 2: Remove 20% for repairs and overhead costs to maintain the property.
Net Assessable Value = 80% of the assessable value
Step 3: Get the property tax.
Property Tax = Net assessable value x Property tax standard rate.
The standard rate as of 2016 is 15%.
Are there other duties involved?
Property owners are also expected to pay a stamp duty – which is calculated based on the rate of the rental value. The rate varies depending on the length of the lease. For instance, a lease for 1 year follows a rate of 0.25% while a lease of 1-3 years will be imposed with 0.50%. If the lease is more than three years, it will be 1%.
Get to know these investment taxes in Hong Kong so you will understand your obligations to the government for earning within their jurisdiction. This place holds a lot of possibilities for business investments so try not to get on the wrong side of the law by being irresponsible with your tax obligations.
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