The Hong Kong Tax System Explained
An overview of Hong Kong's simple tax system. Understand how tax is determined by the source of your income, a key distinction from residency-based approaches.
Hong Kong’s tax system is known for its simplicity and low rates. Unlike systems that tax worldwide income based on citizenship or residency, Hong Kong’s structure is built on the territorial source principle. This means tax is levied only on income that arises in or is derived from Hong Kong. This approach creates a unique financial environment for both individuals and corporations. The system targets specific types of income through separate, direct taxes and does not have capital gains taxes, withholding taxes on dividends and interest, or value-added taxes.
The Territorial Source Principle
The territorial source principle means that income earned from activities outside of Hong Kong is not subject to its tax, regardless of an individual’s residency or a company’s place of incorporation. For individuals, the application of this principle to employment income, or Salaries Tax, depends on where services are rendered. An employee of a Hong Kong-based company will have their full income subject to tax. If that employee travels for business, the income related to services performed outside the city may still be considered Hong Kong-sourced. An exemption exists for individuals with non-Hong Kong employment who visit the city for 60 days or less in a tax year.
For businesses, the source of profits is determined by the location of the core operations that generate them. The Inland Revenue Ordinance provides the legal framework, but the “operations test” is a practical guide: one must identify what the taxpayer did to earn the profit and where they did it. For instance, if a company’s profits are from manufacturing, the source is where the manufacturing occurs. Profits from goods made entirely outside Hong Kong are considered offshore and not taxable, even if sales are managed from a Hong Kong office. The location where sales contracts are negotiated and finalized is also a factor in determining the source of trading profits.
Key Direct Taxes in Hong Kong
Hong Kong’s tax structure is built around three direct taxes that are assessed independently, though an individual can elect for a consolidated assessment. The first is Salaries Tax, levied on income from employment, holding an office, or a pension for services rendered in Hong Kong. This encompasses remuneration like wages, bonuses, commissions, and certain non-cash benefits, and it applies to anyone earning income from a Hong Kong source.
The next is Profits Tax, which applies to profits from any trade, profession, or business carried on in Hong Kong. This tax is applicable to corporations, partnerships, and sole proprietorships.
The third direct tax is Property Tax, charged on income from the rental of land and buildings in Hong Kong. This tax is levied on the property owner and is a separate charge from the profits of a property management business, which fall under Profits Tax.
Calculating Your Tax Liability
For Salaries Tax, the liability is the lower of two calculations. The first method applies progressive rates to the “net chargeable income,” which is assessable income after subtracting deductions and allowances. For the 2024/25 tax year, rates start at 2% on the first HK$50,000 and increase to a maximum of 17%. The second method applies a standard rate of 15% to “net income” (assessable income minus deductions), with a second tier of 16% for income over HK$5 million.
Common allowances and deductions for Salaries Tax include:
- Basic allowance (HK$132,000)
- Married person’s allowance (HK$264,000)
- Child allowance (HK$130,000 per child)
- Mandatory contributions to retirement schemes (up to HK$18,000)
- Self-education expenses (up to HK$100,000)
- Approved charitable donations
Profits Tax uses a two-tiered system. For corporations, the first HK$2 million of assessable profits is taxed at 8.25%, with the remainder taxed at a flat rate of 16.5%. For unincorporated businesses, the rates are 7.5% on the first HK$2 million and 15% on the remainder. Businesses can deduct expenses incurred in producing profits, such as employee salaries, rent for office premises, and the cost of goods sold, but domestic, private, or capital expenditures are not deductible.
Property Tax is levied at a standard rate of 15% on the net assessable value of a property. This value is the total rental income less a statutory allowance of 20% for repairs and outgoings. If the owner pays government rates, these can be deducted from the rental income before the 20% allowance is applied.
For the 2024/25 assessment year, a one-off tax reduction reduces the final tax for both Salaries Tax and Profits Tax by 100%, up to a maximum of HK$1,500 per case.
Tax Administration and Compliance
Hong Kong’s tax system is managed by the Inland Revenue Department (IRD). The tax year runs from April 1 to March 31, after which the IRD issues tax returns. Individual returns must be filed within one month of issuance, though extensions are common.
The system uses a provisional tax for both Salaries Tax and Profits Tax. The IRD issues a provisional assessment for the current tax year based on the income of the preceding year. This estimated tax is payable in two installments: 75% in the final quarter of the tax year and the remaining 25% three months later. Once the final liability is calculated, the provisional amount paid is credited against it.
If a taxpayer’s income is expected to be less than 90% of the previous year’s income, they can apply to have the provisional tax reduced. This application must be submitted to the IRD no later than 28 days before the payment due date. Payment can be made through online banking, ATM transfers, or by mail.
If a taxpayer disagrees with an assessment, they can lodge an objection in writing to the Commissioner of Inland Revenue within one month of the assessment date. The IRD will review the case and may amend or confirm the assessment.