Wednesday, 17 October 2012

HONG KONG TAX

Hong Kong personal Tax (salaries tax)
Salaries tax is charged on individuals in respect of all income arising in or  erived
from Hong Kong in relation to any office, employment or pension or payments for services rendered in Hong Kong. The tax charge is calculated at the lower of:

(a) 15% of chargeable income after deduction of charitable donations; or

(b) the applicable progressive rates on net chargeable income after the deduction of charitable donations and personal allowances. The progressive salaries tax rates for the year 2009/10 are as follows:


Net chargeable income (NCI) (HK$)        Progressive tax rate (%)

0 – 40,000                                                         2 %
40,001 – 80,000                                                 7 %
80,001 – 120,000                                              12 %
120,001 or above                                              17 %

NCI = Taxable income – Allowable deductions – Personal allowances
Salaries tax payable = Net chargeable income × Progressive tax rates



OTHER INCOME TAXES

Under the Hong Kong tax system, various sources of income are taxed under separate categories (i.e. business income is subject to profits tax, rental income is subject to property tax and employment income is subject to salaries tax).

Sometimes, it may be advantageous for an individual to elect to pay tax under 'personal assessment' if he/she has expenses which may be non-deductible against a particular source of income (e.g. mortgage interest payments) or allowable tax losses which cannot be completely absorbed by his/her business profits. Under personal assessment, all his/her assessable sources of income are aggregated in a single assessment.

Applicants must be permanent or temporary residents of Hong Kong. An election for personal assessment must be made within a stipulated time limit.

Real property tax – Property owners are taxed on rental income derived from property in Hong Kong. The tax is charged at the standard rate of 15% of the net assessable value of the property as determined by rent, service charges and fees paid to the owner, less an allowance of 20% for repairs and maintenance.

Inheritance/estate tax – No
Net wealth/net worth tax – No

Social security – For employees whose monthly income is HKD 5,000 or more, the employer is required to deduct 5% as the employee's contribution to the Mandatory Provident Fund (MPF) scheme and then pay an additional 5% as its own contribution. Self-employed persons also contribute 5% of their relevant income and may choose to contribute on a monthly or annual basis. The maximum deduction is HKD 1,000 per month. All benefits derived from mandatory contributions must be preserved until the scheme member attains the retirement age of 65, when the member may withdraw the benefits in a lump sum.

Tax year – The tax year starts on 1 April of  every year and ends on 31 March of the following year.

Tax Filing and tax payment – The Inland Revenue Department issues tax returns to individual taxpayers on the first working day of May each year.

Penalties – Penalties may be imposed for failure to comply with the Inland Revenue Ordinance. The Commissioner of Inland Revenue has authority to institute prosecution, to compound or to assess additional tax (which is a form of penalty) in respect of the offence.


 

Hong Kong profits Tax (company tax)

Hong Kong profits tax rates are as follows:

Corporations: 16.5%
Persons other than corporations: 15.0%


DEEMED TRADING RECEIPTS

The following income of a non-resident person is deemed to be receipts from a trade, profession or business carried on in Hong Kong:

(1) Royalties receivable from the exhibition or use in Hong Kong of cinematograph or television film or tape, any sound recording or any advertising material connected with such film, tape or recording.
(2) Royalties receivable for the use of or right to use in Hong Kong a patent, design, trademark, copyright, formula or other property of a similar nature.
(3) Royalties receivable for the use of or right to use outside Hong Kong a patent design, trademark, copyright, formula or other property of a similar nature if the payee of such royalties has claimed a tax deduction in Hong Kong.
(4) Sums received or accrued in respect of the hire, rental or similar charges for the use of movable property in Hong Kong.

The assessable profits for cases (1) to (3) above are equal to 30% of the sum receivable by the non-resident person if the Inland Revenue Department is satisfied that no person carrying on a trade, profession or business in Hong Kong has, at any time, wholly or partly-owned the relevant intellectual property. However, if the above condition is not satisfied, the assessable profits will be the full amount receivable by the non-resident person.


BRANCH PROFITS TAX

There is no distinction between branch profits tax and corporation profits tax. Branch profits of foreign corporations are also taxed at the flat rate of 16.5% on Hong Kong sourced profits.


OTHER TAXES

Other important taxes imposed include the following:


PROPERTY TAX

Property tax is charged at a standard rate of 15% on the net assessable value of any land or buildings in Hong Kong. The net assessable value is the rents payable to the owner of the land or building after deducting the following amounts:
(a) unpaid rent
(b) government rates paid by the owner
(c) 20% of the assessable value after deduction of (a) and (b) above.

Any building occupied by the owner as residence is exempted from tax.


ESTATE DUTY

The Hong Kong Government has abolished the estate duty effective from 11 February 2006 pursuant to the Revenue (Abolition of Estate Duty) Ordinance 2005. No estate duty will be imposed on the value of an individual's Hong Kong property passing on death.


STAMP DUTY

Stamp duty applies only to the following categories of transactions:
(a) contract notes on Hong Kong shares and marketable securities
(b) assignment of immovable property
(c) leases and assignment of leases of Hong Kong property
(d) insurance of bearer instruments.

Transactions in Hong Kong shares or marketable securities during the year 2009/10 will attract an ad valorem duty of HK$2 per HK$1,000 payable equally by the buyer and the seller.

Stamp duty on the transfer of immovable property is levied at the following rates:

Sales consideration (HK$)      Stamp duty rates 2009/10

1 – 2,000,000                       HK$100
2,000,001 – 2,351,760           HK$100 + 10% of excess over HK$2M
2,351,761 – 3,000,000           1.50%
3,000,001 – 3,290,320           HK$45,000 + 10% of excess over HK$3M
3,290,321 – 4,000,000           2.25%
4,000,001 – 4,428,570           HK$90,000 + 10% of excess over HK$4M
4,428,571 – 6,000,000           3.00%
6,000,001 – 6,720,000           HK$180,000 + 10% of excess over HK$6M
6,720,001 or above                3.75%


CAPITAL GAINS

There is no capital gains tax in Hong Kong and capital gains are not subject to corporate or personal income tax.


FRINGE BENEFITS TAX

There is no fringe benefits tax in Hong Kong.


LOCAL TAXES

There are no local taxes in Hong Kong.


DETERMINATION OF TAXABLE INCOME

Generally, in arriving at profits assessable to tax, deductions are allowed for revenue expenditure to the extent that they are incurred in the production of chargeable profits in the basis period. Special rules apply in respect of the following categories of expenditure.


CAPITAL ALLOWANCES

Capital allowances are available to a taxpayer who incurs qualifying capital expenditure on specified assets used in the production of chargeable profits.

The capital allowances can be classified into industrial building allowance, commercial building allowance, depreciation allowance for plant and machinery, and refurbishment allowance as summarised below.


INDUSTRIAL BUILDING ALLOWANCE

An initial allowance of 20% is granted in the year of purchase for capital expenditure incurred on the construction of an industrial building or structure occupied for the purposes of a qualifying trade, and an additional allowance of 4% of the capital expenditure (on a straight-line basis) is given annually.


COMMERCIAL BUILDING ALLOWANCE

A building or structure used for the purposes of a trade, profession or business other than an industrial building or used as stock in trade can qualify for a commercial building allowance. An annual allowance of 4% of the capital expenditure incurred on the construction of the building is given.


DEPRECIATION ALLOWANCE ON PLANT AND MACHINERY

Depreciation allowance on plant and machinery is in the form of an initial allowance and an annual allowance.

An initial allowance of 60% is granted in the year of purchase on capital expenditure incurred in acquiring the plant and machinery.

The annual allowance is based on the reducing value of each class of plant and machinery (the 'pool'). A pool is made up of all items of plant or machinery carrying the same rate of depreciation. It is only necessary for the assets to be or have been owned and used in the production of chargeable profits to qualify for the deduction. The annual allowance is equal to the reducing value of the pool multiplied by the appropriate depreciation rate, currently at 10%, 20% or 30% per annum.


EXPENDITURE ON PRESCRIBED FIXED ASSETS

Capital expenditure incurred on certain prescribed fixed asset in any year of assessment is allowed to be fully written-off in the year it is incurred. 'Prescribed fixed assets' include computer hardware and software, and certain defined plant and machinery that are used specifically and directly for any manufacturing process.


Expenditure on prescribed environmental protection facilities

With effect from the year of assessment 2008/09, capital expenditure incurred on certain prescribed environmental protection facilities is entitled to preferential tax deduction. Expenditure incurred on environmental protection machinery is allowed to be fully written-off in the year it is incurred whereas those on environmental protection installation is allowed to be deducted equally in five years of assessment.


REFURBISHMENT ALLOWANCE

With effect from 1 April 1998, a special allowance has been introduced to enable taxpayers to deduct 20% of the refurbishment expenditure annually over a five-year period.

Note that for industrial buildings and plant and machinery, both the initial allowance and the writing down allowance are available in a period in which the expenditure is incurred and the asset is brought into use (not just the initial allowance).


INVENTORY

All trading stock should be valued at the lower of cost or market value. Accepted valuation methods include FIFO and average cost but not LIFO, base stock method or replacement value. The term 'market value' would normally mean realisable value.


CAPITAL GAINS AND LOSSES

Capital gains and losses are not taxable or deductible in arriving at the assessable profits.


DIVIDENDS

Dividend income, whether from Hong Kong or overseas, is not taxable. Dividends paid to either a resident or non-resident of Hong Kong are not subject to any withholding tax.


INTEREST DEDUCTIONS

Interest expenses which fall within one of the following categories are deductible if incurred for the production of chargeable profits:
(a) Interest on money borrowed by a financial institution.
(b) Interest subject to Hong Kong profits tax in the hands of the recipient.
(c) Interest on money borrowed from a financial institution.
(d) Interest on money borrowed other than from a related person or corporation, wholly and exclusively for the provision of
     (i) plant and machinery that qualifies for tax depreciation allowances, or
     (ii) trading stock used in the production of chargeable profits.
(e) Interest paid on debentures.
(f) Interest paid to the holder of any instrument issued:
     (i) in the course of carrying on a business which is bona fide and marketable in either Hong Kong or major foreign financial centres approved by the Hong Kong tax authorities; or
     (ii) pursuant to any agreement or arrangement authorised by the Securities Commission under the Protection of Investors Ordinance.
(g) Interest on loans from a related corporation, where the creditor raised the borrowed amount entirely from the proceeds of an issue of debentures. With effect from 25 June 2004, certain types of interest expense must satisfy the following two additional conditions to be tax deductible:
     (1) The loan must not be effectively or actually secured by the lender or an associate of the lender.
     (2) There is no arrangement in place that the interest payment will be ultimately paid back to the borrower or to a person connected with the borrower.
Both of conditions (1) and (2) apply to types (b), (c) and (d) interest expenses. For types (e), (f) and (g) interest expenses, they are required to satisfy condition (2) only.


LOSSES

Losses incurred can be carried forward indefinitely for set-off against any future assessable profits of the same entity. However, there are anti-avoidance provisions in the Inland Revenue Ordinance that restrict the use of tax losses where a change in shareholding was undertaken solely or predominantly for the purpose of utilising the losses to obtain a tax benefit. Losses cannot be carried back.


OFFSHORE INCOME

Generally, income derived from or arising outside Hong Kong is exempt from tax under the territorial taxation system.


TAX INCENTIVES

(a) The low tax rates and territorial basis of taxation adopted by Hong Kong are in themselves major incentives to foreign investors.
(b) Share trading profits derived by non-resident investors trading through share brokers in Hong Kong are exempt from profits tax.
(c) Interest income derived from deposits placed in Hong Kong with authorised financial institutions by any person carrying on business in Hong Kong is exempt from profits tax.
(d) Income derived from bona fide offshore funds managed in Hong Kong is exempt from profits tax.
(e) Scientific research expenditure, including payments to an approved research institute and payments for technical education, qualify as allowable deductions.
(f) Profits derived by a professional reinsurer from the business of reinsuring offshore risks will be entitled to a 50% reduction in the profits tax rate.
(g) Profits derived from qualified debt instruments with a maturity period of at least three years will also be entitled to a 50% reduction in profits tax rate and full exemption will be granted to certain qualified debt instruments having a maturity period of seven years or more.


CORPORATE GROUPS

Companies of the same group are assessed to profits tax separately. There is no group tax relief in Hong Kong.


RELATED PARTY TRANSACTIONS

There is not a well developed transfer pricing regime in Hong Kong. Profits on royalty and licence fee received by a related non-resident person from its Hong Kong associate may be deemed to be trading receipts in Hong Kong and therefore wholly chargeable to profits tax. Furthermore, a non-resident person who does not carry on business in Hong Kong can be assessed to Hong Kong profits tax if he/she carries on his/her business with a closely connected resident person and the business is so arranged that the resident person earns either no profit or less than the ordinary profit which might be expected.


WITHHOLDING TAXES

Royalties and licence fees paid to non-residents for the use of certain intellectual properties in Hong Kong and payments to non-resident entertainers or sportsmen for their performance on commercial occasions or events in Hong Kong are subject to withholding tax of 16.5% on their assessable profits. There are no withholding taxes levied on dividends and interest.


EXCHANGE CONTROL

There are no exchange controls in Hong Kong.

No comments:

CBDT issues second round of frequently asked questions in relation to Direct Tax Vivad Se Vishwas Scheme, 2024

  This Tax Alert summarizes Circular No. 19/2024 dated 16 December 2024 (VSV 2- December Circular) issued by the Central Board of Direct Tax...