Welcome to Our Hong Kong Tax Residency Series Part 1. I am Henry Kwong, the Tax Partner of Cheng & Cheng. In part 1, we will tell you the special features of Hong Kong Taxation System.
Hong Kong is famous for its simple taxation system. There are only four main type of tax: Salaries Tax, Property Tax, Profits Tax and Stamp Duty. As you can see, the tax rate in Hong Kong is really really low. The maximum tax rate for Salaries Income is 15%, while the maximum tax rate for Profits Tax is 16.5%. Half tax rate concession is generally available for the first HK$2 million of profits.
More importantly, Hong Kong does not have capital gain tax and does not tax on dividend income. As such, Hong Kong is an ideal jurisdiction to set up investment holding companies.
If you can prove that a company or an asset is held for long-term investment purposes, the gain will be taxed at 0% in Hong Kong.
Lastly, Hong Kong does not have Estate Duty nor VAT / GST in most situations.
Hong Kong does not adopt worldwide tax system. Only Hong Kong sourced profits are subject to Hong Kong tax. Offshore profit claim used to be a useful tax planning in Hong Kong for both salary income and business income. Right now, offshore profit claim are an effective way to avoid double taxation issues.
Another clear advantage of Hong Kong is that we do not have withholding tax at all except for royalties paid to overseas corporations.
We do not have withholding tax on dividend, interest and services. The general withholding tax rate of royalty is 4.95%, but the tax rate under certain circumstances could be significantly different.
The low Profits Tax rate and withholding tax rate makes Hong Kong an ideal place to set up business here.
Last but not least, Hong Kong is rapidly expanding its Double Taxation Agreement network. It will help corporations significantly reduce the overseas withholding tax paid when you repatriate the profits back to Hong Kong. For further details, please watch our Part 2 Video.