Hong Kong's Tax and Accounting System: What Do Businesses Need to Know?
Hong Kong 
Updated on January 18 
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- 1. History of the development of the tax system in Hong Kong
- 2. Accounting standards in Hong Kong
- 3. Foreign Exchange Control in Hong Kong
- 4. Main taxes in Hong Kong
- 5. Important tax issues that Hong Kong businesses need to pay attention to
- 6. Tax policy on offshore income (Offshore Claim) Hong Kong
- 7. Tax policy for cross-border businesses
- 8. How does GLA support businesses in tax and accounting declaration in Hong Kong?
- 9. Frequently asked questions about the tax system in Hong Kong
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There are many reasons why foreign entrepreneurs and investors should choose Hong Kong as a destination to invest, establish and expand their businesses such as:
- Convenience in establishing and operating business in Hong Kong
- Close to mainland China market
- Attractive tax system - with low personal and corporate income tax rates, no capital gains tax, no VAT, no sales tax, no withholding tax on dividends, interest or social security benefits.
This article by GLA aims to provide an overview of the tax system in Hong Kong. It also provides detailed information on each specific tax. By incorporating this attractive tax policy into its growth-oriented economic goals, Hong Kong is increasingly asserting its position as one of the preferred locations for most global entrepreneurs and business enterprises.
1. History of the development of the tax system in Hong Kong
- The Inland Revenue Ordinance (IRO) was first established in 1947 to impose and collect income taxes in Hong Kong. The mechanism for its operation was based on the legislative package developed by the United Kingdom for its colonies. As a result, the IRO is very similar to the tax systems in the UK, Australia, South Africa and other Commonwealth countries. When the tax system was first introduced in 1940, it was intended to be a temporary measure – to be replaced within a year or so, with higher rates.
- There was no tax reform between 1945 and 1970, although two review committees were established in 1954 and 1967. During the 1970s, Hong Kong developed rapidly and became a prominent modern city-state with an important international financial and commercial centre. This rapid development gradually led to the need for structural reforms in the tax system to increase public spending and tax rates. Therefore, the Third Review Committee was formed. However, the colonial government did not accept the proposed recommendations. As a result, the tax system, although established in the 1940s, remained largely unchanged.
- In 1997, the Government issued a consultation paper on the profits tax system, calling for proposals on how to improve Hong Kong's tax competitiveness and business environment. As a result of this initiative, a number of proposals were introduced in 1998. A further review committee was established in 2002, which recommended the introduction of a Goods and Services Tax (GST). The Government seriously considered introducing a GST but rejected the proposal in December 12 due to widespread public opposition.
2. Accounting standards in Hong Kong
Since 1 January 1, Hong Kong has adopted the Financial Reporting Standards (FRS) in compliance with the International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB).
Hong Kong requires all businesses to keep accounting records for at least seven years and have them audited annually.
Audit requirements:
- LLCs must hire independent auditors to confirm their financial statements.
- Small private companies may be exempted from audit if their turnover is less than HKD50 million/year.
Penalties for non-compliance:
- Fines up to HKD 100.000 for failure to keep adequate records.
- Businesses may be subject to tax investigations and fines if there are signs of violations.
3. Foreign Exchange Control in Hong Kong
No foreign exchange controls: Hong Kong does not impose foreign exchange controls, allowing free movement of money.
Freedom to trade foreign currencies:
- Businesses and individuals are allowed to hold, buy, sell and convert foreign currency without restrictions.
- There is no limit on the amount of foreign currency transferred into or out of Hong Kong.
No declaration of source of funds required:
- No prior authorization required for international transactions or money transfers.
- However, large transactions may be monitored to prevent money laundering.
No foreign exchange transaction tax applies:
- Profits/losses from forex trading are not taxable.
Convenient transactions in Chinese Yuan (RMB):
- Hong Kong is the largest international RMB trading center.
- Enterprises can open RMB accounts and make cross-border payments easily.
Anti-Money Laundering (AML) Regulations:
- Banks and financial institutions are required to report suspicious transactions.
- Transactions over HKD 120.000 or equivalent may be subject to information requests.
4. Main taxes in Hong Kong
4.1 Corporate income tax in Hong Kong
Subject of liability corporate income tax in hong kong:
- Business individuals, private companies, limited companies, partnerships, organisations, trusts with profits arising in Hong Kong.
- No tax on profits arising outside Hong Kong (tax exemption can be claimed if the income is proven to be foreign-sourced).
- Capital gains are not taxed.
Hong Kong applies a two-tier tax system for businesses:
- Legal entity (LLC, joint stock company, etc.)
- 8.25% on taxable profits up to the first HKD 2 million.
- 16.5% for profits exceeding HKD 2 million.
- Individual business (business household, partnership, etc.)
- 7.5% on taxable profits up to the first HKD 2 million.
- 15% for profits exceeding HKD 2 million.
- Affiliated companies are only allowed to apply the low tax rate to one company in the group.
For details on corporate income tax, please refer to the article: Corporate Income Tax in Hong Kong in detail from A to Z.
4.2 Personal Tax Hong Kong
Subjects subject to personal income tax
- Individuals with income from salaries, bonuses, allowances, pensions from Hong Kong sources.
- The company's board members are based in Hong Kong, even if they work overseas.
- Foreign staff working in Hong Kong.
Individuals are not subject to tax if:
- As a non-resident employee, working in Hong Kong less than 60 days/year.
- Income received from abroad that has no connection to Hong Kong.
How to calculate personal income tax in Hong Kong
Hong Kong applies two methods of tax calculation:
- Progressive Tax Rate from 2% to 17%, after deducting exemptions.
- Standard Tax Rate 15% of total taxable income.
The Hong Kong Revenue Department will adopt whichever method of calculation results in the lower tax payable.
| Taxable income (HKD) | Tax rate |
| 0 - 50.000 | 2% |
| 50.001 - 100.000 | 6% |
| 100.001 - 150.000 | 10% |
| 150.001 - 200.000 | 14% |
| On 200.000 | 17% |
4.3 Withholding Tax
Royalties and fees paid to non-resident artists and athletes for their performances in Hong Kong are subject to withholding tax on their taxable profits. No withholding tax applies to dividends and interest.
Hong Kong does not levy withholding tax on:
- Dividends – There is no withholding tax on dividends.
- Interest – There is no withholding tax on interest paid to foreign entities.
- Business profits – There is no withholding tax on business profits remitted abroad.
Hong Kong only applies withholding tax to the following payments:
- Royalties paid to foreign individuals or companies.
- Technical or consulting service fees from foreign suppliers (in certain specific cases).
4.4 Value Added Tax (VAT Tax)
Hong Kong does not impose value added tax (VAT Tax) or sales tax.
4.5 Property Tax in Hong Kong
Property tax in Hong Kong applies to income from the rental of real estate (residential, office, commercial premises, car parks, etc.) located within Hong Kong territory.
- Taxpayer: Property owner (individual or organization).
- Taxation by geographical origin: Tax is only levied on real estate located in Hong Kong.
No property tax applies to:
- Owner has no rental income.
- The company has paid profits tax on income from real estate.
Tax rates and how to calculate property tax in Hong Kong
- Flat tax rate: 15% on net value of rental income.
4.6 Hong Kong Stamp Duty
Stamp Duty in Hong Kong is a tax levied on the transaction of real estate and securities. It is levied on the transaction value and has different rates depending on the type of property.
Applicable to transactions:
- Buying and selling real estate (residential, commercial, land).
- Transfer of securities (stocks, bonds, investment contracts).
- Some valuable legal documents (contracts, financial documents).
Not applicable to:
- Government owned real estate.
- Securities trading does not take place in Hong Kong.
- Transfer of assets between parent and qualifying subsidiary.
The fixed registration tax rate of 15% is applied from November 5, 11 to:
- A company or individual who is not a Hong Kong permanent resident when purchasing real estate.
- Hong Kong permanent resident individuals purchasing second or more properties.
4.7 Dividend tax in Hong Kong
Dividend income, whether derived from Hong Kong or overseas, is not taxed, specifically:
No tax on dividends:
- Businesses are not taxed when distributing dividends to shareholders.
- Individual shareholders or organizations receiving dividends are also not required to pay taxes.
No Withholding Tax:
- Dividends remitted abroad are not tax deductible.
- It does not matter whether the recipient is an individual or a foreign organization.
4.8 Tax jurisdiction
Hong Kong follows a territorial tax system. In other words, tax is only levied on profits that arise from, or are derived from, transactions or businesses in Hong Kong. Tax is not levied on profits that are derived from outside Hong Kong. Therefore, if a company/individual establishes a company in Hong Kong but the profits are derived from outside Hong Kong, the company/individual will not be liable to pay tax on those profits, regardless of whether or not they have been remitted to Hong Kong.
This territorial taxation principle does not distinguish between residents and non-residents. For example, if an individual is a permanent resident of Hong Kong but the profits are derived elsewhere, he or she will not be taxed on that portion of the profit. Similarly, if an individual is not a resident of Hong Kong but derives profits from Hong Kong, he or she will be taxed on the profits in Hong Kong.
Whether a business is doing business in Hong Kong, or whether profits are derived from Hong Kong, is a matter of concern for businesses. However, some guidance can be found in cases that have been considered by the courts of Hong Kong and other common law jurisdictions.
4.9 Single-tier tax system
Hong Kong applies a single-tier tax system; that means there is no tax on dividends.
4.10 Capital Gains Tax
Hong Kong has no capital gains tax.
4.11 Customs and Excise Duty
Hong Kong is a free port. There are no import duties on general goods except for liquor, tobacco, hydrocarbon oils and methyl alcohol. For liquor, hydrocarbon oils and methyl alcohol, duties are levied on a specific volume basis. For liquor, duties are levied at different percentages based on its alcohol content. There are no excise duties or taxes on exports from Hong Kong.
4.12 Hotel Accommodation Tax (HAT)
This tax is levied on owners who provide accommodation at home. From 01 July 2008, the Government abolished the HAT tax. The tax rate was reduced to 0% (it had been 3% for the period up to 30 June 6) on all accommodation expenses paid to guests.
4.13 Hong Kong Estate Duty
Also known as the "death tax" or inheritance tax in some countries, this tax was abolished as of February 10, 2.
5. Important tax issues that Hong Kong businesses need to pay attention to
5.1 Provisional Tax Holdover
The Hong Kong tax system requires businesses to pay a portion of their tax based on previous year's income in advance, called Provisional Tax. Businesses can request a deferral or reduction of tax if:
- This year's profits are expected to fall more than 90% from last year.
- The company has accumulated losses to offset against taxable income.
- The company ceased operations before the end of the fiscal year.
Deadline for filing tax deferral application:
- At least 28 days before payment due.
- Within 14 days of receipt of tax notice.
5.2 Handling of tax declaration violations and penalties
Businesses need to ensure that their tax returns are truthful, otherwise they will face the following penalties:
Late Tax Payment:
- Penalty of 5% on unpaid tax amount.
- If you continue to be late, you will be fined an additional 10% and may be sued.
False declaration or tax fraud:
- Maximum fine of HKD 10.000 and may be subject to recovery of 3 times the tax underpayment.
- Serious cases may be fined 50.000 HKD and 3 years in prison.
How to avoid violations:
- Keep complete accounting records for at least 7 years.
- Periodic audit and assurance
5.3 Advance Ruling
Enterprises can request the Hong Kong Inland Revenue Department (HKIRD) to issue an Advance Ruling to determine how to calculate tax in certain special situations, helping to reduce the risk of tax disputes later.
Situations that require Advance Ruling:
- Determine whether income generated outside Hong Kong is taxable.
- Transfer pricing between parent company and subsidiary.
- Are asset sales subject to capital gains tax?
Processing time: Usually takes 2-3 months.
5.4 Tax Dispute Resolution
If a business disagrees with the HKIRD's tax decision, it can:
- File a formal complaint within 1 month of receiving the tax notice.
- Request negotiation or conciliation with the Hong Kong Revenue Department.
- File a lawsuit with the Tax Court if the dispute is not resolved.
Note: During the appeal period, businesses still have to pay taxes, but can request a tax refund after settlement.
5.5 Double Taxation Avoidance Agreement (DTA)
Hong Kong has signed more than 40 tax treaties with countries to avoid double taxation of income.
Businesses benefit if:
- Have business operations abroad and want to avoid double taxation.
- Remittance of profits or dividends to Hong Kong.
- Foreign employees work in Hong Kong but pay taxes in another country.
Countries with tax treaties with Hong Kong: Vietnam, China, Singapore, Japan, UK, France, Germany, USA, etc.
6. Tax policy on offshore income (Offshore Claim) Hong Kong
Hong Kong applies the territorial taxation principle, which means that it only taxes income generated in Hong Kong.
A business can claim an Offshore Claim if:
- No office or personnel in Hong Kong.
- The contract is concluded and performed entirely outside Hong Kong.
- No storage of goods or provision of services in Hong Kong.
Evidence must be prepared to prove that the transaction actually took place outside Hong Kong.
7. Tax policy for cross-border businesses
Businesses in Hong Kong often deal with international partners, so please note:
Inbound investment (foreign enterprises investing in Hong Kong)
- If a business has a permanent establishment in Hong Kong, profits generated there will be taxed.
- Without a PE, income may be tax-free.
Outbound investment (Hong Kong enterprises invest abroad)
- Profits earned outside Hong Kong are generally not taxed in Hong Kong.
- However, it may be taxable in the country in which the company invests.
Note on Withholding Tax:
- Some countries apply withholding tax on dividends, interest or royalties remitted abroad.
8. How does GLA support businesses in tax and accounting declaration in Hong Kong?
GLA is one of the units supporting businesses in the fields of accounting, tax and legal compliance in Hong Kong. Below are the services GLA provides to help businesses optimize their accounting and tax declaration in Hong Kong.
- Set up your financial system in compliance with HFRS with our Hong Kong corporate accounting and financial reporting services
- Record financial transactions according to professional accounting systems.
- Prepare annual financial statements in accordance with the regulations of the Hong Kong International Accounting Standards Council (HKICPA).
- Cost optimization consulting to ensure business operations are efficient and in compliance with regulations.
- Tax declaration support in Hong Kong
- Prepare and submit corporate tax returns (Profits Tax Return) as required by Hong Kong Inland Revenue Department (HKIRD).
- Calculate personal income tax (Salaries Tax) for employees, including foreign workers working in Hong Kong.
- Declare and process property tax if the business has rental properties in Hong Kong.
- Evaluate and optimize tax rates, especially applying tax incentives under current laws.
- Audit and legal compliance for companies incorporated in Hong Kong
- Consulting and connecting auditors suitable for the industry and company size.
- Prepare complete financial records before submitting to auditors.
- Explain to tax authorities if requested for inspection.
- Support in handling arising tax issues
- Consult with the Hong Kong Inland Revenue Department (HKIRD) to clarify any relevant issues.
- Prepare documents and evidence to prove the validity of income and expenditure.
- Support for requesting tax payment extension or tax reporting adjustment.
9. Frequently asked questions about the tax system in Hong Kong
What are the main taxes in the Hong Kong tax system?
Hong Kong imposes several major taxes: Profits Tax, Salaries Tax, Property Tax, Stamp Duty and Customs Duty, etc.
What is the profit tax rate?
- Limited Company: 8,25% on first HKD 2 million, 16,5% on excess profits.
- Private and partnership enterprises: 7,5% on the first HKD 2 million, 15% on the excess.
How is Personal Income Tax (Salaries Tax) calculated?
There are two ways to calculate:
- Progressive tax rates range from 2% - 17% after deduction of exemptions.
- Fixed tax rate of 15% if more beneficial to taxpayer.
Who does Property Tax apply to and how much is it?
Owners of rental properties are required to pay property tax at a rate of 15% on the net rental income.
Who can be exempt from property tax?
Companies that have paid profits tax on rental income can claim property tax exemption.
Are there any tax incentives for businesses?
Yes, such as deducting the cost of purchasing manufacturing machinery, computer software, environmentally friendly equipment, and income from long-term bonds.
Can Hong Kong businesses declare losses for future tax deductions?
Yes, tax losses in one year can be carried forward to the following year to deduct from taxable profits.
Which countries does Hong Kong have double taxation agreements (DTAs) with?
Hong Kong has signed DTA agreements with more than 40 countries and territories, including China, Singapore, Japan, the UK, the US, etc.
Highlights- Territorial Source Principle: Only income generated in Hong Kong is taxed. Income earned abroad, even if remitted to Hong Kong, is generally not taxable.
- Flexible Profits Tax for businesses: Companies enjoy a preferential tax rate of 8.25% for the first HKD 2 million of profits and 16.5% for the remainder. Eligible business expenses such as interest, rent, research & development can be tax deducted.
- Double Taxation Avoidance: Hong Kong has signed more than 40 double taxation agreements, helping businesses and individuals to take advantage of tax benefits in international business.
- No Value Added Tax (VAT) or Sales Tax: Unlike many other countries, Hong Kong does not impose VAT or sales tax, which reduces the tax burden on businesses and facilitates trade.
This article was published by GLA on 23/12/2015. Copyright and accompanying content are intellectual property of GLA. All rights reserved.
The guidance and content are for general information only and are not intended to provide specific guidance and advice on accounting, tax, legal or other professional advice. Readers should consult professional advisors on specific issues.
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