Hong Kong Taxation

Direct and Indirect Taxes

By CA Ravi. G. Thiruvenkadam

Agenda

• Introduction
• Direct Taxes
• Indirect Taxes
• Double Tax Avoidance Agreement
• Latest Developments

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Introduction

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Ordinance: Inland Revenue Ordinance (IRO)

Authority: Inland Revenue Department (IRD)

Tax System: Territorial based Tax system

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Taxes levied:

• Direct Taxes (Chapter 112 of IRO)
• Profits Tax
• Salaries Tax
• Property Tax

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• Indirect Taxes:
• Stamp Duty
• Customs Duty
• Excise Duty
• Betting Duty
• Business Registration

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Introduction

• There is NO:

- Capital Gains Tax

- Dividend Tax

- Wealth Tax

- Estate Duty (Abolished from Feb 2006)

- Gift Tax

- Withholding Tax except on Royalty payment to non-residents (2.475% - 4.95%)

- Sales Tax , VAT or GST

- Hotel Accommodation Tax

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��Profits Tax�

• Scope:

Source: All profits arising in or derived from Hong Kong from carrying on any Trade, Profession or Business. Excludes profits arising from sale of capital assets.

Persons: Sole proprietors, Partnerships, Corporations, Trustees and bodies of persons. No distinction between Resident and Non-Residents.

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Whether a business is carried on in Hong Kong and whether profits are derived from Hong Kong are largely questions of fact.

• Year of Assessment (YA): 1st Apr – 31st Mar. Any accounting year ends during the YA is taxed in the YA. Option to have your own accounting year end like 30th June, 30th Sep, 31st Dec, 31st Mar or any other date.

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Profits Tax Rates:

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• Tax Reduction: Businesses enjoy a tax reduction 100% subject to maximum of HK$6,000 for the Year of Assessment 2022/23.
• Provisional Tax: Advance tax for the following year is to be paid based on the profits assessed in the current YA.

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## If the Taxpayer has more than one connected entity (with common majority shareholding, voting rights or profit share), then Two-tiered tax rate is applicable to any one business only at the option of the Taxpayer

Profits Tax

Profits Tax

• Tax Incentives:
• 100% deduction for capital expenditure on Plant & Machinery related to manufacturing.
• 100% deduction for capital expenditure on Computer Hardware and Software
• 100% deduction for capital expenditure on specified Environmental protection facilities
• 100% deduction for capital expenditure on specified Environmentally friendly vehicles
• Full exemption for Interest received from banks excluding the interest on deposits pledged as collateral for banking facilities.

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Profits Tax

• Offshore Claims:

- Hong Kong adopts Territorial Source system of taxation

- Profits sourced outside Hong Kong are not subject to Hong Kong Profits Tax.

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• Broad guiding principles:

Operations Test:

- What the taxpayer has done to earn the profit

- Where he has done it

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Trading – place of purchase & sales contracts negotiated, and decisions made

Manufacturing – place of manufacturing

Service fee income – place where the services rendered

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�Salaries Tax�

Scope:

• Source: All income arising in or derived from Hong Kong from an office, employment or pension.

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• Persons: All the individuals. The resident status is not an important factor except in the context of DTAAs.
• IRO provides special provisions for crews of ships and aircrafts who visit Hong Kong for short spans of time.

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Chargeability:

• Hong Kong Employment :
• all the income from services rendered in Hong Kong.
• If all the services rendered outside HK, the employment income is not taxable in Hong Kong (“Territorial concept”).
• Non-Hong Kong Employment:
• Only income from services rendered in Hong Kong is taxable (“Time apportionment basis”)

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• Definition “Non-Hong Kong Employment”:

1. Employment contract entered and enforceable outside Hong Kong.

2. Employer resides outside Hong Kong

3. Salary is paid outside Hong Kong

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3.

Salaries Tax

“60-day rule” for services rendered in Hong Kong

• Less than 60 days in Hong Kong – considered no services rendered in Hong Kong
• More than 60 days in Hong Kong – income is calculated on pro rata basis on no. of days stayed in Hong Kong.

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Exemption:

• Income from office (Directors’ fee) – The 60 day rule and time-apportionment basis are not applicable, if the company’s central management and control are exercised in Hong Kong. Such fee is chargeable to Salaries Tax irrespective of where the payee Director stays. Otherwise, it is not taxable in Hong Kong.

Salaries Tax

Deductions Allowed:

• Approved Donations subject to a ceiling of 35% of the income
• Self-education expenses up to maximum of HK$100,000
• Elderly residential care expenses in respect of person or spouse’s parents and grandparents up to maximum of HK$100,000.
• Home loan interest paid on a home mortgage loan up to maximum of HK$100,000
• MPF contribution by the employee up to HK$18,000
• Voluntary Health Insurance Scheme (VHIS) policy premium up to HK$8,000
• Qualifying annuity premium and Tax Deductible MPF Voluntary Contributions (TVC) – maximum deduction HK$60,000.
• Domestic rents paid up to maximum of HK$100,000 from YA 2022/23 onwards

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Salaries Tax

Allowances:

Salaries Tax

Tax rates:

Taxable income ( = salary income – deductions – allowances) is taxed at progressive rates as below:

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• Note: The maximum tax is limited at the standard rate of 15% on the net assessable income after deducting the allowable deductions but before the allowances.
• Tax Reduction: Same as Business entities, individuals also enjoy a tax reduction 100% subject to maximum of HK$6,000 for Year of Assessment 2022/23.

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Salaries Tax

Personal Assessment (PA):

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What is Personal Assessment and how it may reduce tax liability:

Ordinary resident of Hong Kong may elect personal assessment and can aggregate the 3 sources of income namely, Profits Tax, Salaries Tax and Property Tax in single assessment.

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Advantages of PA:

• Can deduct interest on loan borrowed to acquire property which is let out. It is not available under Property Tax assessment
• Can offset business losses against salary income and property income
• Losses brought forward from previous year under PA may be used to offset current year income.
• Also, can avail all the deductions and allowances available under the 3 main sources of income if separately assessed.
• The tax rate is calculated in the same manner as Salaries Tax i.e. at progressive rate.

��Property Tax�

Source: Income from land and/or buildings in Hong Kong.

Persons: Owners of land and/or buildings

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Basis of Assessment:

• Assessable value = The actual consideration payable to the owner in respect of the right of use of the property.

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• Net Assessable value = Assessable value – irrecoverable rent – Govt Rates paid – 20% statutory allowance for repairs.

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• Property Tax = Net Assessable value is 15%

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• Tax Reduction: No Tax Reduction

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�Indirect Taxes - Stamp Duty�

Stamp Duty:

A. Lease

B. Transfer of immovable property

C. Transfer of shares

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A. Lease:

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Indirect Taxes - Stamp Duty

B. Transfer of Immovable Property:

3 types of Stamp Duties

1. Ad Valorem Duty (AVD)

2. Buyers Stamp Duty (BSD)

3. Special Stamp Duty (SSD)

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## The BSD is is payable in addition to the AVD payable

Residential Property:

Indirect Taxes - Stamp Duty

Non-Residential Property

Special Stamp Duty (SSD): When the residential property is sold within 36 months of purchase and payable at the time of selling.

C. Transfer of Hong Kong Stock:

0.13% on the value of every sold note and every bought note

�Indirect Taxes �

Betting Duty:

@ progressive rates from 72.5% to 75% on net stake receipts.

Business Registration:

HK$2,150 per year. Option to pay annually or 3 years in total.

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Customs Duty:

No Customs Duty on goods imported.

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Excise Duty:

Excise Duty is levied on limited goods like tobacco, liquor, methyl alcohol and hydrocarbons imported or locally manufactured.

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The duty ranges from 100% to per pc or per Kg rates.

Double Tax Avoidance Agreement �(DTAA)

Came into force on 30 November 2018

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Taxes covered:

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Article 2 – Taxes covered

Hong Kong

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• Profits Tax
• Property Tax
• Salaries Tax and
• Similar Taxes charged in the future

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India

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• The Income Tax including any Surcharge thereon

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• Taxes under DTAA are administered based on resident status of individuals, corporations, etc.,
• So, determination of resident status is important to avail benefits under the DTAA

Double Tax Avoidance Agreement (DTAA)

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Article 4 – Resident

Special case – Resident of both countries

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• The status shall be determined as follows
• Permanent home
• Centre of vital interests
• Habitual Abode
• Right of Abode in HKSAR /Right of Nationality in India
• If none of the above can determine, then by Mutual Agreement Process (MAP)

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• Article 6 – Income from property
• Income derived by a resident of a Contracting Party from immovable property situated in the other Contracting Party may be taxed in that other Party.
• Article 7 – Business Profits
• Profits of an enterprise of a Contracting party shall be taxable only in that party unless the business is carried on in the other Contracting party through Permanent Establishment (PE).

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Double Tax Avoidance Agreement (DTAA)

Article 10 – 13: Passive stream of incomes:

The following passive incomes are generally taxable in the resident country of the taxpayer. However, such incomes may also be taxed in the sourcing country by way of withholding tax.

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Withholding tax rates applicable as per India-Hong Kong DTAA are as follows:

• Dividend: 5%
• Interest: 10%
• Royalty: 10%
• Fees for Technical Services: 10%

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Article 14 – Capital Gains:

A resident of one Contracting Party deriving gains from the alienation of immovable properties situated in the other Contracting Party might get taxed in the other Party.

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Double Tax Avoidance Agreement (DTAA)

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Article 23 – Elimination of Double Taxation

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The HKSAR

• By way of tax credit for the taxes paid in India by a resident of the HKSAR subject to maximum of tax payable in the HKSAR.

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In India

• By way of tax credit for the taxes paid in the HKSAR by a resident of India subject to maximum of tax payable in India on the income before giving the deduction.

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Article 26 – Exchange of information

The competent authorities of the Contracting Parties shall exchange such information as is foreseeably relevant for carrying out the provisions of this agreement or to the administration or enforcement of the domestic law of Contracting Parties.

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�Latest Developments�

• Family-Owned Investment Holding Vehicles (FIHV): 0% tax on profit derived from qualifying transactions for an eligible FIHV managed by Eligible Single-Family office (ESF). Enacted on 19 May 2023 with retrospective effect from 1 Apr 2022.

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• Taxation on Foreign-Sourced Income – Gazetted on 22 December 2022 taking effect from 1^st Jan 2023. 4 types of foreign sourced income namely (1) Interest (2) Dividends (3) Gains from disposal of equity interests and (4) Income from Intellectual Properties (IPs) are chargeable to Profits Tax under certain circumstances for Multinational Enterprises (MNE) under Foreign-Sourced Income Exemption (FSIE) regime. It is deeming provision which considers Economic Substance, Nexus and Participation requirements.

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• Tax exemption (0% tax) or tax concessions (0% to 8.25%) for certain shipping related activities. Gazetted on 22 July 2022 taking effect from 1^st Apr 2022.

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Thank you�

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Email: ravi@skybestcpa.com