The meeting takes place in the welcoming lobby of an undisclosed hotel in Central, Hong Kong.
Head Tax Native (“TN”):
[Adjusts glasses, voice hushed] Secret Private Client Adviser in Hong Kong, your mission, should you choose to accept it, is to educate us on the detailed tax considerations in Hong Kong.
This task requires in-depth knowledge and utmost discretion.
Should your identity be compromised, you will be disavowed.
Are you ready to embark on this mission?
Secret Private Client Adviser in Hong Kong (Secret Adviser):
[Nods firmly, a glint of excitement in their eyes] I accept. Let’s unravel the complexities of Hong Kong’s tax landscape.
TN:
[Opens a notebook, intrigued] Could you start by explaining the tax system in Hong Kong, especially for individuals?
Secret Adviser:
[Leans forward, speaking earnestly] Certainly. Hong Kong operates on a territorial basis for taxation.
This means only income and profits arising in or derived from Hong Kong are taxed. There are two main legislations: the Inland Revenue Ordinance (IRO) and the Stamp Duty Ordinance (SDO).
For individuals, the primary tax is the salaries tax. It’s unique because it’s imposed on income earned within Hong Kong, regardless of the individual’s tax residency. [Pauses as a waiter passes by offering snacks]
TN:
[Nods, taking a snack] And what about the rates for this salaries tax?
Secret Adviser:
[Sips coffee, then responds] Salaries tax is interesting.
Individuals can be taxed at progressive rates from 2% to 17%, or a flat rate of 15%, depending on which method yields lower tax.
Deductions and allowances, like contributions to the mandatory pension scheme or donations to charities, play a crucial role in determining the taxable income.
TN:
[Frowning slightly] What about other forms of income? Are they taxed differently?
Secret Adviser:
[Smiles reassuringly] Indeed. For instance, rental income is subject to property tax, but individuals can opt for personal assessment, which allows them to be taxed on their aggregate income. But remember, dividends, interest, and trust distributions are generally not taxed.
TN:
[Leans in, curious] What about businesses? How does profits tax work?
Secret Adviser:
[Gestures with hands for emphasis] Profits tax is levied on profits arising in Hong Kong from any trade, profession, or business.
It’s similar to corporate tax but with a territorial twist. The place of incorporation or the tax residency of the company doesn’t matter as much as where the profits are made.
The rates are 8.25% for the first HK$2 million and 16.5% thereafter for corporations.
For unincorporated businesses, it’s 7.5% and 15%, respectively.
[A tourist nearby loudly inquires about local attractions, causing a brief distraction]
TN:
[Glancing at the tourist, then back] And what about property tax?
Secret Adviser:
[Nods] Property tax is charged on rental income from land and buildings at 15%.
However, if a corporation owns the property and the income is subject to profits tax, they can apply for an exemption from property tax.
TN:
[Scratching head] Stamp duty sounds complicated. Can you break it down?
Secret Adviser:
[Laughs lightly] Stamp duty in Hong Kong is indeed multi-faceted. It’s imposed on leases, transfer of immovable property, and Hong Kong stocks.
The rates vary, and there have been additional duties in recent years to cool the property market.
[Suddenly, a cleaner bumps into a table nearby, apologising profusely before scurrying away]
TN:
[Smirking at the interruption] I see. What about cross-border tax issues?
Secret Adviser:
[Nods seriously] Ah, that’s a critical aspect. Hong Kong’s tax treaties and agreements, especially for automatic exchange of financial information, are key.
The IRD issues certificates of resident status for international tax matters, but the concept of tax residency is less defined in Hong Kong law.
TN:
[Leaning back, satisfied] This has been incredibly enlightening. Your expertise is invaluable, Secret Adviser.
Secret Adviser:
[Standing up, discreetly] The world of taxation is ever-evolving, especially in a dynamic city like Hong Kong. Remember, discretion is the soul of our profession.
[They exchange a knowing look before the Adviser blends into the bustling hotel lobby.]
Final thoughts
If you have any queries about private client taxation in Hong Kong, or tax matters in Hong Kong more generally, than please get in touch