Taxation in Hong Kong

Under Article 108 of the Basic Law of Hong Kong, the taxation system in Hong Kong is independent of, and different from, the taxation system in mainland China. In addition, under Article 106 of the Hong Kong Basic Law, Hong Kong enjoys independent public finance, and no tax revenue is handed over to the Central Government in China. The taxation system in Hong Kong is generally considered to be simple, transparent and straightforward among jurisdictions in the world. Taxes are collected through the Inland Revenue Department (IRD).

Since the Common Law System is applied in Hong Kong, judgements by the Courts and Boards of Review in tax law cases are resorted to assist the interpretation of taxation rules and concepts. Furthermore, the Inland Revenue Department also issues Departmental Interpretation and Practice Notes (DIPNs) from time to time to clarify and elaborate on the tax rules and to smoothen the tax collection process.

Taxes collected in Hong Kong can be generally classified as:

In the fiscal year 2013/14, Profits tax, an income tax on corporations constituted the largest source of tax collected by the government, followed by Salaries Tax, an income tax on individuals.

Unlike most countries which apply both residential jurisdiction and territorial jurisdiction in determining the tax liability of a person, Hong Kong uses only the territorial source jurisdiction and disregards the concept of residence. Thus, only profits sourced in Hong Kong would be taxable whereas a person's overseas income will not be taxable. (As an exception, certain kinds of worldwide deemed trading receipts will be taxable for non-residents.)

Hong Kong Profits Tax is a tax levied on the net profits on business. Companies and individuals (sole proprietors) carrying out business in Hong Kong will be liable to Profits Tax provided that the profits are sourced in Hong Kong. The source of profits is one of the most controversial topics in the context of Hong Kong taxation. Principally, it is guided by an established set of tests and judgments in court cases. The Departmental Interpretation and Practice Notes provides viewpoints from IRD's perspective but these are subject to revision if major inconsistencies with court judgments are subsequently found. Certain kinds of deemed trading receipts are taxed irrespective of the source rule. Tax on these deemed trading receipts are collected by agents or other persons on withholding basis. Tax liability may be measured by reference to gross income or turnover for deemed trading receipts and in case where profits cannot reliably ascertained. Capital gain is out of the scope of Hong Kong Profits Tax. However, whether a gain is in capital nature is debatable.

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Wikipedia