Taxation Law

If a taxpayer disagrees with a tax assessment issued by the Inland Revenue Department (IRD), they have the statutory right to lodge an objection and, if necessary, pursue an appeal. This process is governed by the Inland Revenue Ordinance (Cap. 112) and must be followed strictly to preserve legal rights.

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1. Filing an Objection

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• The taxpayer must submit a written notice of objection to the IRD, clearly stating the grounds for disagreement.
• If the assessment is an estimated assessment issued under section 59(3) of the Inland Revenue Ordinance — for example, where no tax return has been filed or the IRD believes the return is incomplete — the taxpayer must also submit a completed tax return together with the objection letter. Without this, the objection will be considered invalid.
• The objection must be lodged within one month from the date shown on the Notice of Assessment.
• Late objections may only be entertained if the Commissioner is satisfied there are reasonable grounds, such as illness or absence from Hong Kong. The taxpayer must explain these reasons in the objection letter.
• Taxpayers with an eTAX account may file objections electronically for:
  
  • Salaries Tax and Property Tax on solely owned properties.
  • Profits Tax for sole proprietorship businesses.

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2. Appeal to the Board of Review

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• If the taxpayer is dissatisfied with the Commissioner’s written determination on the objection, they may appeal to the Board of Review (Inland Revenue Ordinance), an independent tribunal.
• The appeal must be made in writing and submitted within one month from the date of the Commissioner’s decision.
• The Board has discretion to extend the deadline if justified by exceptional circumstances.
• The Board may confirm, vary, increase, or annul the assessment, or refer the matter back to the Commissioner with recommendations.

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3. Appeal to the Courts

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• If the taxpayer is still dissatisfied after the Board’s decision, they may appeal to the Court of First Instance on a question of law.
• A summons application must be filed within one month from the date of the Board’s decision.
• With leave, further appeals may be made to the Court of Appeal.
• Court proceedings are complex and often require professional legal representation.

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Tax evasion in Hong Kong is a serious criminal offence under the Inland Revenue Ordinance (Cap. 112). It involves deliberately providing false or misleading information, omitting taxable income, or engaging in fraudulent schemes to reduce or avoid paying tax.

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Criminal Penalties:

• A fine of up to HK$50,000 for each offence.
• An additional fine equal to three times the amount of tax undercharged.
• Imprisonment for a maximum term of 3 years.
• In serious cases, courts have emphasised that immediate custodial sentences are appropriate, meaning offenders may be sent directly to prison without suspension.

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Civil Penalties:

• Even where criminal prosecution is not pursued, the Inland Revenue Department (IRD) may impose civil penalties.
• These can include fines of up to HK$100,000 or more, depending on the nature and seriousness of the offence.
• Civil penalties may also involve orders to rectify incorrect returns, submit missing information, or comply with statutory record-keeping obligations.

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Other Consequences:

• Damage to personal and corporate reputation.
• Possible investigation into related offences such as conspiracy to defraud or cheating the public revenue.
• Directors and officers of companies can be held personally liable if they consented to, or were involved in, the evasion.

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DTAs (tax treaties) aim at preventing double taxation, allocating taxing rights between territories and fostering cooperation between Hong Kong and other international tax administrations. 

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Hong Kong has entered into DTAs with the Mainland of China, the Macao Special Administrative Region. 

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These arrangements cover Profits Tax, Salaries Tax, and Property Tax, whether or not charged under Personal Assessment.

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As of the latest information, Hong Kong has DTAs with (non‑exhaustive list):

Armenia, Austria, Bahrain, Bangladesh, Belarus, Belgium, Brunei, Cambodia, Canada, Croatia, Czech Republic, Estonia, Finland, France, Georgia, Guernsey, Hungary, India, Indonesia, Ireland, Italy, Japan, Jersey, Korea, Kuwait, Latvia, Liechtenstein, Luxembourg, Malaysia, Malta, Mauritius, Mexico, Netherlands, New Zealand, Pakistan, Portugal, Qatar, Romania, Russia, Saudi Arabia, Serbia, South Africa, Spain, Switzerland, Thailand, Türkiye, United Arab Emirates, United Kingdom, and Vietnam.

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Stamp duty in Hong Kong is a tax imposed on certain documents, such as:

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• Property transaction documents
• Share transfer documents
• Lease agreements
• Instruments that increase rent

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The applicable rate depends on the type and value of the transaction.

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Sale or transfer of immovable property (Hong Kong):

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• Residential property:
  
  • For documents executed on or after 5 November 2016: Part 1 of Scale 1 AVD rates apply.
  • For documents executed between 23 February 2013 and 4 November 2016: Part 2 of Scale 1 AVD rates apply.

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Lease of immovable property:

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Rate depends on lease term:

• Uncertain term or term not exceeding 1 year: 0.25% of yearly or average yearly rent.
• Exceeding 1 year but not more than 3 years: 0.5% of yearly or average yearly rent.
• Exceeding 3 years: 1% of yearly or average yearly rent.
• For key money or construction fees: 4.25% of the consideration.
• Duplicate documents: $5 per copy.

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Transfer of Hong Kong stock:

For contract notes of sale or purchase: 

• 0.1% of the consideration or market value for each sold note and each bought note.

For transfers by way of voluntary disposition: 

• $5 plus 0.2% of the value.

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Property Tax in Hong Kong is levied under Section 5(1) of the Inland Revenue Ordinance (Cap. 112). It is charged on individuals or corporations that own property (land or buildings) in Hong Kong and derive rental income or other related payments from letting those properties. 

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Formula of calculating the property tax: 

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Property Tax=(Net Assessable Value)×15%

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Calculation of Net Assessable Value:

1. Start with rental income: all rent and related payments received or receivable by the owner (including overdue rent).
2. Deduct irrecoverable rent, if any.
3. Subtract rates (if paid by the owner).
4. Deduct a statutory allowance of 20% of the assessable value to cover repairs and outgoings.

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Year of Assessment

A year of assessment runs from 1 April to 31 March of the following year.

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Provisional Property Tax

Taxpayers pay provisional property tax in advance, based on estimated income as actual income may not be confirmed until year-end. The provisional tax is adjusted later when actual value is assessed. 

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Properties for Business Use

In the case where the owner uses the property for business purposes, and the rental income is already included in the taxpayer’s assessable profits in Profits tax purposes, the amount of property tax paid can be deducted from the profits tax assessed.

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Salaries Tax shall be charged for each year of assessment on every person in respect of his/her income arising in or derived from Hong Kong from any office or employment of profit or any pension, as specified in section 8(1) of the Inland Revenue Ordinance. 

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Therefore, salaries Tax is charged on any income from employment, office, or pensions arising in or derived from Hong Kong, for example:

• wages, 
• bonuses, 
• allowances, and 
• rental value of employer‑provided housing.

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Profits Tax in Hong Kong is a tax imposed on persons, partnerships, and corporations that derive assessable profits from any trade, profession, or business carried on in Hong Kong, other than profits of a capital nature. It is levied annually under the Inland Revenue Ordinance (Cap. 112).

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Profits Tax applies to both residents and non-residents, provided that the profits arise in or are derived from Hong Kong.  

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Residency status itself is not a determining factor.

• Residents who do not derive profits from activities or business operations in Hong Kong are generally not subject to tax.
• Non-residents, however, may be chargeable if their profits are generated from business activities carried out in Hong Kong, even if the business entity is based elsewhere.

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The key test lies in the "source of profits"

Only profits with a Hong Kong source are taxable. Determining whether a business is “carried on in Hong Kong” and whether its profits are “arising in or derived from Hong Kong” is a matter of fact and degree based on case law and practical circumstances. The Inland Revenue Department (IRD) assesses each case according to the nature of the transactions, the location of profit-generating activities, and the substance of the operations.

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Provisional Profits Tax

In addition to the final assessment, taxpayers are required to pay Provisional Profits Tax each year.

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This is an advance payment based on the assessable profits of the preceding year. The amount is credited against the final tax liability for the current year when the actual profits are determined. Adjustments or refunds are made where the provisional amount exceeds the final assessment.

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This system ensures a steady inflow of tax revenue and aligns tax payments closely with the timing of income generation.

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Hong Kong operates a territorial basis of taxation under the Inland Revenue Ordinance (Cap. 112) (“IRO”). This means tax is charged only on profits or income that arise in or are derived from Hong Kong, regardless of the taxpayer’s residence.

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1. Core Principle

Only Hong Kong-sourced profits are taxable.

Profits or income sourced outside Hong Kong are not subject to Hong Kong tax (unless caught by special deeming provisions).

There is no tax on worldwide income.

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2. Application to Different Taxes

• Profits Tax: Charged on assessable profits arising in or derived from Hong Kong from a trade, profession or business.
• Property Tax: Charged on owners of land/buildings situated in Hong Kong.
• Salaries Tax: Charged on income arising in or derived from Hong Kong from any office, employment or pension.

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3. No Residence-Based Tax

A company’s place of incorporation or residence is irrelevant for profits tax purposes.

What matters is source of profit, determined by facts — e.g., where contracts are negotiated/executed, where goods are manufactured, where services are performed.

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4. Foreign-Sourced Income Exemption (FSIE) Regime

• Effective 1 January 2023 for members of multinational enterprise groups.
• Certain foreign-sourced passive income (interest, dividends, IP income, disposal gains) received in Hong Kong is deemed taxable unless exemption conditions are met (e.g., economic substance, participation exemption).

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5. Source Determination

• Manufacturing profits: Source is where manufacturing takes place.
• Trading profits: Source is where contracts are effected.
• Service income: Source is where services are performed.
• Special deeming provisions apply to royalties, hire of movable property, exhibition of films, etc.

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6. No Capital Gains Tax

Profits from sale of capital assets are not taxable.

But sale of depreciable assets may trigger recapture of allowances.

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7. Losses

Tax losses can be carried forward indefinitely to offset future profits.

No carry-back and no group relief.

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8. Tax Treaties

Hong Kong has double taxation agreements with multiple jurisdictions to avoid double taxation and clarify source rules.

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Hong Kong levies:

• profits tax, 
• salaries tax, 
• property tax, 
• personal assessment
• taxation arrangement between Mainland and Hong Kong (to prevent double taxation)
• stamp duty, 
• estate tax, 
• betting duty, and
• hotel accommodation tax. 

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There is no value‑added tax (VAT), goods and services tax (GST), or capital gains tax.

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Taxation Law in Hong Kong refers to the comprehensive legal framework governing the assessment, collection, and enforcement of various taxes administered under Hong Kong law. The principal legislation is the Inland Revenue Ordinance (Cap. 112), which sets out the rules for major direct taxes, namely salaries tax, profits tax, and property tax. Together with its subsidiary legislation and related ordinances, it provides the foundation for the administration and interpretation of the territory’s tax system.

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In addition to these principal taxes, Hong Kong imposes specific taxes on selected activities. These include:

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Authorized betting activities: covering horse races, football matches, basketball matches, and lotteries. These are regulated under the Betting Duty Ordinance (Cap. 108), which authorizes the imposition of duties on such betting operations.

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Hotel accommodation tax: governed by the Hotel Accommodation Tax Ordinance (Cap. 348), which levies a tax on charges for accommodation provided in hotels or guesthouses.

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Collectively, these legislative instruments form part of Hong Kong’s overall taxation framework, ensuring revenue collection while promoting simplicity, fairness, and compliance within the scope of its territorial tax system.

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