Taxation in Hong Kong and Your Home Place

Hong Kong's low tax regime has made the city an attractive destination for non-local talent, and it's often considered a tax haven due to its laws that limit taxation on outside residents and corporations. In fact, in 2020, accounting firm PwC ranked Hong Kong second only to Bahrain in terms of having the most-friendly tax system, without taxing capital gains, interest, dividends, or sales tax benefiting investors and shoppers. 

As you relocate to a new city, you may consider hiring an accountant to help you navigate through the taxation process. However, it's helpful to understand the tax regulations of both Hong Kong and your home place, so as to ensure you comply with all tax obligations and avoid double taxation.  

Territorial-based Tax in Hong Kong

Hong Kong follows a territorial basis of taxation. To put it simply, only income sourced within Hong Kong is subject to tax, meaning earnings made beyond the territory’s borders are not taxable. Whether you're self-employed or work for a company, you need to file a tax claim individually and pay the estimated amount on time. The good news is that filing your taxes is relatively straightforward in Hong Kong. 

For residents who work for a company pay a salary tax following a progressive tax rate system with five marginal tax brackets from 2% to 17%,   or at a standard rate of 15%.  To file your salary tax claim, you need to submit a BIR60 form, in print or online through e-Tax. This form covers all your employment income, including income from the office and pension, profits from sole proprietorship businesses, rental income from solely owned properties, as well as claiming deductions and allowances in one return. You can utilize the Guide to Tax Return (Individuals) by  Inland Revenue Department (IRD), which explains everything from completing the BIR60 form to the types of allowances available. The IRD website also offers an automatic tax computation system that helps you calculate your estimated taxes.

While for self-employed individuals or startuppers, on the other hand, you are chargeable to profits tax on the assessable profits of your sole proprietorship or partnership business. The two-tier profit tax rate stands between 7.5 to 15% for non-corporates, and 8.25% to 16.5% for corporates, depending on the profit levels generated in Hong Kong. There are three series of Profits Tax return forms, depending on your business nature:

• Corporations (BIR51)
• Persons Other Than Corporations (BIR52)
• In Respect Of Non-Resident Persons (BIR54)

To make it at ease, you can follow the guidance here and submit Profit Tax Tax Return through the Internet. 

Residency-based Tax in Mainland China and other countries

On the contrary, some countries follow a residency-based tax system, including Australia, Canada, Japan, the UK, New Zealand, Mainland China and more. This means that taxes are levied based on the taxpayer's place of residence. In other words, if an individual resides in a particular country, they are typically subject to taxation on their worldwide income in that country. Worth noting that some of these countries also have special rules that apply to non-residents or to certain types of income, such as income earned from foreign sources, not to mention the specifics of how residency is defined can vary from country to country.

In Mainland China, for instance, the Individual Income Tax (IIT) Law considers you a tax resident if you are domiciled in China or stay in China for 183 days or more during a tax year. Non-residents who stay in China for less than 183 days during a tax year are generally taxed only on their income sourced from China. While for Japan, you are considered a tax resident not only if you have a residence in Japan and have been present in Japan for a total of 183 days or more during the current tax year, but also if you have a domicile, which means your permanent home, in the country. 

Therefore, it is crucial to understand the particular circumstances related to your income sources and residency status, as it will determine your tax obligations and may be subject to taxes in both Hong Kong and your home place. 

The Potential of Double Taxation

You may be concerned about the potential for double taxation in your home place and Hong Kong. However, there are certain deductions and exemptions available to help reduce your tax liability. Hong Kong has signed Comprehensive Double Taxation Agreements (CDTAs) with 46 countries/territories, including Canada, France, India, Italy, Japan, the UK, and Mainland China, and is in negotiations with 15 others, such as Germany, Norway, and Turkey. These agreements clarify tax rights between Hong Kong and other jurisdictions, providing tax relief or exemptions for taxpayers in specific situations. Make sure to verify if your home place is on the list and for a detailed list of countries/territories Hong Kong is negotiating with.

Similarly, there is a CDTA between Hong Kong and Mainland China, which means that you may be eligible for certain tax relief or tax credits. If a resident enterprise earns income from a foreign jurisdiction, they're entitled to a tax credit for foreign income tax paid on the income in that jurisdiction. Moreover, an indirect foreign income tax credit is also allowed, and the total amount of credit is limited to the China tax payable on foreign income.

Before attending to tax affairs as a Hong Kong resident, check out the tax rules in your home place and find out if you're eligible for double taxation relief.