Hong Kong Tax Explained: A Simplified Guide for Global Business

Setting up a business abroad is only half the battle; navigating local tax administration is the other. The global community recognizes Hong Kong for its favorable tax regime, but understanding the core principles and obligations is essential for seamless, penalty-free operation.

This guide provides an overview of how international entrepreneurs should approach corporate and personal tax obligations. It emphasizes why professional support is crucial for compliance management.

Tax System Fundamentals: Low Rates and the Territorial Principle

Hong Kong operates on the territorial tax principle. It imposes only three main direct taxes, making it one of the most attractive places for trade.

Key Taxes and Rates

Hong Kong imposes no VAT/Sales Tax, no Capital Gains Tax, no Tax on Dividends, and no Estate Tax. You only need to account for these direct taxes:

• Profits Tax (Corporate Tax): A two-tiered rate applies. For the first HK$2 million of profits, the rate is just 8.25%. Profit above this amount is taxed at 16.5%.
• Salaries Tax (Personal Income Tax): Progressive rates range from 2% to a maximum of 17%, subject to generous personal allowances that significantly reduce the tax base.

The Territoriality Principle

This is the core of the HK tax system. Profits Tax is only levied on profits that arise in or are derived from carrying on a trade, profession, or business in Hong Kong.

• If your HK entity conducts business activities and generates profit wholly outside of Hong Kong (e.g., selling goods/services to international clients with no HK operations involvement), it may claim exemption from tax on this “Offshore Profit.”
• IMPORTANT: The burden of proof lies with the company. Successfully claiming this exemption requires meticulous documentation and a formal, detailed submission supported by auditors.

Corporate Obligations: Audit and Tax Agenda

The most critical aspect for global entrepreneurs is to understand the mandatory annual compliance cycle associated with Profits Tax.

The Audit Mandate

Unlike many jurisdictions, every private limited company in Hong Kong must undergo a compulsory annual audit, regardless of its size or turnover.

• This audit must be performed by a Certified Public Accountant (CPA) registered in Hong Kong.
• The audit ensures the accuracy of the financial statements and is an indispensable component of the annual Profits Tax Return (PTR) submission.

Profits Tax

• New Companies (The 18-Month Rule): The first Profits Tax Return (PTR) is generally issued by the IRD (Inland Revenue Department) approximately 18 months after incorporation.
• Annual Cycle: Subsequently, companies file the PTR every year in line with their fiscal year-end (most commonly March 31 or December 31), often utilizing filing extensions secured through authorized tax representatives.
• The Crucial Role of the CPA: All tax filings to the IRD require the attachment of the Auditor’s Report and the Tax Computation, which is prepared by your CPA. This practically necessitates the use of a local professional representative to fulfill the annual corporate tax obligation.

Employer Obligations: MPF and Salaries Tax

If the company employs staff in Hong Kong (including directors), it must comply with the Mandatory Provident Fund (MPF) Scheme and Salaries Tax obligations.

Mandatory Provident Fund (MPF)

• Mandatory Contributions: The employer and the employee both contribute 5% of the employee’s relevant income (subject to a maximum income cap of HK$ 30,000 per month).
• Employer Responsibility: The employer is responsible for deducting the employee’s contribution and remitting both shares to the MPF trustee every month.

Salaries Tax

• Taxable Income: Only income arising in or derived from HK employment is taxed. Many employment benefits, including housing and compensation, are considered taxable income.
• Employee Reporting: Employers must file annual Form IR56 (e.g., IR56B) with the IRD, detailing all payments and benefits made to employees for the preceding tax year.

Hong Kong Tax System Fundamentals: Overview

This table summarizes the key direct taxes, the territoriality principle, and the mandatory corporate requirements.

Category	Aspect	Description and Key Rates
Core Principle	Territorial Taxation	Tax is levied only on profits that arise in or are derived from carrying on a business in Hong Kong. Profits generated wholly outside HK may claim tax exemption (Offshore Profit).
Main Direct Taxes	Profits Tax (Corporate Tax)	Two-Tiered Rate: * First HK$ 2 million of profits: 8.25% * Remaining profit (above HK$ 2M): 16.5%
	Salaries Tax (Personal Income Tax)	Progressive rates from 2% up to a maximum of 17%, subject to generous personal allowances.
	Property Tax	(Not specified in the text, but it is the third main direct tax.)
Taxes That Are NOT Paid	Exemptions	No VAT/Sales Tax, no Capital Gains Tax, no Tax on Dividends, and no Estate Tax.
Mandatory Annual Agenda	Compulsory Audit	Every private limited company in HK must undergo a compulsory annual audit, regardless of size/turnover. The audit must be performed by a local CPA (Certified Public Accountant).
	Tax Return (PTR)	New Companies: The first Profits Tax Return (PTR) is generally issued by the IRD approximately 18 months after incorporation. Annual Cycle: Subsequent filing is done yearly, often utilizing filing extensions secured through a CPA.
	Crucial Role of the CPA	All tax filings must include the Auditor’s Report and the Tax Computation, which is prepared by the CPA. This practically necessitates the use of a local CPA.
Employer Obligations	Mandatory Provident Fund (MPF)	Mandatory pension scheme. Both the employer and employee contribute 5% of relevant income (max income HK$ 30,000/month). The employer is responsible for remitting both shares.
	Salaries Tax	Employers must file annual forms Form IR56 (e.g., IR56B) detailing all payments and benefits made to employees for the preceding tax year.

Why You Need Professional Assistance

For the global entrepreneur, Hong Kong’s tax system is advantageous. However, compliance, especially the mandatory annual audit and complex offshore profit exemption claims, requires expert knowledge.

Our team offers comprehensive services to ensure your company meets all local requirements accurately and on time. We provide this support regardless of where you are based in the world. Ready to launch your Hong Kong entity with a solid compliance plan? Contact us for assistance with managing audits, corporate tax returns, and applying for offshore exemption claims – Get Accounting & Bookkeeping Services in Hong Kong!