Hong Kong has a simplified taxation which mainly includes Profit Tax, Salaries Tax and Property Tax.

Profits Tax

1. General introduction

Profits arising in or derived in Hong Kong are subject to Profit Tax. In contrast, no tax is levied on profits arising abroad, even if they are remitted to Hong Kong. Tax rate for year 2008 and 2009 is 16.5%, one of the lowest tax rate in the whole world without any additional tax imposed.there is no tax on capital gain, dividends or interest; and generous capital allowance is offered.

A tax rate at 50% of the normal profits tax rate will be applied to offshore business of professional reinsurance companies. Expenses incurred in research and development activities such as market research, feasibility studies and other commercial and management activities are deductible under generous tax concessions in Hong Kong.

For expenditure on plant and machinery specially related to manufacturing, and on computer hardware and software a full deduction is allowed in the basis period in which the expenditure was incurred, except from an initial allowance of 20% on the cost of construction of the premises, an annual allowance of 4% on the cost of construction of the premises will be allowed until fully deducted. Commercial buildings and structures can obtain an annual allowance of 4% on the cost of construction of the premises. Government also provides funding to encourage commercial or technological research and development activities. Besides, training staff to learn new technology cost can enjoy up to 75% of the cost of funds allowance. Basically, only profits, remuneration and rents of property are taxable. Compare to high tax rate of 40%~50% in most countries, in Hong Kong, only profits arising in or derived in Hong Kong are subject to Profit Tax. In contrast, no tax is levied on profits arising abroad, even if they are remitted to Hong Kong, which enables Hong Kong to keep its simplified taxation system with a low rate.Only income directly derived from Hong Kong are subject to profits tax.

2. Tax incentives

1) An initial allowance of 60% of the capital expenditure on machinery or plant is available in the year in which the expenditure is incurred

2) An immediate 100% write-off is allowed for capital expenditure on computer hardware and computer software.

3)Capital expenditure incurred on the renovation or refurbishment of business premises is allowed to deduct that expenditure over a period of 5 years in equal installments commencing in the year in which the expenditure is made.

4) For Hong Kong companies located in china (processing plant), can simply assess 50% of profits as profits derived from Hong Kong

3. Year of assessment

Year of assessment runs from 1 April of a year to 31 March of the following year, An accounting period of 12 months, an extended period of 18 months for newly established company .

4. Deduction and exemption

1.     Interest income for person(including a corporation) carrying on a trade, profession or business in Hong Kong and derived from any deposit placed in Hong Kong with a financial institution is exempt from Profit Tax.

2.     Expenses incurred in the production of taxable profits are allowed without territorial restriction, which include:

·         Interest on money borrowed for the purpose of producing taxable profits

·         Bad debts written off

·         Certain expenditure on research and development

·         Remuneration paid to directors

In computing the assessable profits deduction is specifically prohibited in respect of the following:

·         Domestic or private expenses and any sums not expended for the purpose of producing the profits

·         Any loss or withdrawal of capital, the cost of improvements and any expenditure of a capital nature

·         Any sum recoverable under insurance or contract of indemnity

·         Rent of or expenses relating to premises not occupied or used for the purpose of producing the profits

·         Taxes payable under the Inland Revenue Ordinance

·         Traffic fines incurred for violations of law

Salaries Tax

1. General introduction

Salaries Tax in Hong Kong is charged based on the territorial concept. All income arising in or derived from Hong Kong is assessable.

2. Year of assessment

Year of assessment runs from 1 April of a year to 31 March of the following year

3. Deductions and exemptions

Clear definition on deductible items of Salaries Tax, deductible expenses include approved charitable donations, contributions to a Mandatory Provident Fund Scheme or Recognized Occupational Retirement Scheme, home loan interest, expenses of self-education, outgoings and expenses that are wholly, exclusively and necessarily incurred in the production of the assessable income.

4. Tax Rate

Salaries Tax can be computed with progressive tax rate or standard tax rate, whichever is less.

1) Computed with a standard tax rate of 16%;

2) Computed with progressive tax rate.

Property Tax

1. General introduction

Property Tax is charged on the property owner who has derived rental income from leasing of properties situated in Hong Kong and is computed at the standard rate of 16% on the net assessable value of the property.

2. Year of assessment

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

3. Scope of charge

Property Tax is charged at the standard rate of 15% of the net assessable value of the property as determined by rent, service charges and fees paid to the owner, less an allowance of 20% for repairs and maintenance. Except for the above items, no other expenses are allowable as deductions for Property Tax purposes. The amount of rent confirmed to be irrecoverable during the year is deductible. However, if in future any part of the “irrecoverable rent” deducted from these assessments is recovered, the amount recovered should be reported as part of the assessable value of the year of recovery. A company that derives rental income from property is subject to profits tax and may apply for an exemption from Property Tax.