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Taxes in Hong Kong [2023] – A Complete Guide

income tax in Hong Kong

Last updated on 7 de April de 2023

Hong Kong is the financial capital of China and one of the most powerful economic centers on the planer. We analyze the most important taxes in Hong Kong.

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Introduction

Officially within China, but an independent administrative region, Hong Kong is one of the great cities in Asia and the world. It is also the financial center for China and its most international city.

As a result, it is a place that concentrates a huge amount of capital, many large companies and talent from all over the world. With such focus on economic and financial success, how taxes work in Hong Kong is a very important topic.

Hong Kong uses its own currency, the Hong Kong dollar (HKD), whose value is pegged to the US Dollar (USD), at an exchange rate of approximately 1 USD = 7.80 HKD. Throughout this post we will analyze Hong Kong taxes in the original amounts in HKD, as well as its equivalent in USD.

Taxes on Earned Income

Unlike in most developed countries, there is no social security system in Hong Kong. But there is a similar mechanism. Let us analyze how labor income is taxed:

Mandatory Provident Fund (MPF)

While it is true that there is no social security in Hong Kong, the government does force workers and employers to contribute to the Mandatory Provident Fund, known as MPF, for their future retirement.

Thus, the MPF is nothing more than a pension fund to which contributions must be made by law. The minimum contributions are 5% of the gross salary, both from the employer and employee, making the minimum aggregate contribution equivalent to 10% of the worker’s gross salary.

For both employer and employee, the mandatory monthly contribution is limited to 5% on HKD 30,000 ($3,846). That is, for monthly incomes that exceed this figure, the mandatory contribution is set at 5% of HKD 30,000.

Consequently, the minimum contribution made by either party will never be higher than HKD 1,500 ($192).

The money contributed to the MPF is not trapped in a bank account or a government bond. We have the option to invest it in a multitude of products, including equity funds, so that it can for the future.

For those wondering how healthcare is financed in Hong Kong, since many countries finance their healthcare with social security contributions, the answer is with regular taxes.

Hong Kong has a public health system, which is also available to foreigners residing in the territory. And it is also quite common for employers to offer private health insurance to its employees, especially expats.

Finally, for those who are thinking about unemployment insurance, it does not exist in Hong Kong. Instead, Hong Kong offers help to those who can prove they need it.

Income Tax

When it comes to income taxes, Hong Kong has significantly lower tax rates than practically all developed countries.

Hong Kong offers us two ways to calculate how much income tax we must pay: a progressive system or a flat rate. And we will always have to pay the one that results in a lower amount of tax.

The progressive income tax rates are as follows:

  • From 0 to 50.000 HKD ($0 to $6,410): 2%
  • From 50,000 to 100,000 HKD ($6,410 to $12,820): 6%
  • From 100.000 to 150.000 HKD ($12,820 to $19,231): 10%
  • From 150,000 to 200,000 HKD ($19,231 to $25,641): 14%
  • More than 200.000 HKD ($25,641): 17%

On the other hand, the flat rate for income tax is 15%. This means that, de facto, middle- and high-income earners will pay an effective rate of 15%, which is the maximum.

The marginal rate of 17% is only used for a small subset of low income earners who, on average, will see their average tax rate below 15%.

At the same time, it should be noted that those who are married, have children and/or other dependents, will benefit from slightly lower tax rates.

If we consider that the maximum income tax rate in Hong Kong is 15%, and that neither workers nor employers must make social security contributions, we will understand why net salaries are so high compared to other jurisdictions.

In most developed countries, the total tax burden on people with average and high wages hovers around 50%.

Capital Income Taxes

Next we will analyze how income from savings and investments is taxed in Hong Kong:

Interest Income

Interest income in Hong Kong is generally exempt from tax for individual investors. This is valid regardless of whether such interest comes from within Hong Kong or abroad. It does not matter whether it comes from a bank deposit or a fixed income instrument.

Dividends

Dividends receive a very favorable treatment in Hong Kong, as they are de facto exempt from tax.

Dividends received from companies headquartered in Hong Kong are exempt from taxation on the basis that the company has already paid corporate tax on the profits it made. Therefore, no double taxation is to take place.

As for dividends received from foreign companies, as they do not originate in Hong Kong, they are not subject to tax. The only tax we may have to pay are withholding taxes from the country of origin of the company paying the dividend.

Rental Income

The income we get from renting out our properties in Hong Kong is also subject to tax. In that case, the applicable rate will be 15% of the tax base.

The tax base shall be calculated based on the rental income obtained. From that figure, 15% will be subtracted as real estate taxes. And from the resulting figure, a subsequent 20% will be subtracted for expenses associated with the ownership of the property.

Rental income from properties located outside of Hong Kong is exempt from tax.

Capital Gains

Capital gains are always exempt from taxation in Hong Kong, regardless how where and how they have originated.

Simultaneously, it should be noted that Hong Kong has no wealth tax. This makes it an excellent jurisdiction for wealthy individuals.

Corporate Tax

As for companies based in Hong Kong, in most cases they will have to pay tax on the profits they make. The applicable rate will depend on the amount of these profits, since there are two brackets:

  • From 0 to 2,000,000 HKD ($0 to $256,410): 8.25%
  • More than 2,000,000 HKD ($256,410): 16.5%

As a result, small businesses will be taxed at a very low rate, while medium and large companies will face decent a decent corporate tax rate.

Also, remember that net profits distributed to shareholders based in Hong Kong are not subject to additional taxes.

Sales Tax

In terms of sales tax or VAT, Hong Kong is one of the few territories in the world that do not tax the consumption of goods and services.

The only items that are subject to indirect taxes are those whose consumption the territorial government wants to discourage, such as tobacco, and alcohol.

Stamp Duty

Due to the scarcity of land in Hong Kong, and despite the hundreds of skyscrapers built over the decades, the number of properties available is limited. Consequently, the government aggressively taxes real estate transactions, especially when they are carried out for investment purposes.

Thus, for those residents of Hong Kong who acquire their first home in the territory, the purchase is taxed at the following approximate rates of Stamp Duty, depending on the value of the property:

  • From 0 to 2,000,000 HKD ($0 to $256,410): 1.5%
  • From 2,000,000 to 3,000,000 HKD ($256,410 to $384,615): 3%
  • From 3,000,000 to 4,000,000 HKD ($384,615 to $512,820): 4.5%
  • From 4,000,000 to 6,000,000 HKD ($512,820 to $769,231): 6%
  • From 6,000,000 to 20,000,000 HKD ($769,231 to $2,564,100): 7.5%
  • More than 20,000,000 HKD ($2,564,100): 8.5%

For home buyers who are not resident in Hong Kong, resident in Hong Kong acquiring an additional property, or for all investors in non-residential real estate, the applicable rate shall be 15% of the purchase value.

Inheritance and Gift Tax

Inheritance and gift taxes do not exist in Hong Kong. This means we are free to transfer our wealth to whoever and whenever we want, without having to worry about potential tax consequences.

Hong Kong Public Finances

Now that we have seen the most important taxes in Hong Kong, let us focus on the state of its public finances to see how well public resources are managed.

The graph below shows the level of public debt relative to the gross domestic product:

As we can see, the level of public debt is low, at around 40% of GDP, and has remained fairly stable for over two decades. This indicates that the existing tax rates are sustainable in the long term.

Conclusion

Apart from being a very powerful economic center, Hong Kong is also one of the best jurisdictions in the world when it comes to taxation.

Workers, companies, investors, and consumers are taxed very lightly. The only tax that stands out is the stamp duty payable on real estate transactions, especially for property investors.

For all these reasons, Hong Kong is certainly an interesting place for expats and digital nomads with a high level of income, and who can afford to live there.

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