Hong Kong's tax landscape is characterized by a generally low-tax environment with specific incentives tailored to different sectors. While the region does not provide extensive tax incentives for all companies, it benefits critical industries such as aviation services, financial services, and the shipping sector.
Further, to support economic growth and SMEs, Hong Kong offers 45 funding schemes across various industries. The SME ReachOut service team assists in identifying eligible schemes and navigating the application process, spanning various industries and business operations. Popular schemes include:
- The Dedicated Fund for Branding,
- Export Marketing Fund (EMF),
- Technology Voucher Programme (TVP), and
- The Enterprise Support Scheme.
Each is designed to address specific business needs and promote growth.
Hong Kong uses tax incentives to attract investment across sectors. These incentives encompass 100 percent write-offs for new expenditures on manufacturing machinery, exemptions for capital expenditures related to environmental protection and intellectual property rights, and reduced profit tax rates for the aviation industry.
The region also encourages research and development activities by offering businesses 100 percent standard tax deductions for payments to educational and research institutions engaged in R&D efforts. Hong Kong's tax policies aim to support various industries, stimulate economic growth, and promote innovation.
Two-tiered profits tax rates
Hong Kong has implemented a two-tier tax profits tax system, where the first HK$2 million (US$255,000) of assessable profits for qualified enterprises is taxed at a reduced rate of 8.25 percent rather than the standard 16.5 percent. This system aims to ease the tax burden on smaller businesses.
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Two-Tiered Profits Tax Rates in Hong Kong |
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Assessable profits |
Corporations |
Unincorporated businesses |
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First HK$2 million |
8.25% |
7.5% |
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Over HK$2 million |
16.5% |
15% |
Note that only one may elect the two-tiered profits tax rates for two or more connected entities. All other entities are still taxed at the 16.5 percent rate for corporations and 15 percent for incorporated businesses.
In addition to the two-tier tax regime, Hong Kong does not have a value-added tax (VAT), meaning that businesses are not subject to additional taxes on products or services provided.
Tax exemption on offshore profits
Hong Kong does not charge tax on profits or revenue earned offshore under the so-called “territorial source principle of taxation.” This means that the profits tax is only levied if profits are derived in Hong Kong, the company carries out business in Hong Kong, and this Hong Kong-based business generates profit.
Hong Kong has implemented the Foreign-Sourced Income Exemption (FSIE) regime to prevent the establishment of shell companies in Hong Kong for the express purpose of filing offshore tax claims for passive income. Under this new regime, companies must prove they have a “substantial economic presence” in Hong Kong in order to benefit from preferential tax treatment.
In relation to the FSIE regime, Hong Kong’s Inland Revenue Department (IRD) amended provisions of the Inland Revenue Ordinance (IRO) so that it will now levy profits tax on certain types of foreign-sourced income that have been raised by a member of a multinational enterprise (MNE) group which carries out business or trade in Hong Kong when it receives this income in Hong Kong.
This foreign-sourced income includes passive income such as interest, dividends, disposal gain from the sale of equity interests in an entity, and income from intellectual property.
Certain types of companies, such as regulated financial entities, are exempted from the FSIE regime regarding income derived from interest, dividends, or disposal gain.
Tax deductions
Hong Kong allows for a wide range of tax deductions that can help businesses reduce their overall tax burden. According to Hong Kong’s revenue department, “all outgoings and expenses, to the extent to which the taxpayer has incurred them in the production of chargeable profits, are allowed as deductions.”
Certain expenses are not deductible when calculating assessable profits. These are:
- 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 I.R.O., except Salaries Tax paid in respect of employees' remuneration;
- Any remuneration or interest on capital or loans payable to or, subject to section 16AA, contribution made to a mandatory provident fund scheme in respect of the proprietor or the proprietor's spouse or, in case of a partnership, to its partners or their spouses.
Certain expenses, mostly those related to upgrading infrastructure for environmental protection, are eligible for deductions over a longer period. These are listed in the table below.
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Deductible Expenses |
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Expenditure |
Details |
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Building refurbishment |
Deductible over a period of five years in equal installments commencing in the year in which the expenditure was made. |
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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. |
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Environmental protection facilities
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From the year of assessment 2008/09, a full deduction is allowed during the basis period in which the expenditure is incurred. |
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Environmental protection installation |
From 2008/09, a deduction of 20% of the expenditure is allowed in each of the five consecutive years commencing from the year in which the expenditure is incurred. From 2018/19, a full deduction is allowed during the basis period (instead of over five years) in which the expenditure is incurred for procuring environmental protection installations [including any part of expenditure on environmental protection installation that remains to be deducted (and is to be fully deducted) in the year of assessment 2018/19]. |
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Environmentally friendly vehicles |
From 2010/11, a full deduction is allowed during the basis period in which the expenditure is incurred. |
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Source: Hong Kong Inland Revenue Department |
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Depreciation allowances
Hong Kong provides depreciation allowances for businesses to reduce their tax burden. The permitted allowances are detailed in the table below.
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Depreciation Allowances |
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Industrial buildings allowances on industrial buildings and structures |
Balancing allowance or charge will be due upon disposal of the premises |
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Commercial buildings allowances on commercial buildings and structures |
Balancing allowance or charge will be due upon disposal of the premises |
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Plant and machinery |
A balancing allowance is available only on cessation of a business with no successor. A balancing charge can, however, arise whenever the disposal proceeds of one or more assets exceed the reducing value of the whole "pool" of assets to which the disposed items belong. |
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Source: Hong Kong Inland Revenue Department |
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Donations
Charitable donations can be deducted from the assessable profits if:
- They are made to approve charitable institutions or trusts of a public character or to the Hong Kong government; and
- In aggregate, total at least HK$100 (US$12.7) but do not exceed 35 percent of the adjusted assessable profits before deduction of donations (10 percent for years of assessment up to and including 2002/03; and 25 percent for years of assessment 2003/04 to 2007/08).
"Approved charitable donation" means a donation of money to:
- Any charitable institution or trust of a public character that is exempt from tax under section 88 of the Inland Revenue Ordinance, or
- To the government for charitable purposes.
No value-added tax (VAT)
Hong Kong has no Value Added Tax (VAT) system to spare businesses from extra taxes on their products and services. In contrast, many other countries impose VAT rates as high as 20 percent, substantially significantly increasing business costs.
