Hong Kong Tax System
- Roman Verzin
- Nov 10
- 3 min read
Hong Kong is globally renowned for its simple, low-tax environment, making it a magnet for international founders.
Yet, the promise of “zero tax” or “offshore status” comes with strict rules and nuances. Misunderstanding them can lead to penalties, lost opportunities, or banking complications.
In this article, you’ll learn how the Hong Kong tax system works, what qualifies as taxable profit, when offshore exemptions apply, and how to legally optimize your company’s tax position.
By following these frameworks, you’ll make strategic decisions that protect your business and simplify compliance.
Taxes in Hong Kong:
Profits Tax: The corporate income tax on Hong Kong-sourced profits.
Salaries Tax: For employees who are Hong Kong tax residents.
Property Tax: Applies only if you own and rent out Hong Kong property.
Non-existent taxes in Hong Kong:
No VAT or GST
No capital gains tax
No dividend or withholding tax
Insight: For most international founders, Profits Tax is the only tax that matters, simplifying compliance significantly.
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Understanding Taxable Profit
Only profits sourced in Hong Kong are taxable.
Hong Kong uses a territorial tax system:
8.25% on the first 2 million HKD of profit
16.5% on profits above 2 million HKD
Tax is calculated on net profit, not revenue.
Whether profit is Hong Kong-sourced depends on:
Where your key activities occur
Location of counterparties
Employee location
Rule of thumb:
100% offshore operations → apply for offshore status → 0% tax.
Any Hong Kong activity → profits taxed normally.
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How Offshore Tax Exemption Works
Offshore status is attainable but requires thorough documentation and ongoing compliance.
Step 1: File Profits Tax Return (PTR)
First PTR issued ~18 months post-incorporation.
Must submit audited accounts proving offshore profit.
Step 2: Prepare Offshore Claim Package
Business model description.
Complete transaction records.
Contracts, invoices, logistics documents.
Communication logs proving deals occurred offshore.
Bank statements linking payments to offshore activities.
Step 3: IRD Queries
Expect 20–40 questions about directors, contracts, and operations.
Step 4: IRD Decision
Approval → 0% tax.
Rejection → full tax + potential penalties (interest, fines, increased scrutiny).
Approval valid for one year; renew annually.
Approval rates
Classic trading businesses: 60–70%
Digital/service businesses or weak documentation: <50%
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Common Rejection Reasons
Documentation mismatches
Insufficient evidence that operations are offshore
Decision-making occurs in Hong Kong
Complex or opaque cash flows
Main income sourced from Mainland China
Tip: Full transparency and clean bookkeeping significantly improve approval chances.
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When It’s Safer to Stay Onshore
Sometimes paying a small amount of tax is strategically safer.
Situations where onshore is preferable:
Marketplaces like Amazon/Shopify require tax certificates
Banks prefer companies paying some tax
Investors or M&A due diligence may see zero-tax structures as risky
Reputation with corporate clients and international partners
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Expense Deductions in Hong Kong
Even without offshore status, you can optimize taxable profit via deductions.
Deductible items:
Operational expenses; rent, salaries, utilities, marketing, software subscriptions, logistics, travel, professional services.
Cost of goods sold (if trading).
Depreciation of assets; laptops, equipment, buildings.
Professional fees; audit, accounting, corporate secretary, bank, legal.
MPF contributions; employer contributions count as deductible costs.
R&D expenses; can be enhanced up to 200–300%.
Non-deductible items:
Shareholder personal expenses
Dividends
Fines/penalties
Pure capital expenditures (deducted gradually via depreciation)
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Special Cases to Consider In Hong Kong Tax System
Passive income: dividends, interest, royalties may be taxed under FSIE if part of a larger group
Royalties abroad: could be taxed up to 16.5% if IP was created/used in HK
Salaries tax: progressive 2–17%, paid by employees, employer reports salaries & MPF
MPF: employer contributes 5% capped at 1,500 HKD/month
Property tax: 15% on rental income, 20% standard deduction
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Dividends Distribution
Pay profits tax (if applicable)
Declare dividends: via board resolution
Transfer funds: no withholding, dividend, VAT, or GST taxes
Insight: Hong Kong allows clean, tax-efficient profit distribution.
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Final Takeaways
Hong Kong’s tax system is simple but requires organization.
Offshore status is possible but requires 100% clear offshore operations.
Expense deductions offer substantial legal optimization.
Certain passive income and royalties may require extra planning.
Transparency and documentation are critical for compliance and credibility.
Actionable tip: Audit your operations, verify sourcing, and prepare clear documentation before claiming offshore status.