Housing Market

Tax Issues

As a general rule, taxation is only levied on income or transactions having a direct connection with Hong Kong. The concepts of residence, domicile or citizenship have little, if any, relevance. Taxation is based on the 'territorial' concept.

There are three distinct taxes designed to tax income derived from Hong Kong, namely Profits Tax, Salaries Tax and Property Tax.

Profits Tax

Profits Tax is levied at the rate of 17.5% on corporations, and 16% on unincorporated entities on business profits which satisfy both of the following criteria:

• The company must be carrying on business in Hong Kong.
• The relevant profits must be earned in or derived from Hong Kong.

Hong Kong adopts a territorial basis for taxing profits derived from a trade, profession, or business carried on in Hong Kong. Profits Tax is only charged on profits which arise in or are derived from Hong Kong. That means, a person who carries on a business in Hong Kong but derives profits from another place is not required to pay tax in Hong Kong on those profits. The source of income is generally regarded as a 'practical hard matter of fact'. In the context of international operations, this typically means that the person ultimately deriving the income may have some tax planning opportunities. Rates of Hong Kong taxation are low and with care effective rates can be made even lower. Hong Kong does not have any form of dividend taxation or withholding taxes and hence profits accumulated in a Hong Kong company can be distributed without tax deduction in Hong Kong.

Capital Gains

There is no taxation of capital gains in Hong Kong. Any profits arising from the sale of capital assets are not subject to Profits Tax. The question of whether an asset is capital or revenue depends upon the circumstances of each case. Although there is extreme difficulty in distinguishing between the two, the principles applied by the Hong Kong courts and the Board of Review in similar cases in determining whether the asset is acquired as capital asset or trading asset include:-

• the intention of the taxpayer at the time of acquisition of the property is crucial.
• the intention to hold property as a capital investment must be definite and can only be determined objectively.
• length of period of ownership
• frequency or number of similar transactions
• circumstances responsible for the disposal
• accounting treatment

Thus, if a company is engaged in the business of property trading in Hong Kong, the company is subject to Profits Tax on the trading profits.

Tax Returns

Any company potentially liable to Profits Tax will be issued with a tax return for completion at the end of each tax year. This should be submitted within one month of issue (although in practice longer periods may be granted upon application) together with audited financial statements covering the company's accounting year ending in the relevant tax year.

This return forms the basis for a final tax assessment on respect of the relevant tax year payable for the current years. For example, a company with a 31 December year-end would report its results for that year-end in its return for the tax year ending the following 31 March.

Salaries Tax

Although many salary and wage earners pay no tax due to levels of income below the threshold, employment income with a Hong Kong source is strictly subject to Salaries Tax. In most circumstances where tax is payable a flat rate of tax at (2006/07: 16%) applies, but in the case of annual income levels below HK$983,350 (for a single person) or HK$1,616,660 (for a married couple) lower effective rates can apply. These lower rates are applicable irrespective of whether or not the salary earner is a resident of Hong Kong.

Housing benefits and other benefits in kind

Generous tax treatment of company supplied housing and other 'benefits in kind' makes Hong Kong a competitive location for senior executives of international groups responsible for the Asian region. For example, the provision of accommodation, a company car, domestic furniture etc. should, under suitable arrangements, attract no tax to the employee (whilst the cost should be fully deductible to his employer). Housing provided to an employee is taxed by way of increasing his taxable income by 10 percent. Only in exceptional circumstances does this have any direct relationship to the actual cost of the housing to the employer; the actual cost is usually significantly higher.

Property Tax

Property tax is imposed on owners of rented land and/or buildings situated in Hong Kong. It is computed at the standard tax rate (16% in the year 2006/07) on the net assessable value of a rental property. The “net assessable value” is 80% of the rental income after deduction of any rates paid.

Companies are exempt from the tax, being liable to pay Profits Tax on any such income.

Stamp Duty

The transfer of shares in a Hong Kong company (whether private or publicly quoted) must be stamped. The rate of duty is 0.1% payable by each of the purchaser and seller involved in a transaction, giving an effective rate of 0.2%. Duty is charged on the sales consideration or the fair market value, whichever is the higher. In evaluating the fair market value, the Stamp Duty Office will normally accept the net asset value shown by the company's audited accounts, subject to an upward adjustment to reflect a higher value for land and buildings than that shown in the accounts, where appropriate. No Stamp Duty is charged in the case of transfers of shares within a group of companies, where both parties are under 90% common ownership.

Duty at the maximum rate of 3.75% is payable on the transfer of land and buildings located in Hong Kong and on agreements for sale. In order to dampen land speculation the government introduced Stamp Duty chargeable on agreements to purchase property. However, as a relief to a buyer of residential property, payment of Stamp Duty may be deferred until the assignment is executed according to the agreement on the date of re-sale of the property. The maximum period of deferral is three years after the execution of the agreement.

Stamp duty is also chargeable in relation to leases of land and buildings located in Hong Kong. The rate of stamp duty on an agreement for lease ranges from 0.25% to 1% of the rentals depending on the lease period.

All parties executing the transaction for (a) conveyance on sale (b) agreement for sale of residential property or (iii) lease agreements are liable to stamp duty. Although there is no stipulation in the relevant laws who should be responsible for the stamp duty, it is customary for the purchaser to bear this tax in a sale and purchase transaction. In the case of leasing transaction, it is usually shared equally by the landlord and the tenant.

The rates of stamp duty are as follows:

On Sale or Transfer of Immovable Property in Hong Kong

With effect from 1 April 1999, stamp duty on sale of immovable property in Hong Kong is charged at rates which vary with the amount or value of the consideration as follows:

Estate Duty

Estate Duty is abolished for estates of the deceased on or after February 11, 2006. No estate duty affidavits and accounts need to be filed and no estate duty clearance papers are needed for the application for a grant of representation in respect of deaths occurring on or after that date. By abolishing Estate Duty, it is hoped that Hong Kong could attract more local and overseas investors to hold assets in Hong Kong and promote the development of Hong Kong as a trust and an asset management centre.

*The above information is provided by HLB Hodgson Impey Cheng