A number of taxes that exist in most OECD jurisdictions do not exist in Hong Kong. Thus there are no capital gains taxes, no withholding taxes, no sales taxes, no VAT, no annual net worth taxes and no accumulated earnings taxes on companies which retain earnings rather than distribute them. In the long term it is intended to completely phase out stamp duty on the sale and issue of shares and securities and to reduce direct taxes further.

The tax year ends on March 31^st and starts on April 1^st.

Whilst there is no Capital Gains Tax in Hong Kong, investment companies or other such vehicles viewed as 'Property Schemes' must pay Profit Tax on their declared profits. This may be payable in advance as a provisional tax pending production of the company reports the following year, which pertain to the previous years profits. At this time the advance payment is reconciled.

The highest rate for profit tax is 17.5%.

Persons, including corporations, partnerships, trustees and bodies of persons carrying on any trade, profession or business in Hong Kong are chargeable to tax on all profits (excluding profits arising from the sale of capital assets) arising in or derived from Hong Kong from such trade, profession or business. There is therefore no distinction made between residents and non-residents. A resident may therefore derive profits from abroad without suffering tax; conversely, a non-resident may suffer tax on profits arising in Hong Kong. The question of whether a business is carried on in Hong Kong and whether profits are derived from Hong Kong is largely one of fact, however some guidance on the principles applied can be found in cases which have been considered by the Hong Kong Courts and the Privy Council. No tax is levied on profits arising abroad, even if they are remitted to Hong Kong.

If a person sells his flat or any property as part of a scheme of profit-making, it will be regarded as a business and he is required to pay tax on any profit he may make.

The Assessable Profits (or Adjusted Loss) are the net profits (or loss) [other than profits (or loss) arising from the sale of capital assets] for the basis period, arising in or derived from Hong Kong, calculated in accordance with the provisions of Part IV of the I.R.O.

The following income and profits are excluded from the assessable profits:

Interest (accrued on or after 22 June 1998) derived from any deposit placed in Hong Kong with an authorized institution is exempt from payment of Profits Tax. This exemption, however, does not apply to interest received by or accrued to a financial institution.

Generally, all outgoings and expenses, to the extent to which they have been incurred by the taxpayer in the production of chargeable profits, are allowed as deductions.

A transfer of certain allowable head office administrative expenses by means of a charge to a local branch or subsidiary in Hong Kong would be allowed as a deduction for Hong Kong tax purposes, to the extent to which they were incurred during the basis period for the year of assessment in the production of profits chargeable to tax.

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

A person who incurs capital expenditure 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.

Trading profits and interest income derived from debt instruments issued in Hong Kong with an original maturity of not less than 5 years will be chargeable to tax at a concessionary rate, being 50% of the normal profits tax rate. Commencing from the year of assessment 2003/04, this concession extends to cover debt instruments that are issued in Hong Kong on or after 5 March 2003 and have an original maturity of less than 7 years but not less than 3 years. Debt instruments that qualify for this concessionary treatment are specified in section 14A(4) of the I.R.O.

Commencing from the year of assessment 2003/04, trading profits and interest income derived from "long term debt instruments" issued in Hong Kong on or after 5 March 2003 with an original maturity of not less than 7 years are exempt from profits tax. Long term debt instruments that qualify for this exemption are specified in section 26A(2) of the I.R.O.

Losses made in an accounting year are to be carried forward and set off against future profits of that trade but a corporation carrying on more than one trade may have losses in one trade offset against profits of the other. For gains or losses which are subject to concessionary tax rate, there are special provisions on the adjustment of losses between concessionary trading activities and normal trading activities. An individual who incurs a trading loss and who claims Personal Assessment will have the loss allowed as a deduction from his total income.

All taxpayers are subject to the same corporation or unincorporated business tax rate irrespective of their residential status.

Profits Tax is chargeable on the actual profits of the year. As the profits for any particular year cannot be known until after the year end, a provisional tax charge is raised during the course of the year. In the following year, when the profits of the previous year are ascertained an assessment is made and credit given for the provisional tax paid.