Understanding Property Tax in Hong Kong

Property tax in Hong Kong is charged to the owner of any land or buildings (except government and consular properties) at a standard rate of 15% on the net assessable value. Contrary to common misconceptions, the basic property tax rate is the same for both commercial and residential properties. However, the treatment can vary significantly depending on the ownership structure and intended use of the property.

The net assessable value is calculated as the total rent receivable (net of rates) less a statutory allowance of 20% for repairs and outgoings. This means the effective tax rate is actually 12% on gross rental income (15% of 80%).

Commercial vs. Residential Property: Tax Treatment Comparison

Individual Property Owners: Property Tax Treatment

For individual property owners, whether renting out commercial or residential property, the treatment is straightforward if the rental activity does not constitute a business. In such cases, the income is subject to property tax at the standard rate of 15% on net assessable value.

Allowable Deductions

• Statutory Allowance: 20% of assessable value for repairs and outgoings (no receipts required)
• Rates: Only rates agreed to be paid and actually paid by the property owner are deductible
• Irrecoverable Rent: Rent that cannot be collected may be deducted

Important Considerations for Residential Property Owners

• Progressive Rates System: Since 2024-25, domestic properties are subject to progressive rates rather than a flat 5% rate, potentially increasing costs for high-value residential properties
• Home Loan Interest Deduction: Individuals may claim home loan interest deductions under salaries tax or personal assessment, but not under property tax directly
• Personal Assessment Option: Landlords eligible for personal assessment may benefit from tax reductions that are not available under property tax alone
• Self-Occupied Properties: Properties occupied by the owner are not subject to property tax as no rent is receivable

Important Considerations for Commercial Property Owners

• Flat Rates: Commercial properties maintain the simpler 5% flat rate structure on rateable value
• Limited Deductions: Under property tax, only the 20% statutory allowance and rates are deductible; actual expenses cannot be claimed
• Business Activity Threshold: If rental activities constitute a business, profits tax may apply instead of property tax

Corporate Property Owners: Profits Tax Considerations

When a corporation owns rental property in Hong Kong, the tax treatment becomes more nuanced. Rental income derived by a corporation from Hong Kong property is generally subject to profits tax rather than property tax.

Two-Tiered Profits Tax Rates

Under Hong Kong’s two-tiered profits tax system implemented for corporations:

• First HKD 2 million of profits: Taxed at 8.25%
• Profits exceeding HKD 2 million: Taxed at 16.5%

For unincorporated businesses:

• First HKD 2 million of profits: Taxed at 7.5%
• Profits exceeding HKD 2 million: Taxed at 15%

Property Tax Exemption for Corporations

Corporations carrying on a trade, profession, or business in Hong Kong may apply in writing for exemption from property tax if the rental income is assessable under profits tax. This exemption is advantageous as it:

• Avoids double taxation on the same income
• Allows deduction of actual expenses incurred (not limited to the 20% statutory allowance)
• Permits claiming of commercial building allowances
• May result in lower effective tax rates under the two-tiered system

If no exemption is applied, property tax paid can be offset against profits tax payable by the corporation.

Commercial Building Allowances

A significant advantage for commercial property owners operating under profits tax is eligibility for commercial building allowances. These allowances permit:

• Annual Allowance: 4% of capital expenditure on commercial buildings or structures used for business purposes (deductible annually for 25 years)
• No Time Limit: Recent changes (2024-25) removed the 25-year time limit for older buildings
• Lease Reinstatement Costs: Now deductible under the updated rules
• Plant and Machinery: More favorable treatment with 60% initial allowances plus annual allowances of 10%, 20%, or 30% depending on type

For example, if HKD 50 million is spent constructing a commercial building, the owner can claim HKD 2 million in annual deductions. At the 16.5% profits tax rate, this translates to HKD 330,000 in annual tax savings.

Stamp Duty Considerations

Stamp Duty on Leases

Both commercial and residential property leases are subject to stamp duty calculated on annual rental, varying with the lease term:

• Not exceeding 1 year: 0.25% of annual rent
• Exceeding 1 year but not exceeding 3 years: 0.5% of annual rent
• Exceeding 3 years: 1% of annual rent

Stamp Duty on Property Transfers (2025 Updates)

Effective from 11 am on 26 February 2025, ad valorem stamp duty on property transfers is charged at progressive rates:

• Up to HKD 4 million: HKD 100
• Progressive rates: Increasing with property value
• Exceeding HKD 20 million: 4.25%

Important: As of 28 February 2024, Special Stamp Duty (SSD), Buyer’s Stamp Duty (BSD), and New Residential Stamp Duty (NRSD) have been eliminated for residential property transactions, representing significant relief for the residential property market.

Strategic Tax Planning Considerations

Choosing Between Property Tax and Profits Tax

Property owners should carefully consider which tax regime offers the most favorable treatment:

Property Tax is Generally Better When:

• Rental income is low and stable
• Limited deductible expenses are incurred
• Simplicity and lower compliance costs are preferred
• The property owner is an individual with no business structure

Profits Tax is Generally Better When:

• The property is held through a corporation
• Significant deductible expenses are incurred (repairs, management fees, financing costs)
• Commercial building allowances can be claimed
• Rental income can benefit from the two-tiered profits tax rates
• Multiple properties are managed as a business operation

Recent Tax Measures (2024-25 and 2025-26)

• Profits Tax Reduction: 100% reduction in profits tax payable for 2024-25, subject to a ceiling of HKD 1,500 (this reduction does not apply to property tax)
• Personal Assessment Benefit: Individuals with rental income eligible for personal assessment may benefit from tax reductions not available under property tax
• Rates Waiver: Domestic properties received rates waivers in the first quarter of 2024-25, subject to HKD 1,000 ceiling per property
• Hotel Accommodation Tax: Effective 1 January 2025, a 3% hotel accommodation tax applies to hotel and guesthouse accommodations

Commercial vs. Residential: Which is More Tax-Efficient?

The question of whether commercial or residential property rental is more tax-efficient in Hong Kong does not have a straightforward answer. The efficiency depends on several factors:

Factors Favoring Commercial Property Investment

• Commercial Building Allowances: The 4% annual allowance can significantly reduce taxable income for property held under profits tax
• Business Expense Deductions: Greater scope for claiming actual expenses under profits tax regime
• Flat Rates Structure: Simpler 5% rates on rateable value compared to progressive residential rates
• Corporate Structure Benefits: Easier to justify profits tax treatment for commercial properties

Factors Favoring Residential Property Investment

• Stamp Duty Relief: Elimination of SSD, BSD, and NRSD since February 2024
• Home Loan Interest Deduction: Available under salaries tax or personal assessment for owner-occupiers
• Market Liquidity: Generally higher liquidity and demand (non-tax factor but important for overall returns)
• Personal Assessment Options: More flexibility for individual owners to optimize tax treatment

Compliance and Filing Requirements

Property owners must understand their filing obligations:

Property Tax

• Property tax returns must be filed annually
• Due date is typically one month from the date of issue
• Payment of tax is required by the specified deadline
• Late filing or non-filing may result in penalties

Profits Tax

• Profits tax returns are required for corporations and unincorporated businesses
• Annual audited financial statements may be required
• Application for property tax exemption must be made in writing
• More complex compliance requirements compared to property tax