How to Claim Back VAT as a Foreign Business Operating in China
📋 Key Facts at a Glance
- Hong Kong’s Tax Advantage: Hong Kong does not have a Value-Added Tax (VAT), Goods and Services Tax (GST), or sales tax. This is a fundamental competitive edge for businesses.
- Profits Tax is Territorial: Only profits sourced in Hong Kong are subject to tax, with a two-tiered rate of 8.25% on the first HK$2 million and 16.5% on the remainder for corporations.
- Stamp Duty on Property is Simplified: As of 28 February 2024, all special stamp duties (SSD, BSD, NRSD) have been abolished. Only the Ad Valorem Stamp Duty applies, with rates from HK$100 to 4.25%.
- No Tax on Dividends or Capital Gains: Hong Kong does not tax dividends received and has no capital gains tax, making it highly attractive for holding companies and investors.
What if one of your business’s biggest costs simply didn’t exist? For companies operating in Hong Kong, this isn’t a hypothetical—it’s reality. While the original draft discussed navigating complex VAT reclaims in Mainland China, Hong Kong offers a fundamentally different and more straightforward proposition: there is no VAT to reclaim because there is no VAT at all. This absence of a consumption tax is a cornerstone of Hong Kong’s business-friendly environment. Instead of managing refund claims, businesses here focus on understanding a simple, low-rate tax system on profits, salaries, and property. Let’s explore the key taxes that do apply and how to optimise your position within Hong Kong’s clear fiscal framework.
Hong Kong’s Core Tax Regime: What You Actually Pay
Hong Kong’s tax system is renowned for its simplicity and low rates. It is built on a territorial basis, meaning you are only taxed on profits arising in or derived from Hong Kong. Here are the three main direct taxes that form the backbone of the system.
Profits Tax: Low Rates on Hong Kong-Sourced Earnings
All corporations carrying on a trade, profession, or business in Hong Kong are subject to Profits Tax on their assessable profits. The system features a two-tiered rate designed to support SMEs.
| Entity Type | First HK$2m of Profit | Remaining Profit |
|---|---|---|
| Corporations | 8.25% | 16.5% |
| Unincorporated Businesses | 7.5% | 15% |
Salaries Tax: Progressive but Capped
Individuals deriving income from employment, office, or pension in Hong Kong are subject to Salaries Tax. You can calculate your tax using progressive rates on your net chargeable income (after deductions and allowances), but your total tax is capped at the Standard Rate applied to your net income (without deductions).
| Net Chargeable Income Bracket | Tax Rate |
|---|---|
| First HK$50,000 | 2% |
| Next HK$50,000 | 6% |
| Next HK$50,000 | 10% |
| Next HK$50,000 | 14% |
| Remainder | 17% |
Standard Rate (From 2024/25 Year of Assessment): 15% on the first HK$5 million of net income; 16% on the portion exceeding HK$5 million. You pay the lower of the tax calculated under progressive rates or the Standard Rate.
Property Tax: A Fixed Rate on Rental Income
If you own property in Hong Kong that generates rental income, you are subject to Property Tax. The calculation is straightforward: (Rental Income – Rates Paid) x 80% x 15%. The 20% deduction is a statutory allowance for repairs and outgoings.
Understanding Stamp Duty: Post-2024 Simplification
Stamp Duty is a transaction tax. The landscape changed dramatically on 28 February 2024, with the government abolishing all cooling measure duties for residential property.
For stock transfers, the stamp duty is 0.1% payable by the buyer and 0.1% payable by the seller, for a total of 0.2% on the transaction value (or the market value, whichever is higher).
Modern Compliance: FSIE and Global Minimum Tax
Hong Kong has implemented modern international tax standards to maintain its competitiveness while complying with global initiatives.
Foreign-Sourced Income Exemption (FSIE) Regime
Effective from January 2023 (expanded in January 2024), this regime affects multinational enterprises (MNEs). Foreign-sourced dividends, interest, disposal gains, and IP income received in Hong Kong are only exempt from Profits Tax if the recipient meets specific economic substance requirements in Hong Kong. This is a key consideration for holding companies and treasury centres.
Global Minimum Tax (Pillar Two)
Hong Kong has enacted legislation for the OECD’s Global Anti-Base Erosion (GloBE) rules. From 1 January 2025, it applies to MNEs with consolidated group revenue of €750 million or more. The rules impose a top-up tax to ensure these groups pay a minimum effective tax rate of 15% on their profits in every jurisdiction they operate, including Hong Kong.
What Hong Kong Does NOT Tax: The Competitive Edge
This is arguably as important as understanding what is taxed. Hong Kong’s tax base is narrow, providing significant advantages:
- No VAT/GST/Sales Tax: Unlike Mainland China and most major economies, Hong Kong has no consumption tax. This simplifies pricing, accounting, and cash flow.
- No Capital Gains Tax: Profits from the sale of capital assets (like stocks or property held as investments) are generally not taxable.
- No Dividend Withholding Tax: Dividends paid by a Hong Kong company to shareholders, local or foreign, are not subject to withholding tax.
- No Estate or Inheritance Tax: Assets can be passed on without a specific death duty.
✅ Key Takeaways
- Focus on Profits, Not Transactions: Hong Kong’s system taxes profits, salaries, and property rentals—not general consumption or capital gains. This aligns tax costs directly with business success.
- Leverage the Two-Tiered Rate: Structure your business to benefit from the 8.25% tax rate on the first HK$2 million of profits, mindful of the group restrictions.
- Property Market is Simplified: The abolition of special stamp duties in February 2024 has made residential property transactions significantly simpler and cheaper from a tax perspective.
- Plan for International Rules: If you are part of a large MNE, the FSIE regime and Global Minimum Tax (Pillar Two) are now active compliance considerations that require proactive planning.
- Maximise Allowances: For individuals, diligently claim all applicable personal allowances and deductions to minimise Salaries Tax liability.
Navigating Hong Kong’s tax landscape is less about reclaiming complex taxes and more about strategically positioning within a clear, low-tax framework. The absence of VAT is a powerful advantage, freeing up administrative resources. By understanding the core taxes on profits and salaries, the simplified stamp duty system, and the new international compliance requirements, businesses and individuals can operate with confidence and efficiency. In Hong Kong, tax planning is not a defensive game of reclaims—it’s an offensive strategy for growth and wealth preservation.
📚 Sources & References
This article has been fact-checked against official Hong Kong government sources:
- Inland Revenue Department (IRD) – Official tax authority
- GovHK – Hong Kong Government portal
- IRD Profits Tax Guide
- IRD Salaries Tax Guide
- IRD Stamp Duty Guide
- IRD FSIE Regime Guide
- Hong Kong Budget 2024-25
Last verified: December 2024 | For professional advice, consult a qualified tax practitioner.