Are you earning rental income from serviced apartments in Hong Kong? You might be surprised to learn that your tax liability could vary dramatically depending on how you operate your property. The Inland Revenue Department (IRD) applies different tax treatments based on whether your serviced apartment functions as a passive rental property or an active hospitality business. Understanding this distinction is crucial for compliance, tax planning, and maximizing your after-tax returns in Hong Kong’s competitive property market.

The Fundamental Tax Choice: Property Tax vs. Profits Tax

Hong Kong’s schedular tax system treats different types of income under separate regimes. For serviced apartment owners, the critical decision is whether your income falls under Property Tax or Profits Tax. This isn’t just a technical distinction—it can mean the difference between paying 15% on your net rental income or accessing lower rates and actual expense deductions.

Property Tax: The Passive Rental Approach

Property Tax applies to passive rental income from land or buildings in Hong Kong. The current rate is 15% on the net assessable value, calculated as:

The 20% statutory allowance for repairs and outgoings is automatic—you cannot deduct actual expenses. This system works well for traditional landlords with minimal services and long-term tenants.

Profits Tax: The Business Operation Approach

Profits Tax applies when your serviced apartment operations constitute carrying on a trade, profession, or business. The rates for 2024-2025 are:

• Corporations: 8.25% on first HK$2 million of profits, 16.5% on remainder
• Unincorporated businesses: 7.5% on first HK$2 million, 15% on remainder

The Business vs. Passive Income Test: How the IRD Decides

The IRD examines several factors to determine whether your serviced apartment operations constitute a business subject to Profits Tax or passive rental income subject to Property Tax. The key indicators include:

Hotel Accommodation Tax: The 2025 Game Changer

A significant development affecting serviced apartment operators is the reintroduction of the Hotel Accommodation Tax (HAT) effective January 1, 2025. The tax rate is 3% on accommodation charges for properties classified as hotels.

When HAT Applies to Your Serviced Apartment

HAT applies if your serviced apartment falls within the definition of “hotel” under the Hotel Accommodation Tax Ordinance. Key considerations include:

• Properties holding out to provide accommodation to transient guests
• Establishments providing furnished rooms or suites for lodging
• Accommodation charges include all charges for providing hotel accommodation

Comparative Tax Treatment: Property Tax vs. Profits Tax

Service Charges: The Critical Tax Treatment Difference

How you treat service charges can dramatically affect your tax liability. Under Property Tax, service charges are simply included in gross rental income with only the 20% notional deduction. Under Profits Tax, service charges are business revenue, and you can deduct the actual costs of providing those services.

Corporate Owners: Strategic Tax Planning Opportunities

Corporate owners of serviced apartments have additional planning opportunities:

1. Property Tax Exemption: Corporations carrying on a trade, profession, or business can apply in writing to the IRD for exemption from Property Tax when rental income is included in Profits Tax computations
2. Two-Tiered Rates: Access to 8.25% rate on first HK$2 million of profits, then 16.5% on remainder
3. Loss Utilization: Losses can be carried forward indefinitely to offset future profits
4. Tax Set-Off: Any Property Tax paid can be set off against Profits Tax liability, preventing double taxation

Record-Keeping: Your Defense Against IRD Scrutiny

Regardless of your tax classification, comprehensive record-keeping is essential. The IRD can back-assess for up to 6 years (10 years for fraud), and you must retain records for 7 years. Essential documentation includes:

• Tenancy agreements or booking confirmations with stamped documents
• Detailed financial records of all income and expenses with supporting invoices
• Occupancy records showing guest/tenant details and duration of stays
• Service documentation showing nature, frequency, and costs of services provided
• HAT records and exemption documentation for 28+ night stays
• Licensing documents or evidence of exemption from hotel licensing requirements

Common Compliance Pitfalls to Avoid

Common mistakes serviced apartment owners make include:

• Inconsistent Classification: Claiming Property Tax treatment while deducting business expenses elsewhere
• HAT Misapplication: Incorrectly claiming exemption for stays under 28 consecutive nights
• Service Charge Errors: Failing to properly account for service charges as revenue
• Inadequate Documentation: Not maintaining sufficient records to support your tax position
• Corporate Structure Issues: Multiple entities in a connected group incorrectly claiming the lower Profits Tax tier

Navigating Hong Kong’s tax treatment of serviced apartments requires careful consideration of your operational model, expense structure, and long-term business strategy. The choice between Property Tax and Profits Tax isn’t just about current tax rates—it’s about aligning your tax treatment with the genuine nature of your operations. With the reintroduction of Hotel Accommodation Tax in 2025, now is the ideal time to review your serviced apartment’s tax position, ensure proper classification, and implement robust record-keeping systems. Consider consulting a qualified Hong Kong tax professional to optimize your tax position while maintaining full compliance with IRD requirements.