What happens when you challenge a Hong Kong tax assessment and lose? The financial consequences can be staggering—transforming a manageable tax bill into a financial nightmare. Under Hong Kong’s “pay first, argue later” system, unsuccessful taxpayers face not just the original liability but accumulating interest, substantial penalties, and legal costs that can exceed the disputed amount itself. Understanding these risks is crucial before deciding whether to fight a tax assessment.

The High Cost of Interest on Held-Over Tax

When you file an objection or appeal against a tax assessment, you can apply to hold over payment of the disputed amount. However, this temporary relief comes with a significant price tag. Under sections 71(9)(e)(ii) and 71(10) of the Inland Revenue Ordinance, interest accrues on any tax ultimately found payable when your objection or appeal is withdrawn or finally determined.

Current Interest Rate: 8.25% Per Annum

As of July 2025, the judgment debt interest rate applicable to tax held over is 8.25% per annum. This rate is fixed by the Chief Justice under section 50 of the District Court Ordinance and is subject to periodic adjustments published in the Gazette.

Real-World Impact: A HK$1 Million Example

Consider a taxpayer disputing a HK$1,000,000 assessment who holds over payment. The appeal proceeds through the Board of Review (2 years) and Court of First Instance (2 years). If the taxpayer ultimately loses, interest at 8.25% p.a. over 4 years amounts to approximately HK$330,000 in additional charges—nearly one-third of the original tax bill.

Board of Review Costs: Up to HK$25,000

The Board of Review (Income Tax) provides an accessible forum for tax disputes, but unsuccessful appellants face potential cost orders. According to the Board of Review (Income Tax) Ordinance, if the Board does not reduce or annul the assessment, the appellant may be ordered to pay up to HK$25,000 as costs to the Board.

When Costs Are Typically Awarded

• The appeal is wholly unsuccessful (no reduction in assessment)
• The appeal is deemed frivolous or vexatious
• The appellant has acted unreasonably in conducting the appeal
• The appellant withdraws the appeal without good reason

Court Litigation: Where Costs Skyrocket

If either party is dissatisfied with a Board of Review decision, they may apply to the Court of First Instance for leave to appeal on a question of law. Appeals can proceed to the Court of Appeal and potentially the Court of Final Appeal. At this stage, costs follow the “costs follow the event” principle—meaning the losing party typically pays the winner’s costs.

What You Can Actually Recover (or Pay)

When costs are taxed on a “party and party” basis (the standard in litigation), the winning party typically recovers:

• 50% to 65% of solicitors’ costs
• 80% to 100% of disbursements (barristers’ fees, court fees, expert witness fees)

This means even if you win, you may not recover all legal costs. If you lose, you bear both your unrecovered expenses and a portion of the IRD’s costs.

Professional Legal Fee Ranges

Estimated Total Litigation Costs by Court Level

• Court of First Instance: HK$200,000 – HK$800,000
• Court of Appeal: HK$300,000 – HK$1,200,000
• Court of Final Appeal: HK$500,000 – HK$2,000,000+

Section 82A Penalties: The Triple Threat

Section 82A of the Inland Revenue Ordinance empowers the Commissioner to impose “additional tax” as a civil penalty for incorrect returns or information. This is distinct from criminal prosecution and commonly applies to cases not involving willful tax evasion. The penalty can reach up to three times the amount of tax undercharged.

When Section 82A Applies

• Understatement of income or profits
• Overstatement of deductions or allowances
• Late filing of tax returns (resulting in undercharged tax)
• Failure to disclose relevant information
• Improper transfer pricing or profit attribution

Penalty Calculation: From 10% to 300%

The Complete Financial Picture: A HK$2 Million Case Study

Let’s examine a comprehensive example showing how costs multiply when losing a tax dispute:

This example reveals a sobering reality: the original HK$2,000,000 tax liability balloons to over HK$4.2 million—more than double the initial assessment when interest, penalties, and legal costs are included.

Strategic Decision-Making: Fight or Settle?

Given the substantial costs of losing, taxpayers should carefully evaluate these factors before pursuing a dispute:

1. Assess the merits objectively: What is your realistic probability of success? Seek independent legal advice.
2. Calculate the true cost: Include interest accumulation, potential penalties, and legal fees—not just the disputed tax amount.
3. Consider business impact: What are the opportunity costs and reputational risks of prolonged litigation?
4. Explore settlement options: Is the IRD open to negotiation or partial settlement at an early stage?
5. Review cost-benefit regularly: Reassess your position as the dispute progresses and costs mount.

Early Resolution Strategies

• Discussion with assessing officers: Many disputes resolve through additional information or clarification
• Well-documented objections: Comprehensive submissions may lead to revised assessments without formal appeals
• Advance ruling applications: For uncertain tax treatments, seek rulings proactively to avoid disputes
• Contemporaneous documentation: Maintain proper records to support positions and minimize penalty risks

Recent Developments: BEPS Pillar Two Implications

The Inland Revenue (Amendment) (Minimum Tax for Multinational Enterprise Groups) Ordinance 2025, enacted on 6 June 2025, introduces new penal provisions under Sections 80O, 82, and 82A for non-compliance with Global Anti-Base Erosion (GloBE) and Hong Kong Minimum Top-up Tax (HKMTT) requirements.

These provisions apply to multinational enterprise groups with annual revenue of at least EUR 750 million and include penalties for:

• Failure to file required returns or notifications
• Incorrect returns and notifications
• Other wrongdoings related to BEPS reporting

The decision to challenge a Hong Kong tax assessment requires careful financial analysis beyond the disputed tax amount. With interest accruing at 8.25%, potential penalties up to triple the undercharge, and legal costs that can exceed HK$2 million for court appeals, the true cost of losing often far outweighs the original assessment. Before proceeding with any tax dispute, obtain realistic cost estimates and probability assessments from experienced tax professionals who understand both the legal merits and financial implications of Hong Kong’s “pay first, argue later” system.