Hong Kong does not charge VAT or GST. Businesses are taxed under profits tax.
Two-tier profits tax for corporations: 8.25% on the first HKD 2,000,000 of assessable profits, 16.5% above that. Unincorporated businesses: 7.5% and 15%.
Hong Kong uses a territorial system. Only Hong Kong-sourced profits are taxable. Offshore claims are not automatic and require evidence to the Inland Revenue Department (IRD).
The refined foreign-sourced income exemption (FSIE) regime can tax certain foreign-sourced passive income when received in Hong Kong unless substance or other conditions are met.
No withholding tax on dividends or interest. Royalties paid to non-residents may be taxable under Inland Revenue Ordinance (Cap. 112) deeming rules.
Employer and employee MPF contributions are generally 5% each, capped at HKD 1,500 per month per side (HKD 18,000 per year). MPF offsetting has been abolished.
Every business has the responsibility to file and pay its taxes.
Hong Kong doesn’t charge VAT (Value-Added Tax) like many countries do. Instead, it uses a profits tax system, where only income sourced in Hong Kong is taxed.
If you're running an eCommerce business, especially cross-border, understanding this system can help you legally reduce your tax burden and protect your profits.
What Is Tax & VAT?
Taxes are compulsory charges imposed by government to fund public expenditure.
Value-added tax (VAT) is a consumption tax applied at each stage of production and distribution in many jurisdictions.
Hong Kong does not impose VAT or GST. Instead, profits tax applies to business income sourced in Hong Kong. For e-commerce and cross-border sellers, understanding this system helps legally reduce tax and protect profit margins.
How Does Corporate Income Tax Work in Hong Kong?
Hong Kong uses a two-tier system.
Only profits arising in or derived from Hong Kong are chargeable.
Profits earned entirely outside Hong Kong may qualify as offshore (subject to evidence and IRD approval).
There is no VAT, no capital gains tax, and no withholding tax on dividends or interest.
However, royalties paid to non-residents for IP used in or exploited for Hong Kong may be taxable under IRO s.15(1)(b), (ba)–(bb).
You must file a Profits Tax Return (PTR) annually and maintain accounting records for at least 7 years (IRO s.51C).
Territorial Taxation, Offshore Claims, and FSIE
- Only Hong Kong-sourced profits are taxable.
- If your core profit-generating activities (such as contracting, negotiation, logistics, or management) occur outside Hong Kong, you may apply for offshore tax exemption.
- Offshore tax exemption is not automatic and is evidence-based. The IRD may request contracts, shipping records, payment flows, organizational charts, and workflow descriptions.
- Certain foreign-sourced passive income (interest, dividends, IP income or royalties, and disposal gains) can be taxable when received in Hong Kong unless economic substance, participation, or nexus requirements are met. Plan carefully if you hold IP or investments.
Air Corporate can prepare offshore evidence packs and can assist with advance ruling requests to the IRD where appropriate.
How Does Your eCommerce Get Taxed?
Your assessable profits are generally revenue minus deductible business expenses and depreciation allowances. Lower assessable profits mean lower tax.
Taxable Income
Taxable income for profits tax purposes is what remains after subtracting tax-deductible expenses that are wholly and exclusively incurred in the production of chargeable profits.
What Income Is Exempt or Not Charged in Hong Kong
- Foreign-sourced trading or service profits may be treated as offshore if you prove the operations that produce those profits take place outside Hong Kong.
- Dividends, capital gains, and most interest are generally not taxed unless caught by specific provisions, including the FSIE rules when received in Hong Kong.
- Certain personal receipts such as severance or long-service payments are governed by the Employment Ordinance and related IRD practice.
If uncertain, seek advice or consider an advance ruling from the IRD.
Deductible vs Non-Deductible Expenses
Deductible Expenses
A deductible expense is an amount wholly and exclusively incurred in producing chargeable profits. Common examples for e-commerce and service businesses include:
- Website and platform costs: domain registration, hosting, payment gateways, SaaS, IT support, and business-use hardware/software
- Logistics: shipping, packaging, postage, and fulfillment fees
- Marketing: digital ads, content creation, and influencer services
- Professional fees: accounting, audit, tax, legal, and company-secretarial
- Telecommunications and internet: apportioned if partly personal
- Premises: rent and utilities for offices or coworking spaces; home-office costs can be apportioned
- Charitable donations: minimum HKD 100, deductible up to 35% of assessable profits under IRO s.88
- Depreciation allowances: for qualifying plant and machinery, spreading cost over time
Maintain proper invoices and receipts for at least seven years to support deductions during IRD review.
Non-Deductible Expenses
Personal, domestic, or capital expenditure is not deductible.
Keep personal and business transactions separate to prevent IRD disallowance.
Ways to Reduce Your Tax in Hong Kong
Looking to legally reduce your Hong Kong profits tax? The following IRD-compliant tax strategies help e-commerce owners and SMEs lower their tax bill while staying within the Inland Revenue Ordinance (Cap. 112).
1. Choose the Right Business Structure
Forming a limited company allows you to:
- Benefit from the two-tier profits tax rates, and
- Maintain clearer separation of personal vs business expenses.
2. Plan and Document Offshore Treatment
If profits come from outside Hong Kong, apply for offshore treatment and keep supporting documentation ready.
Remember the FSIE regime may still apply to certain foreign-sourced passive income received in Hong Kong.
3. Comply With MPF Obligations and Use Deductions Correctly
Both employer and employee must contribute 5% of relevant income, capped at HKD 1,500 per month per side (HKD 18,000 per year).
- Self-employed persons must also contribute within statutory limits.
- MPF offsetting has been abolished since 1 May 2025, improving retirement protection for employees.
4. Adjust Provisional Tax When Profits Fall
Apply to hold over provisional profits tax if your current-year profits are lower.
Submit Form IR1121 28 days before payment or 14 days after notice, whichever is later.
5. Deduct Professional Fees and Charitable Donations
You can deduct fees for accounting, audit, legal, and tax services if they are wholly and exclusively incurred in producing profits.
- Approved charitable donations (minimum HKD 100) are deductible up to 35% of assessable profits under IRO s.88.
Air Corporate help prepare IR1121 hold-over applications, review ledgers for IRD readiness, and ensure deductions and apportionments align with current tax rules.
Work-From-Home, Office Sharing, and Mixed-Use Costs
- You can apportion home utilities, internet, and phone where they are wholly and exclusively used for business. Keep a clear and reasonable basis for apportionment.
- Coworking and shared office costs are generally deductible when incurred to produce chargeable profits.
- For mixed personal and business use, document the method used to calculate the business portion.
Withholding Tax and Cross-Border Payments
- Dividends and interest: no Hong Kong withholding tax.
- Royalties: paid to non-residents for IP used in or exploited for Hong Kong are deemed taxable under IRO s.15(1)(b), (ba), (bb); effective rates vary by facts.
Final Words
Hong Kong’s simple tax system and lack of VAT make it one of the most business-friendly places for e-commerce. By understanding profits tax rules and keeping IRD-compliant records, you can reduce your tax bill and grow sustainably.
Need help with your Hong Kong tax filings or offshore claim? Air Corporate can handle everything — from bookkeeping and profits tax returns to IRD rulings — so you can focus on scaling your online business.
