Characteristics of Property Tax
Property tax is levied annually on the owner or occupier of real estate located in Hong Kong. Since ownership may be split (e.g. an entity with a 100-year lease may grant a 50 year sublease to a 3rd party) separate assessments may be made on the same parcel of land. Property tax, which is governed by the provisions of the Inland Revenue Ordinance, has the following characteristics for individuals:
The annual assessment to property tax is based on 100% of the annual rental income of the property less any rates paid, any bad debts, a repairs and outgoings allowance constituting a maximum of 20% of the annual rental income (irrespective of whether or not more was actually spent) and other allowable deductions. In determining “rental income” the Inland Revenue will include any premiums, service charges, management fees, rates, repairs and outgoings paid by the tenant either to the owner or on behalf of the owner under the terms of the lease. In order to assist the inland revenue to assess the rental income the owner is obliged to keep records for up to 7 years and inform the tax authorities of the actual sums received.
Property tax is based on the territorial principle and is levied on buildings, parts of buildings, wharves, piers and other structures located in Hong Kong. The fact that the owner is non-resident, non-domiciled or a national of a foreign country is completely irrelevant and does not exempt him from having to pay this tax.
The tax rate is 16% of the assessed annual rental income.
Property tax is levied on a provisional assessment basis which considers the previous year’s rental income with a tax credit being granted where the previous year’s rental income exceeds the current year’s rental income. Relief is also given where part of the assessed rental income is a bad debt.
It is advisable for properties to be owned by Hong Kong corporate entities since property tax does not make allowances for either depreciation or interest costs on a loan to finance the purchase, while such costs are deductible for corporate profits tax purposes.
Rates on Property
Rates are levied annually and are payable by the occupier of premises (although the owner retains legal responsibility for payment of the same in the event of default by the occupier). The value of a property is based on its rental value. The annual rates tax is 4.5% of the annual value of the premises as determined under the Rating Ordinance.