Tax Evasion Penalties in Hong Kong – A Complete Guide

May 24, 2023

Hong Kong is an ideal place for overseas investors and company owners to set up businesses and grow their operations. Hong Kong’s Tax system is favorably accepted by entrepreneurs worldwide for many reasons, including the city’s ease of starting up and maintaining a company and its closeness to the mainland Chinese market. For one, it has one of the world’s most favorable company tax systems, with a flat rate and territorial structure. Nonetheless, even with the preferential tax rates, instances of tax evasion in Hong Kong still exist, which may have serious legal repercussions. This article will help you understand how tax rates in Hong Kong work and what tax evasion penalties in Hong Kong are in detail.

Tax evasion penalties in Hong Kong

Corporate and individual taxes in Hong Kong are governed by the Inland Revenue Law and its ancillary legislation, the Inland Revenue Regulations. The Inland Revenue Department’s mission is to maximize revenue collection while minimizing costs, and it employs law enforcement, educational, and public relations initiatives to increase voluntary tax compliance. However, involving in tax evasion can lead to financial and legal consequences. Read on to understand how tax evasion in Hong Kong works.

What is tax evasion?

When a person or business intentionally tries to avoid paying their fair share of taxes, they are engaging in tax evasion, which is a criminal offence. Tax evaders face criminal prosecution and heavy fines if they are identified. Due diligence methods for financial account information must be established, maintained, and applied by the Inland Revenue Ordinance (IRO) regulations for submitting returns on time and accurately. All required individuals and organizations must strictly adhere to the rules for their efforts to yield results.

The applicable penal provisions of the IRO provide the Commissioner the authority to start prosecution, to compound, or to assess extra tax in respect of an offense if the conditions under the IRO are not met. The severity of the punishment may depend on the complexity of the evidence, the sum of taxes undercharged, how long the offense was committed, and other factors.

Why is Hong Kong considered a tax haven?

Countries having low tax rates, especially for foreign investors, are known as “tax havens” and are thus often used as offshore financial centres. Hong Kong’s rules that minimize taxes on the island’s rich foreign residents and companies give it a reputation as a major tax haven. Hong Kong has become one of the most popular places for startups and multinational corporations to establish businesses because of its progressive tax system and focus on economic development.

Hong Kong is a popular place to incorporate a company not just because its tax rates are very low but also because the following factors contribute to the city’s tax system’s popularity. The reasons for considering Hong Kong a tax haven include:

It does not impose a tax on capital gains
Low personal and corporate tax rates in Hong Kong
No value-added or sales tax
No withholding tax on earnings or interest
No social security benefit collection

Tax rates/regime in Hong Kong

The tax rates in Hong Kong vary according to the company setup and net income. Here are the significant tax application rules for businesses and individuals thriving in Hong Kong.

Corporate Tax Rates

Companies pay an 8.25% tax on the first HK$2 million they earn.
The 16.5% threshold is reached at HK$2 million or more.

Tax Rates for Unincorporated companies

For the first HK$2 million in revenue, sole proprietors pay 7.5% in taxes.
For revenue exceeding HK$2 million, a 15% tax rate is applied.
Capital gains are taxed at zero percent.
Zero percent dividend tax rate
Zero percent tax rate on earnings earned abroad.

Individual Tax Rates

For individuals earning 1 – 50,000 HKD, the tax rate is set at 2%
For those with an income ranging between 50,001 – 100,000 HKD, a 6% tax rate is applied
If an individual earning is between 100,001 – 150,000 HKD, the tax applied will be 10%
A 14% tax rate is applied for individuals earning 150,001 – 200,000 HKD
If the income exceeds HK$200,000, the tax rate becomes 17%
The capital gains tax rate is 0%.
Earnings made outside the country incur no tax.
There is no withholding tax on profits received from a Hong Kong-based corporation.

Difference between tax avoidance and tax evasion

It’s incorrect to use the terms “tax avoidance” and “tax evasion” interchangeably, as some do. The terms tax avoidance and tax evasion are, in fact, antonyms. Legal accounting strategies and processes may lower a company’s tax liability. But unlawful tax evasion practices, on the contrary, can land you in trouble if caught. The primary goal of tax evasion is to minimize the amount of money owed to the government via taxes by finding loopholes in the regulations. Some common evasion practices include:

Misrepresenting your income statement
Misreporting your company’s financial statements by exaggerating its earnings and/or by only partially reporting its tax liability.
Making up costs that weren’t incurred to reduce taxable income and avoid tax penalties.

Similarly, the following are some of the common tax avoidance practices.

Cutting down on taxable income
Management of revenue and expenditure timings
Making use of all tax deductions to the fullest

The most significant difference is that tax avoidance might save you a lot of money in taxes, while tax evasion can get you locked up. An exchange of taxable income may be presented and finalized in many ways. Tax preparation in advance can be helpful since it reduces your tax burden.

Why should you avoid tax evading?

It’s natural for a company owner to want to minimize their tax liability. When your taxable income is less, you’ll have more money left over to invest. Reducing your tax burden is a wonderful idea, but you must also be aware of what you might lose if it goes wrong. Unlike tax avoidance, which might help you avoid paying a large sum in taxes, tax evasion can get you in prison.

Activities that evade tax in Hong Kong

Any person who willfully and with a purpose to dodge or help any other person in evading tax is subject to prosecution under section 82(1). The activities that are considered to be tax evading are listed as the following.

Failing to include all required payments in a return
Making a significantly false statement or item on any tax return.
Deliberately or recklessly making a false statement in support of a claim for a credit, deduction, or allowance.
Making a false statement or signing a false return is required under the IRO.
In response to any inquiry or request for information made in line with the IRO, provides any untrue information.
Making fake entries in financial records or books.
Engages in any kind of fraudulent activity to avoid paying taxes.

What business owners should be careful of?

In addition to being responsible for filing tax returns, entrepreneurs and business owners also have more input over the company’s financial statements. The company’s yearly tax returns should be double-checked with a trusted accountant to rule out any potential for error. Because of this, tax authorities in each country often scrutinize business owners more closely than they do firm workers. Business owners may avoid paying taxes in several methods, including:

Intentionally hiding their true income
Keeping to the established norms and procedures of accounting
involvement in illegally misrepresenting a transaction, and related offenses

Penalties for evading tax in Hong Kong

The purpose of the Inland Revenue Ordinance (IRO) is to enforce reliable and timely tax return submission by all businesses. Such instances include performing due diligence methods to business payment information and preserving and retaining financial records. If found guilty of tax evasion, your punishment will be determined by the Commissioner and is subject to specific restrictions. In the absence of a valid excuse, you may be subject to a penalty of $10,000 and ordered to pay it within a certain period.

Failing to preserve proper rental records is a mandatory obligation.
Making an inaccurate deduction
Using false information when requesting a deduction or allowance
Making someone’s tax burden worse by giving them false information.
Claiming a premium tax credit but not informing the government about your refund,
The failure to submit a tax return by the due date
Nor reporting tax obligation

In the absence of a valid justification, you may be liable to a fine of $50,000 and ordered to pay it within a certain time limit. Actions leading to the payment of the mentioned penalty include:

Willfully engage in tax evasion or aid another individual in doing so
Omitting any money from your tax return
Fabricating data to get a better result
Creating or keeping inaccurate accounting records
Using illegal means to evade taxation.

In the absence of a valid justification, you may also be liable to a fine of $100,000 and ordered to pay it within a certain time limit if you disobey business record-keeping requirements.

Punishments you could face for tax evading in Hong Kong

If you did not intentionally avoid paying your taxes, the issue will be resolved administratively via the Profits Tax system as an overpayment. Thus, the outcome may be decided by an on-the-ground audit or inquiry. If you are in this category, you will get information about any additional taxes you owe and how to pay them. For all the activities representing tax evasion, if the offender can’t provide a valid cause, they’ll have to pay a fine of $10,000, and the court could even have them do the delinquent action within a certain amount of time.

If the offender has the intent to deceive, they would face a punishment of $50,000 and 3 years in jail. After conviction, a reporting financial institution is liable to an additional $500 punishment for each day it fails to file a return or fix its compliance system and process following Section 50C(1), 51B(1AAAD), or 51BA(6). Section 80F of the Criminal Code allows for the possibility of a compounded offence in place of prosecution.

Need help with tax complying in Hong Kong?

Hong Kong’s commitment to maintaining investor anonymity, along with its advantageous tax system, has made the city a haven for international investors and helped it rise to prominence as a global financial centre. However, tax return filing requires strict adherence to local laws. Therefore, the involvement of an accounting professional becomes inevitable.

At Startupr, regular conformity to the Hong Kong Company Ordinance’s laws and regulations is ensured by our team. Our team of experts can help with filings based on your company’s requirements. We will also deliver you official forms of the process for free, instantly. For quicker, professional and legally compliant tax filing, contact us now.