Capital gains can be defined as profits which have been generated through the sale of either a property or an investment. In many instances, there will be a difference between the sale price of the item being sold and the original price at which the item has been purchased. If the difference is in the favor of the person who purchased and sold the item, the profits gained are the capital gains.
Most countries and territories impose a tax on capital gains which are earned by taxpayers. In some areas, capital gains taxes may sometimes be divided into long-term capital gains tax and short-term capital gains tax depending on the duration for which the items generating the capital gains are held.
Capital Gains Tax in Hong Kong
Hong Kong is one of the few locations in the world in which capital gains are not subject to any taxation. However, any taxpayer who receives any shares or options as part of the remuneration earned from working in Hong Kong will be taxed. Such a taxpayer is to be taxed at Hong Kong’s usual income tax rate related to the value of the options or shares at the end of any vesting period minus any amount paid by the taxpayer in question for the grant.
Should any part of the vesting period be spent outside Hong Kong, the amount of tax which is to be paid in Hong Kong will be proportional to the amount of time which has been spent working in Hong Kong. One should also note that Hong Kong is not part of many double tax agreements. Therefore, taxpayers of Hong Kong do not have many opportunities to avoid the effects of double taxation. This means that many taxpayers who have moved from abroad to Hong Kong might be required to pay the full amount of income tax on vested shares in Hong Kong as well as in their respective countries of origin.
For the same reason, a taxpayer who has left Hong Kong might have to pay double taxation on the unrealized capital gains of any vested shares owned. It should also be noted that the fact that Hong Kong taxes capital gains on shares or options owned by employees which are also subject to a vesting period contradicts the fact that it does not impose any capital gains tax on unrestricted options or shares.
Any income earned in Hong Kong by those who conduct trading activities such as purchasing and selling securities professionally will have the income which they earn from such activities taxed at the usual personal income tax rates.
Why Hong Kong Does Not Tax Capital Gains
Hong Kong does not tax capital gains because this lack of taxation is one of its key public policy positions. Hong Kong’s government favors a relatively simple tax structure in order to maximize economic efficiency. Hong Kong is renowned internationally as a global trade hub. Therefore, it gains particular benefit from the free entry and exit of goods and products from all over the world. For the purposes of facilitating international trade activities, it is in Hong Kong’s best interest to keep its tax structure as simple as possible. The imposition of a capital gains tax would therefore introduce unnecessary complications into Hong Kong’s tax system.
Furthermore, the government of Hong Kong has placed a great deal of importance on economic growth. Therefore, its tax policies are geared towards ensuring that the economy of Hong Kong grows at the most rapid rate possible. One way by which such can be done is by making the tax environment of Hong Kong one of the world’s most taxpayer friendly. The lack of a capital gains tax therefore helps Hong Kong achieve its economic goals.
If you would like further information on the tax system of Hong Kong and how taxpayers benefit from it, you may contact us at Paul Hype Page & Co. We will keep you informed about everything you might need to know as a taxpayer in Hong Kong. We will also enable you to take advantage of any tax incentives for which you are eligible to reduce your overall tax burden.