Hong Kong is known as one of the world’s leading business centers, and for good reason. Its unique tax system offers significant advantages that are worth understanding before making decisions
More and more Israeli business owners, investors, and entrepreneurs are considering setting up a company in Hong Kong or relocating there. One of the main reasons is Hong Kong’s tax system, which is considered one of the most business-friendly in the world. Hong Kong is known as one of the world’s freest and most competitive economies, based on the principles of a free market, a low tax burden, and minimal government involvement in the economy.
However, it is important to understand not only what Hong Kong offers, but also how it relates to Israel.
What Is Territorial Taxation and Why Is It So Important?
Israel applies a personal taxation system: every Israeli resident is subject to tax on all income, whether generated in Israel or abroad.
Hong Kong applies a completely different principle: territorial taxation. The meaning is simple but significant. In Hong Kong, tax is paid only on income generated within the territory itself. Income sourced outside Hong Kong is fully exempt from tax, even if the person generating the income is a Hong Kong resident.
This principle is the basis for the significant advantage Hong Kong offers to investors and business owners operating in the international arena.
Tax Rates in Hong Kong – How Much Is Actually Paid?
Hong Kong’s tax system is divided into only three types of tax:
Profits Tax
Hong Kong applies a reduced two-tiered system:
Type of entity | On the first profit | On the remaining profit |
Incorporated company | 8.25% | 16.5% |
Unincorporated business (partnership / sole proprietor) | 7.5% | 15% |
Important to note: only one entity within a business group may benefit from the reduced two-tiered rates.
In addition, Hong Kong offers special incentives for knowledge-intensive companies:
- A 300% deduction for research and development (R&D) expenses
- A reduced tax rate of 5% on intellectual property income (Patent Box)
Personal Income Tax (Salaries Tax)
Progressive rates ranging from 2% to 17%, alongside an alternative method:
- 15% of the first 5 million $HK of net income
- 16% of the remaining income
Tax is calculated according to the lower of the two methods, a significant advantage for high-income earners.
Property Tax
Property owners who lease real estate in Hong Kong pay 15% of the net annual rental value. An owner-occupied property is exempt from tax.
What Hong Kong Does Not Tax
One of the most impressive aspects of Hong Kong’s tax system is not what it includes, but what it does not include:
- No value-added tax (VAT)
- No capital gains tax
- No tax on dividends
- No withholding tax on dividends and interest
- No estate tax
This combination is extremely rare worldwide and constitutes a particularly significant advantage for investors making investments in the Far East through a Hong Kong resident holding company.
Israel vs. Hong Kong – A Quick Comparison
Type of tax | Israel | Hong Kong |
Corporate tax | 23% | 8.25% / 16.5% (two-tiered rates) |
Maximum personal income tax | 50% | 17% or 15%-16% (flat) |
VAT | 18% | None |
Capital gains tax | 25%-33% | None |
Tax on dividends | 25%-33% | None |
Estate tax | None | None |
The Israeli Side of the Equation
This is where many people miss an important point. An Israeli who relocates to Hong Kong or sets up a company there is not automatically exempt from Israeli tax. In our professional experience, many people arrive at their first meeting with expectations that do not match the legal reality.
Three key issues must be examined:
- Severing Israeli tax residency with the Israel Tax Authority – Israel taxes based on residency. Moving to Hong Kong does not automatically eliminate Israeli tax liability. Tax residency must be severed for Israeli tax purposes, a process that is subject to strict requirements.
- No tax treaty between Israel and Hong Kong – Israel has tax treaties with more than 50 countries, but Hong Kong is not one of them. A tax treaty provides protection against double taxation. In its absence, an Israeli generating income in Hong Kong may be exposed to taxation in both jurisdictions without the protections that a treaty would have provided.
- Controlled Foreign Corporation (CFC) rules – An Israeli who sets up a company in Hong Kong may be subject to the Controlled Foreign Company (CFC) rules under the Israeli Income Tax Ordinance: a mechanism designed to prevent the shifting of passive income to foreign companies in low-tax jurisdictions. This matter is currently undergoing legislative changes, so it is important to obtain up-to-date professional advice before taking any action.
The advantages exist and are significant, but the right structure must be built in order to benefit from them.
Three Practical Steps Before Relocation
If you are considering relocating to Hong Kong or setting up a company there, here are the steps we recommend taking:
- First, examine the tax implications in Israel, severance of residency, CFC rules, and more. These are issues that must be addressed before making any decision.
- Plan the operating structure in advance. Is it an incorporated company? A partnership? A holding company? Each structure has different tax implications, both in Hong Kong and in Israel.
- Consult an expert before taking any action. International taxation is a complex field, and proper advance planning can prevent costly and unnecessary mistakes.
Want to know whether your activity structure is suitable?
Nimrod Yaron & Co. specializes in Israeli and international taxation. Our team is composed of professionals with years of experience at the Israel Tax Authority, alongside experience in leading firms and law offices, and brings together legal and economic perspective. We advise private and public companies, Israeli and foreign businesses, global venture capital funds, and clients seeking focused advice in clear, practical language. We also work with a professional network of accounting and law firms around the world in order to provide full support in cross-border matters.
Our team of experts specializes in international taxation, establishing holding structures abroad, and advising Israelis considering relocation or setting up a company outside Israel. We would be pleased to help you build the right tax structure, understand the Israeli implications in advance, and avoid unnecessary pitfalls.
To contact our experts, click here
FAQ
Is an Israeli who relocates to Hong Kong automatically exempt from tax in Israel?
No. Israel taxes based on the principle of residency, and anyone moving abroad will need to prove that they have severed Israeli tax residency for tax purposes. This process requires meeting specific conditions and should be carried out with professional guidance.
What is the corporate tax rate in Hong Kong?
Hong Kong applies a two-tiered rates system: 8.25% on the first profit up to 2 million $HK, and 16.5% on the remaining profit. Unincorporated businesses enjoy lower rates: 7.5% and 15%, respectively.
Is there a tax treaty between Israel and Hong Kong?
No. Hong Kong does not have a tax treaty with Israel. This means there is no agreed mechanism for preventing double taxation, and activity should be planned accordingly using the mechanisms available under Israeli domestic law.
Is there capital gains tax in Hong Kong?
As a general rule, there is no capital gains tax in Hong Kong. However, a company whose main activity is trading in capital assets may be subject to Profits Tax on such gains.
What is a Controlled Foreign Corporation and why is it relevant to Hong Kong?
The CFC rules under the Israeli Income Tax Ordinance require Israelis who hold foreign companies in low-tax jurisdictions to report and pay tax in Israel, even without a dividend distribution. Since tax rates in Hong Kong are low, these rules are highly relevant, and it is recommended to examine this before setting up a company
