Why Is Hong Kong Considered a Tax Haven?

Tax havens are countries with low tax rates, particularly for foreign investors, that make them attractive places for people to park their money. Hong Kong is considered a leading tax haven due to its laws that limit taxation on the island’s wealthy foreign residents and corporations.

In fact, in 2020, accounting firm PwC and the World Bank ranked Hong Kong as the country with the most friendly tax system, second only to Bahrain. The People’s Republic of China, of which Hong Kong is a part, permits Hong Kong’s autonomy and arguably allows for even greater secrecy than the island had under its former British rulers.

Attractive Tax Structure

Hong Kong, a Special Administrative Region (SAR) of China, is one of the leading financial capitals in the world. As such, many of the world’s leading banks have operations there. The island also has one of the largest stock exchanges in the world. It even has its own currency, the Hong Kong dollar, so foreigners need not worry about transacting in the lesser-valued Chinese yuan.

Wealthy foreigners have every reason to bank their money in Hong Kong. For one, the island does not tax income earned beyond its borders. Those who earn salaries in the region pay an income tax between 2% to 17%, depending on their salary, which is significantly lower than taxes levied on salaries in the West. Additionally, corporations pay a tax of 8.25% or 16.5%, depending on the profit levels generated in Hong Kong.

Even more beneficial is that the autonomous region does not charge tax on capital gains, interest, or dividends. Foreigners who keep their money in Hong Kong pay no net-worth taxes and no public benefits taxes, which are similar to Social Security taxes in the United States. High-net-worth individuals who do not keep their financial assets in Hong Kong can still benefit from going on Hong Kong shopping sprees, as shoppers pay no sales tax on their purchases.

Commitment to Secrecy

Few were surprised that the so-called Panama Papers came peppered with mentions of Hong Kong as a place where some wealthy individuals, corporations, and world leaders hide their money. From the latest figures available, from 2019, private wealth assets under management in Hong Kong were approximately HKD 9.1 trillion (US$1.2 trillion).

Renowned tax haven, Switzerland, bowed to pressure from the United States and the European Union to share information about foreign bank accounts and asset owners seeking shelter from taxation.

However, Hong Kong refused to do so and was named to the EU’s blacklist of non-cooperating tax havens around the world. Hong Kong is still behind Switzerland in secrecy rankings but has become a strong competitor. In 2020, Hong Kong ranked fourth on the Financial Secrecy Index, behind Switzerland, the United States, and the Cayman Islands. Hong Kong was given a score of 66, considered a high score and a reflection of the region’s commitment to the privacy of those who keep their money there.

The Bottom Line

Hong Kong's favorable tax structure makes it an attractive place for foreigners to deposit their money as well as a place for corporations to do business. The tax structure and Hong Kong's ongoing dedication to preserving secrecy for investors have contributed to it becoming a popular tax haven that has helped establish it as one of the world's premier financial hubs.

However, the G7 and the US are currently working on new laws to alleviate tax evasion for individuals and corporations. These laws include the wealth tax and the global minimum corporate tax, respectively. If they are instituted, they might be enforced in tax havens as well, such as Hong Kong.