Comparing mainland China and Hong Kong’s tax systems.

Mainland China and Hong Kong each maintain distinct tax systems shaped by their separate legal and regulatory environments. While China applies a centrally administered regime with a broad range of taxes, Hong Kong follows a simpler, territorial-based approach.

This guide compares the two across key areas, including corporate income tax, indirect taxes and the China-Hong Kong Double Taxation Agreement, highlighting how these differences can affect cross-border structuring and day-to-day operations.

The China-Hong Kong Double Taxation Agreement (DTA) implements a principal purposes test to prevent treaty abuse, and businesses operating across both jurisdictions should assess their structures for PE exposure and tax residency implications.

Tax system in Mainland China

China operates a centrally administered tax system that has undergone significant reform since 1994. The current framework categorises taxes into nine distinct categories, as set out below:

Business tax to VAT reform

On 5 March 2016, Premier Li Keqiang announced that the Construction, Real Estate, Financial Services and Consumer/Daily Life Services sectors would be included in the final phase of Business Tax to VAT (B2V) reform, which officially took effect on 1 May 2016. This completed the reform, making China’s Indirect Tax System which had consisted of both VAT and business tax since 1994, obsolete.

All industries in China are subject to VAT, covering the sales or importation of goods, the provision of services and the sales of intangible properties and immovable properties.

On 1 January 2026, a new unified VAT Law came into effect, replacing the former provisional VAT regulations. The law retains the same basic rate structure but consolidates previously scattered rules into a single statutory framework, introduces a general anti-avoidance rule for the first time and refines the rules on cross-border transactions, taxpayer classification, input VAT credit management and tax administration.

The applicable VAT rates for general VAT payers are set out in the following table:

The VAT refund rate for exported services matches the applicable VAT rate. For exported goods, the VAT refund rates vary from 0% to 13%, often resulting in less than a full refund of input VAT for many exported goods.

There are two categories of VAT taxpayers: general taxpayers, whose annual taxable revenue exceeds RMB 5 million and small-scale VAT payers, whose annual VAT taxable revenue is RMB 5 million or less.

The standard VAT rate for small-scale taxpayers is 3%. However, a reduced rate of 1% applies to most taxable transactions by small-scale taxpayers through 31 December 2027, after which the standard 3% rate is expected to resume absent further policy renewal. For a closer look at VAT filing obligations in China, including deadlines and compliance steps, see our dedicated guide.

Tax system in Hong Kong

Hong Kong operates one of the most straightforward tax systems in the Asia-Pacific region, imposing only three direct taxes and no VAT, capital gains tax or withholding tax. Its territorial-based approach and low rates make it a competitive destination for foreign direct investment.

The main direct taxes in Hong Kong are:

• Profits tax
• Salaries tax
• Property tax

Significantly, the tax jurisdiction of Hong Kong does not levy tax on the following:

• Sales tax or VAT
• Withholding tax
• Capital gains tax
• Tax on dividends
• Estate tax

Under the Territorial Principle, only income sourced from Hong Kong is subject to Hong Kong income tax. Hong Kong is also known for its free port status and straightforward customs procedures. Duties are imposed on a limited selection of goods, primarily tobacco, while alcoholic beverages are imported duty-free.

Corporate income tax: China vs Hong Kong

China and Hong Kong take markedly different approaches to corporate income tax, both in their headline rates and the preferential regimes available to qualifying businesses. China imposes a standard CIT rate of 25%, whereas Hong Kong applies a significantly lower rate of 8.25% on the first HKD 2 million of assessable profits and 16.5% on the remainder.

China

In China, tax resident enterprises (TREs) are subject to CIT on their worldwide income. A non-TRE that has no establishment or place in China is taxed only on its China-source income. A non-TRE with an establishment or place in China is required to pay CIT on income derived from sources within China as well as income derived from outside China that is effectively connected with such establishment or place.

Under the China CIT law, the standard tax rate is 25%. However, reduced CIT rates are available for certain sectors and industries on a national basis to promote internationalisation:

• Qualified new/high tech enterprises are eligible for a reduced CIT rate of 15%. To qualify, an enterprise must meet prescribed criteria and undergo an assessment.
• Encouraged designated key software enterprises and encouraged designated integrated circuits (IC) design enterprises are eligible for a reduced CIT rate of 10% after the first five years of CIT exemption.
• Qualified technology-advanced service enterprises can benefit from a reduced CIT rate of 15%, subject to meeting specific criteria and assessment.
• Qualified small and thin-profit enterprises with annual taxable income up to CNY 3 million (inclusive) are subject to an effective CIT rate of 5% from 1 January 2023 to 31 December 2027.
• Qualified enterprises engaged in pollution prevention and control are eligible for a reduced CIT rate of 15% from 1 January 2019 to 31 December 2027.

Additionally, a lower CIT rate is available in different regions in China for different sectors and industries. For example, enterprises in the Western Regions of China, the Hainan Free Trade Port and certain special economic zones offer reductions in CIT rates on specific industries, subject to eligibility criteria and the applicable policy period in each location.

Hong Kong

Companies in Hong Kong are subject to a two-tiered profits tax rate. A rate of 8.25% applies to profits up to HKD 2 million. The remaining profits are subject to a rate of 16.5%. For unincorporated businesses, a rate of 7.5% applies to profits up to HKD 2 million. After that, the rate is 15%.

Hong Kong offers several preferential tax regimes to encourage various industries and activities, including:

• Enhanced deduction for research and development (R&D) expenditures
• Tax exemption for funds
• Concessionary profits tax rate (0%) and salaries tax exemption for carried interest
• Concessionary tax rate (0%) for family offices
• Concessionary tax rate (8.25%) for corporate treasury centres, insurance-related businesses, and aircraft leasing businesses
• Tax exemption for gains from qualified debt instruments
• Concessionary tax rates (0% or 8.25%) for ship leasing businesses and shipping-related activities

Individual income tax: China vs Hong Kong

Both jurisdictions impose individual income tax but apply different rate structures and scope. China uses a broader, progressive system covering worldwide income for residents, while Hong Kong applies a territorial approach with lower headline rates.

China

Individual income tax (IIT) in China is levied at progressive rates ranging from 3% to 45%, depending on the income level and the applicable tax bracket.

For residents in China, employment income, remuneration for labour services, author’s remuneration, and royalties are combined as ‘comprehensive income’ and taxed annually. Income from other categories is taxed separately on a monthly or per transaction basis. For non-residents, income is taxed separately on a monthly or per transaction basis.

Hong Kong

IIT in Hong Kong is calculated using progressive rates ranging from 2% to 17%. However, the maximum tax is capped at the standard rates applicable to the net assessable income after deducting allowable deductions but excluding personal allowances. The standard rate operates on a two-tiered basis: 15% applies to the first HKD 5 million of net income, with 16% applying to the remainder.

In Hong Kong, any person, whether locally employed or an expatriate, who earns Hong Kong-source employment income is subject to salaries tax. The following rules apply to non-Hong Kong employment:

• A person with non-Hong Kong employment is taxed only on income for services rendered within Hong Kong.
• Income for services performed outside of Hong Kong is not subject to salaries tax.
• A non-Hong Kong resident who spends no more than 60 days in Hong Kong in a tax year (from 1 April to 31 March of the following year) is not liable to salaries tax on their entire employment income.
• Director fees received from a company managed and controlled in Hong Kong are subject to salaries tax, regardless of the director’s place of residence.

Summary comparison

The table below outlines the key differences between China and Hong Kong across the main tax categories covered in this guide.

China and Hong Kong Double Taxation Agreement

The China-Hong Kong Double Taxation Agreement (DTA) governs how income is taxed across both jurisdictions, reducing the risk of the same income being taxed twice. Both the PRC and Hong Kong authorities are committed to ensuring the DTA is not abused and work collaboratively on information exchange concerning tax matters.

Withholding tax rates under the DTA

When repatriating profits from Mainland China to Hong Kong through dividend remittance, a withholding income tax rate of 5% is applied, while a rate of 7% is levied on interest and royalties. These rates, introduced under the Fourth Protocol signed on 1 April 2015, represent a reduction from the standard withholding tax rates that would otherwise apply.

Anti-abuse provisions and permanent establishment

The Fifth Protocol, effective in mainland China from 1 January 2020 and in Hong Kong from 1 April 2020, introduced several significant changes to the DTA:

• Dual resident entity: The tax residency of a non-individual entity residing in both Mainland China and Hong Kong is determined through mutual agreement considering factors such as the place of effective management and the place of incorporation. Without mutual agreement, the entity is not entitled to DTA benefits.
• Permanent establishment (PE): The definition of dependent agent PE has been extended. A PE is deemed to exist if a person habitually concludes contracts or plays a principal role leading to the conclusion of contracts on behalf of an enterprise. An independent agent acting in the ordinary course of business is excluded unless they act exclusively or almost exclusively for related enterprises.
• Capital gains: Gains from the alienation of shares or comparable interests deriving over 50% of their value from immovable property in the other contracting state within the three years before the alienation may be taxed in that state.
• Teachers and researchers: A three-year tax exemption applies to remuneration for qualified teachers and researchers engaged in teaching or research activities in the other contracting state, provided their income is taxed in the state of employment.
• Entitlement to tax benefits: DTA benefits will not be granted if it is reasonable to conclude that obtaining these benefits was one of the principal purposes of an arrangement or transaction unless it aligns with the DTA’s objectives and purposes.

The Fifth Protocol’s provisions align with BEPS actions to prevent tax treaty abuse and tax avoidance. Key areas to understand include the application of the principal purpose test, the extended definition of PE, and the criteria for determining tax residency for potential DTA benefits. Businesses may need to review their operational models to assess any corporate income tax exposures or PE risks under the DTA.

Conclusion

China and Hong Kong operate fundamentally different tax systems, and understanding those differences is necessary for any business with cross-border operations between the two jurisdictions. China’s broader, centrally administered framework continues to evolve through the 2026 unified VAT Law, while Hong Kong’s territorial, low-rate system remains one of the most straightforward in the region.

For businesses operating across both jurisdictions, the key practical areas to monitor are CIT preferential regime eligibility, IIT obligations for mobile employees and the implications of the DTA’s anti-abuse provisions, particularly the principal purposes test and PE exposure.

How Acclime can help with tax optimisation

Acclime’s expertise in tax services spans across both foreign and domestic enterprises, as well as individuals and representative offices in China. Our team understands the complexities of tax regulations and strives to help clients navigate them effectively.

Whether it is optimising tax structures, ensuring compliance or providing strategic advice, Acclime is committed to delivering tailored solutions that align with our clients’ goals and objectives.