For 25 consecutive years, Hong Kong has remained the world’s freest economy, thanks partly to low taxes and the rule of law. Photo: File

For 25 consecutive years, Hong Kong has remained the world’s freest economy, thanks partly to low taxes and the rule of law. 

But widening inequality has also fueled the worst unrest the city has seen since the former British colony returned to China in 1997.

The lack of inheritance and capital-gains taxes, for instance, has added to the wealth of tycoons. The combined net worth of the territory’s 20 richest people including CK group founder Li Ka-shing and Lee Shau Kee, the founder of Henderson Land Development Co., is pegged at $210 billion, according to the Bloomberg Billionaires Index. By contrast, the city’s income inequality, as expressed in Gini coefficient, was the most for any developed economy in 2016 at a 45-year high. About 1 in 5 residents lives below the poverty line.

In her address to lawmakers Wednesday, Chief Executive Carrie Lam may wrestle with the topic of social inequities that are stoking the political protests since early June. Lam is under pressure to soothe tensions and find ways to ease the housing crisis in the least-affordable market without rocking a tax regime that made Hong Kong Asia’s financial hub.

“The problem in Hong Kong is many ultra-rich people earn dividends and rents without having to pay tax, while the poorest people don’t have to pay tax either,” said Simon Lee, co-director of the International Business and Chinese Enterprise Programme at the Chinese University of Hong Kong. “So those in the middle become really miserable.”

Here’s a look at the tax policies of Hong Kong:

No Capital Gains Tax

Hong Kong, like Singapore, doesn’t impose a tax on gains from the sale of investment assets. Most other developed countries impose such taxes. The UK, for example, collects as much as 28 percent of capital gains. In South Korea, the levy ranges between 6 percent and 70 percent depending on the type of assets and holding period. In the US, it is as much as 28 percent.

No Dividend Tax

Hong Kong does not tax dividends from share holdings. This is also rare among developed economies. In Japan, for example, dividends are generally taxed at about 20 percent. The UK charges between 7.5 percent and 38.1 percent depending on the dividend recipient’s total taxable income. In the US, dividends are either taxed at ordinary income-tax rates or at capital gains rates, depending on the type.

No Inheritance Tax

Hong Kong abolished its inheritance tax in 2006 to promote the city as a trust and asset-management center. This has encouraged billionaires to park their wealth in the city. Rival Singapore also removed its estate duty in 2008. In the UK, estates above 325,000 pounds ($411,420) will be taxed at 40 percent for the portion above the threshold. In Taiwan, inheritance tax is as much as 20 percent, while Japan’s is between 10 percent and 55 percent, depending on the value of the estate.

No Offshore Income Tax

Hong Kong does not tax overseas income such as foreign investment profits and rental income on overseas properties, which not only helps multimillionaires who hold assets around the world but also encourages foreign companies to shift tax burden via the city. In Singapore, such income is exempted for individuals. But many other countries like the UK, US, Australia, South Korea and Japan tax their residents’ worldwide income.

Flat Property Tax

Almost half of Hong Kong people live in rental housing. But no matter if they are renting a luxury house at the prestigious Victoria Peak or a tiny studio in the old neighborhood of Sham Shui Po, their landlords are taxed at the same 15 percent of rental income -- good news to those renting flats out for a higher margin. In the similarly low-tax Singapore, rental income is subject to income tax, which can reach 22 percent on a progressive scale. In the UK, rental profits are also subject to income tax of as much as 45%, and if landlords rent out properties as a business, they need to pay an additional fee.

Bloomberg