Tax on Airbnb Rental Income: The Grey Area Between Property Tax and Profits Tax

The Hong Kong Inland Revenue Department (IRD) has intensified scrutiny of short-term rental income, particularly from platforms like Airbnb, as the city’s tourism recovery accelerates. In the 2025-26 tax year, the IRD is leveraging data-sharing agreements with digital platforms to cross-reference declared income against property ownership records. This marks a significant shift from the previous reliance on voluntary disclosure, creating a grey area for property owners who must determine whether their rental income falls under Property Tax (assessed on net assessable value at a standard rate of 15%) or Profits Tax (assessed on profits at the two-tiered rate, up to 16.5%). The distinction is critical: misclassification can lead to back taxes, penalties, and interest. This article dissects the operative tax position, supported by the Inland Revenue Ordinance (Cap. 112), relevant Board of Review decisions, and IRD practice notes.

The Legal Framework: Property Tax vs. Profits Tax

The IRD’s classification of short-term rental income hinges on the nature and frequency of the letting activity. Under the Inland Revenue Ordinance (Cap. 112), Property Tax (sections 5-7C) applies to the owner of land or buildings in Hong Kong who receives rental income from letting the property. The tax is charged on the net assessable value (NAV), which is the rent receivable less a standard 20% deduction for repairs and outgoings, capped at 15% of NAV. This is a tax on the passive receipt of rent, not the active business of providing accommodation.

In contrast, Profits Tax (section 14) applies to any person carrying on a trade, profession, or business in Hong Kong that generates profits. The key test is whether the letting activity constitutes a “trade” under the “badges of trade” (a common law doctrine adopted by Hong Kong courts, notably in Commissioner of Inland Revenue v. Yick Fung Estates Ltd. [1982] HKLR 145). The badges include the frequency of transactions, the length of ownership, the nature of the asset, the degree of organization, and the motive for profit. For short-term rentals, the IRD will examine whether the owner is providing services beyond mere accommodation—such as daily cleaning, concierge services, or meal provisions—which elevates the activity from passive letting to an active business.

The Board of Review Decision in D11/17 (2017)

A landmark case is the Board of Review Decision D11/17 (2017), which involved a property owner who let a flat on Airbnb for an average of 20 days per month over two years. The Board held that the income was subject to Profits Tax, not Property Tax, because the owner had actively marketed the property, managed bookings, and provided daily cleaning services. The decision explicitly cited the “badges of trade” and noted that the short-term nature of the lets (average stay: 3 days) and the high turnover of guests constituted a business operation. The IRD has since issued Practice Note No. 48 (2024 revision), which clarifies that for short-term rentals exceeding 28 days per year, the IRD will presume a business intent unless the owner can demonstrate otherwise.

The 28-Day Threshold

A practical rule of thumb, derived from IRD Practice Note No. 48, is that letting a property for an aggregate of 28 days or fewer in a tax year is likely to be treated as passive rental income subject to Property Tax. Letting for more than 28 days—especially if the owner provides services such as linen changes, cleaning, or guest management—triggers a rebuttable presumption of a trade, pushing the income into Profits Tax territory. For 2025-26, the IRD is expected to enforce this threshold strictly, using transaction data from online platforms.

The Grey Area: When Property Tax Meets Profits Tax

The grey area arises when a property owner lets a flat on Airbnb for, say, 60 days in a tax year but does not provide services beyond key handover and basic maintenance. The IRD’s position, as articulated in Practice Note No. 48, is that the frequency of the letting is the primary factor, not the level of services. However, the Board of Review in D11/17 emphasized that even minimal services (e.g., providing toiletries, managing online listings) can tip the balance toward a business. This creates a compliance risk: an owner who files under Property Tax (claiming the 20% deduction) may later face an IRD audit and reassessment under Profits Tax, with penalties of up to 100% of the tax undercharged (section 82A of the IRO).

The Impact of the Two-Tiered Profits Tax Rate

For individual owners, the distinction matters because the Profits Tax rate for the first HKD 2 million of assessable profits is 8.25% (for unincorporated businesses) or 16.5% for the remainder. Property Tax, at a flat 15% on NAV, may be higher or lower depending on the level of expenses. For example, if an owner incurs significant direct costs (e.g., cleaning fees, platform commissions, utilities), the Profits Tax regime allows a deduction for actual expenses, whereas Property Tax only allows the standard 20% deduction. This can result in a lower effective tax rate under Profits Tax for high-expense operations. Conversely, for a low-expense, high-rent property, Property Tax may be cheaper.

The IRD’s Data-Driven Approach

Since 2024, the IRD has been using data from the Inland Revenue (Data Matching) Ordinance (Cap. 112I) to cross-reference property ownership records with income declared on tax returns. In 2025, the IRD announced a pilot program to receive bulk data from Airbnb and other platforms under the Common Reporting Standard (CRS) framework, as Hong Kong is a signatory to the Multilateral Competent Authority Agreement. This means that the IRD can now identify properties that are listed on Airbnb but have not declared rental income. The IRD’s 2025-26 Annual Report (published June 2025) noted a 40% increase in field audits targeting short-term rental properties, with an average additional tax assessment of HKD 85,000 per case.

Practical Steps for Compliance

Determining Your Tax Classification

The operative test is whether the letting activity constitutes a “trade.” The IRD’s checklist for determining this includes:

• Frequency: More than 28 days of letting per year triggers a presumption of trade.
• Services: Provision of cleaning, laundry, or concierge services indicates a business.
• Marketing: Active online listings, pricing adjustments, and guest communication suggest a trade.
• Profit Motive: If the property is acquired specifically for short-term letting, it is likely a trade.

If the answer to two or more of these is “yes,” the income should be reported under Profits Tax.

Filing Your Tax Return

For the 2025-26 tax year (returns due by April 2026), owners should:

1. If filing under Property Tax: Complete the Property Tax return (Form BIR57) and declare the gross rent received. Claim the standard 20% deduction.
2. If filing under Profits Tax: Complete the Profits Tax return (Form BIR52) and include the rental income under “Other Profits.” Deduct actual expenses (e.g., platform fees, cleaning, utilities, mortgage interest—subject to the anti-avoidance rules under section 16(1)).
3. If uncertain: File under Profits Tax and include a note explaining the basis. The IRD will issue a determination if it disagrees.

Avoiding Penalties

The IRD’s penalty regime for under-declaration is severe. Under section 82A, the maximum penalty is 100% of the tax undercharged, plus interest at the prescribed rate (currently 8% per annum). However, voluntary disclosure before an audit can reduce penalties to 10% or less (IRD Departmental Interpretation and Practice Notes No. 48). Owners who have under-declared income in prior years should consider filing a voluntary disclosure under the IRD’s “Tax Amnesty” program (effective until 31 December 2025 for 2020-21 to 2024-25 tax years).

The Future: 2026-27 Legislative Changes

The Inland Revenue (Amendment) (Taxation of Short-term Rentals) Bill 2025 is currently before the Legislative Council. If passed, it will introduce a new category of “Short-term Letting Income” subject to a flat rate of 12% on gross receipts (no deductions), effective from the 2026-27 tax year. This bill is designed to eliminate the grey area by treating all short-term rentals (defined as lets of 30 days or fewer) as a separate class of income, outside both Property Tax and Profits Tax. The bill is expected to pass by mid-2026, with a transition period for existing owners. For now, the current law applies.

Actionable Takeaways

1. Classify your Airbnb income correctly: If you let your property for more than 28 days in a tax year, or provide services beyond key handover, report the income under Profits Tax to avoid reassessment and penalties.
2. Use the IRD’s voluntary disclosure program before 31 December 2025 if you have under-declared short-term rental income in prior years, to cap penalties at 10%.
3. Track all actual expenses (platform fees, cleaning, utilities, mortgage interest) to maximize deductions if filing under Profits Tax, as the standard 20% Property Tax deduction may be less favorable.
4. Monitor the 2025-26 legislative bill that will introduce a flat 12% rate on gross receipts for short-term rentals from 2026-27, which may simplify compliance but eliminate expense deductions.
5. Maintain detailed records of guest stays, services provided, and platform income statements, as the IRD’s data-matching capabilities mean audits are increasingly likely.

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This does not constitute tax advice. Consult a licensed CPA or tax advisor for your specific situation.