(Bloomberg) -- 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.

© Bloomberg Billionaire Li Ka-shing Appears For Last CK Hutchison Holdings Ltd. Annual General Meeting As Chairman

Li Ka-shing

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 U.K., for example, collects as much as 28% of capital gains. In South Korea, the levy ranges between 6% and 70% depending on the type of assets and holding period. In the U.S., it is as much as 28%.

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%. The U.K. charges between 7.5% and 38.1% depending on the dividend recipient’s total taxable income. In the U.S., 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 U.K., estates above 325,000 pounds ($411,420) will be taxed at 40% for the portion above the threshold. In Taiwan, inheritance tax is as much as 20%, while Japan’s is between 10% and 55%, 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 U.K., U.S., 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% 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% on a progressive scale. In the U.K., 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.

To contact the reporters on this story: Shirley Zhao in Hong Kong at xzhao306@bloomberg.net;Bruce Einhorn in Hong Kong at beinhorn1@bloomberg.net

To contact the editors responsible for this story: Sam Nagarajan at samnagarajan@bloomberg.net, Dave McCombs

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.