Passive income
Passive income can supplement your main revenue. Learn what it is, how it works, and how it's taxed in Hong Kong.
December 2023 | Published by Xero
Published Thursday 6 August 2026
Table of contents
Key takeaways
- Passive income is money earned with minimal ongoing effort, though most streams need an upfront investment of time, money, or both to set up.
- Small business owners can build passive income through digital products, content creation, subscription services, and making the most of existing resources like spare space or equipment.
- In Hong Kong, dividends from local companies and interest on bank deposits are generally not taxed for individuals, and there is no capital gains tax, but rental income is charged property tax.
- Tracking each passive income stream alongside your main business finances helps you stay organised, meet your Inland Revenue Department obligations, and see which streams are worth growing.
What is passive income?
Passive income is money you earn without actively working for it on a day-to-day basis. It comes from assets, investments, or business systems you have already set up, and it keeps generating revenue with minimal ongoing effort.
Most passive income streams need significant upfront work, whether that is writing an ebook, building an online course, or saving enough to invest. The “passive” part refers to how income flows once the setup is complete, and building meaningful returns usually takes months of consistent effort.
For small business owners, passive income can be a valuable complement to the revenue you earn through your core services. It helps smooth out cash flow during quieter periods and can gradually reduce how much you rely on trading time for money.
Passive income vs active income
Understanding the difference between passive and active income helps you plan your finances and meet your tax obligations.
Active income is money you earn by directly exchanging your time and effort for payment. If you stop working, the income stops. Salaries, freelance fees, consulting charges, and revenue from client projects all count as active income.
Passive income keeps flowing even when you are not actively involved. Rental income, royalties from a book, or returns from an investment portfolio are all examples. You have done the work or made the investment upfront, and the income continues with minimal day-to-day involvement.
There is also a third category worth knowing about: portfolio income. This covers earnings from investments like dividends, interest, and capital gains. Some people group portfolio income under passive income, but Hong Kong's Inland Revenue Department (IRD) applies different rules to different income types.
That distinction matters when you report your income to the IRD. If you earn from freelancing alongside your business, understanding these categories helps you report your income correctly.
Types of passive income
Passive income streams generally fall into three broad categories. Knowing which type suits your situation helps you choose the right starting point.
Business-based passive income
Business-based passive income comes from commercial systems that run without your constant involvement. This includes things like rental properties, vending machines, self-service laundries, or a business you own but do not manage day to day.
For small business owners, it can also mean productising your expertise. If you currently deliver a service in person, you might package that knowledge into something customers can buy without your direct involvement, like a template pack, a toolkit, or a licensing arrangement.
Investment-based passive income
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.
Investment-based passive income comes from putting your money to work. Dividends from shares, interest from savings accounts or bonds, and returns from funds like real estate investment trusts (REITs) all fall into this category.
The amount you earn depends on how much you invest and the rate of return. For example, a HK$100,000 investment generating a 4% annual yield would produce roughly HK$4,000 a year. Building meaningful investment income usually takes time and consistent contributions.
Digital and online passive income
Digital passive income comes from online products and platforms. Ebooks, online courses, stock photography, mobile apps, and affiliate marketing websites are all common examples.
The appeal of digital income streams is that they are often inexpensive to create compared with physical products, and they can scale without much added cost. Once your ebook is on a marketplace or your course is hosted on a platform, it can sell to hundreds of customers without extra effort from you. For more ideas, explore online business ideas you can start from home.
Passive income ideas for small businesses
If you already run a small business, you have skills, knowledge, and resources that lend themselves to passive income. Whether you are exploring home business ideas or looking to diversify an existing operation, here are some practical ways to get started.
Sell your expertise as digital products
You know your industry better than most people. That expertise has value beyond the services you currently offer, and packaging it into digital products lets you sell it repeatedly without trading more of your time.
Consider creating products like:
- ebooks or guides that solve a specific problem your customers face
- templates, spreadsheets, or toolkits that save your audience time
- online courses that teach a skill you are known for
- downloadable checklists, planners, or PDF resources
Ecommerce and course-hosting platforms make it straightforward to list and sell digital products. The key is creating something genuinely useful that people are willing to pay for.
Create content
Content creation through YouTube channels, podcasts, or blogs can generate passive income over time through advertising revenue, sponsorships, and affiliate links. It is a longer-term play, but once you have built an audience, older content continues to earn.
A blog with well-optimised articles can attract search traffic for months or even years after publication. A YouTube video about a topic in your field can keep generating ad revenue long after you uploaded it. The initial time investment is real, but the ongoing maintenance is relatively light.
Capitalise on your resources
Many small businesses have physical assets sitting underused. If you have office space, a workshop, storage, or specialist equipment, renting it out can generate steady income with very little effort.
Options to consider include:
- renting out spare office or desk space through flexible workspace platforms
- listing equipment for hire when you are not using it
- joining affiliate marketing programmes related to products you already use and recommend
- renting parking spaces or storage you do not need full time
Affiliate marketing is worth a closer look if you already have an audience. By recommending products or services you genuinely use, you can earn a commission on each sale. It works particularly well if you have a website, newsletter, or social media following.
Offer subscription services
Subscription models turn one-off purchases into recurring revenue. If you can bundle your expertise, content, or products into a monthly offering, you create a more predictable income stream.
Examples include membership sites with exclusive content, monthly product boxes curated around your niche, or ongoing access to a library of templates and resources. The subscription model works because it builds loyalty while giving you reliable, repeating income each month.
Investment-based passive income in Hong Kong
If you have savings beyond what your business needs, putting that money into investments is one of the most common routes to passive income. The main options available in Hong Kong include:
- dividend-paying shares: buying shares in Hong Kong-listed companies that pay out part of their profits, either directly or through dividend-focused funds
- real estate investment trusts (REITs): funds that own and manage property portfolios and pass most of the rental income to unit holders, letting you invest in property without buying a building
- exchange-traded funds (ETFs) and index funds: low-cost funds that track a market index such as the Hang Seng Index, giving broad exposure without picking individual stocks
- bonds: Hong Kong government and corporate bonds that pay a fixed rate of interest over a set term, usually with lower risk and lower returns than shares
- bank time deposits: fixed-term deposits with licensed Hong Kong banks that pay a set interest rate with very little risk to your capital
Every investment carries some risk, and higher potential returns usually mean higher risk to your capital. Spread your money across a few options and do your own research, or speak to a licensed adviser, before committing funds you might need for the business.
How passive income is taxed in Hong Kong
How passive income is taxed in Hong Kong depends on where it comes from. Hong Kong uses a territorial basis of taxation, so only income sourced in Hong Kong is taxed, and only under one of three schedules: profits tax, salaries tax, or property tax. The main points to be aware of are:
- dividends and interest: dividends from Hong Kong companies already charged to tax are generally exempt, and interest earned by individuals on deposits with licensed Hong Kong banks is generally exempt from profits tax under the Exemption from Profits Tax (Interest Income) Order 1998 (PwC Tax Summaries)
- capital gains: Hong Kong has no capital gains tax, so gains of a capital nature from selling shares or other assets are not taxed, though frequent trading can be treated as a taxable business (Inland Revenue Department)
- rental income: rental income from Hong Kong property you hold as an individual is charged property tax at 15% of the net assessable value, after a 20% statutory allowance for repairs and outgoings (GovHK)
- business and royalty income: income from a business you run is charged profits tax at two-tiered rates of 8.25% on the first HK$2 million of assessable profits and 16.5% above that for companies, and 7.5% and 15% for unincorporated businesses (GovHK), and Hong Kong-sourced royalties received by resident individuals are also taxable as profits (PwC Tax Summaries)
- sales tax: Hong Kong has no VAT or GST, so you will not charge sales tax on the digital products or services you sell (Financial Services and the Treasury Bureau)
Tax rules change, and your personal circumstances affect what you owe. Speak to an accountant or tax adviser to make sure you report correctly on your annual Tax Return - Individuals (BIR60) and claim everything you are entitled to.
How to start earning passive income
Getting started with passive income does not have to be complicated. These five steps help you choose the right approach and build momentum.
1. Assess your skills and resources
Start by looking at what you already have. Ask what expertise you could package into a product, and whether you have spare space, equipment, or savings you could put to work. The best passive income streams build on strengths you have already developed. If you are still weighing your options, browsing small business ideas can help you narrow your focus.
2. Start small and test
You do not need to invest a large sum upfront. Create a single digital product, list a piece of equipment for hire, or start a modest monthly investment plan. Starting small lets you learn what works before committing more time or money.
3. Set realistic expectations
Most passive income streams take months to build meaningful returns. An online course might take weeks to create and months to gain traction, and investment returns compound over years, not days. Patience and consistency matter more than finding the “perfect” idea.
4. Diversify your streams
Try not to rely on a single source of passive income. Combining a digital product with some investment income and perhaps rental revenue gives you more stability. If one stream slows down, the others help cushion the impact.
5. Track your finances from the start
Keep your passive income separate and well documented from day one. You will need clear records for your tax return, and tracking each stream individually shows you which ones are worth growing and which are not delivering enough to justify the effort.
Manage your passive income with Xero
As your passive income streams grow, keeping track of the money coming in, the expenses going out, and the tax you owe gets more complex. Xero's cloud accounting software brings your finances together, so you can see how each income stream is performing alongside your main business revenue.
With automatic bank feeds, you can categorise passive income transactions as they arrive, and customisable reports let you break down earnings by source, so it is straightforward to spot your most profitable streams and prepare for tax time. Whether you are tracking rental income, digital product sales, or investment returns, Xero helps you stay organised and confident about your numbers, so get one month free and see how it fits your business.
FAQs on passive income
Here are answers to some common questions about passive income.
How much money can you make from passive income?
There is no fixed limit; it depends on the type of income stream, your upfront investment, and how much time you spend building it. Some people earn a few hundred dollars a month from digital products, while others generate much more from investments or rental properties.
Is passive income really passive?
Not entirely. Almost every passive income stream needs effort to set up and some level of ongoing maintenance. The goal is to front-load the work so the income eventually needs far less of your time than active, hourly work would.
How is passive income taxed in Hong Kong?
It depends on the source: dividends from Hong Kong companies and interest on local bank deposits are generally not taxed for individuals, and there is no capital gains tax (Financial Services and the Treasury Bureau). Rental income is charged property tax, while income from a business or Hong Kong royalties is charged profits tax (PwC Tax Summaries).
What is the easiest passive income to start?
Bank time deposits are the simplest because they need no specialist knowledge; you deposit money and earn interest. For business owners, selling a digital product like a template or guide is often a natural next step because it builds on expertise you already have.