Introduction
Hong Kong is an important financial centre in the Far East and a gateway to China. It is very common for international companies to assign expatriate employees to Hong Kong for overseeing their operations. Wong Brothers & Co. provides quality advisory services to expatriate employees and their employers in identifying Hong Kong salaries tax issues, and is able to assist them in fulfilling their tax filing obligations in Hong Kong.
Tax year
The Hong Kong fiscal year starts from 1 April to 31 March next year.
Charge to tax
Hong Kong imposes salaries tax on a source basis. Salaries tax is charged on income arising in or derived from Hong Kong from an office or employment.
Income from an office or employment generally includes:-
- Salaries/wages, director’s fees;
- Commission, bonus, leave pay, end-of-contract gratuities;
- Allowances, perquisites or fringe benefits;
- Salaries tax paid by employer;
- Value of a place of residence;
- Share option and share awards;
- Termination payments and retirement benefits; and
- Pensions
Fringe benefits are subject to salaries tax if they are:-
- capable of being converted to money’s worth by the employee, or
- paid by the employer to discharge the personal liability of the employee
Hong Kong source employment
An expatriate’s employment income is assessable to salaries tax under S.8(1) of the Inland Revenue Ordinance (“IRO”), if his/her source of employment is Hong Kong (e.g. he/she is employed by a Hong Kong company to work in Hong Kong). In such case, the full employment income is chargeable to salaries tax even though part of the expatriate’s duties are performed outside Hong Kong. The following are exceptions:-
(a) All services are rendered by the expatriate outside Hong Kong during a fiscal year.
(b)
Foreign tax was already paid by the expatriate on his/her employment income, full or partial.
Non-Hong Kong source employment
If an expatriate’s source of employment is outside Hong Kong (e.g. he/she is assigned to work in Hong Kong for a few years by the overseas employer and he/she has to perform part of the services in different countries in the Asia Pacific Region), he/she is only assessed on his/her employment income attributable to his/her services rendered in Hong Kong including leave pay based on the number of days he/she was in Hong Kong (commonly known as day-in day-out basis) during a fiscal year. Such exemption is available on a year-by-year basis.
Based on established tax cases, the IRD will generally accept that an expatriate’s employment is non-Hong Kong sourced if:
- the contract of employment is negotiated, entered into and enforceable outside Hong Kong;
- the employer is resident outside Hong Kong; and
- the employee’s remuneration is paid outside Hong Kong.
Directorship
Directorship is regarded as an office. In general, if an expatriate is a director of a Hong Kong company, his/her full income derived from such office in Hong Kong is chargeable to salaries tax irrespective of the number of days he/she stays in Hong Kong during a fiscal year.
Earnings from a non-Hong Kong directorship are exempt from salaries tax.
Application for exemption of income/relief
The above exemptions are granted upon application with supporting documents. Expatriates seeking tax exemption are required to complete appropriate sections of the Salaries Tax Return. In making the application, copies of the following documents are required:-
- Employment contract;
- Letter of assignment to Hong Kong;
- Tax payment notices or receipts issued by tax authorities outside Hong Kong; and
- Passport or other travel documents together with a schedule to show the number of days he/she is in and out of Hong Kong during a fiscal year
Deductions
Outgoings and expenses, other than expenses of a domestic or private nature and capital expenditure, wholly, exclusively and necessarily incurred in the production of assessable employment income are qualified as deductions for salaries tax purposes. In particular, the following deductions are available to employees:-
- Approved charitable donation made during the year;
- Expenses of self-education paid during the year;
- Home loan interest paid during the year; and
- Contributions to Mandatory Provident Fund Scheme or Recognised Occupational Retirement Scheme
Personal allowances
The following are basic allowances for the current year (2008/09) available for deduction:
|
HK$ |
|
|
Personal allowance (single) |
108,000 |
Personal allowance (married) |
216,000 |
Single parent allowance |
108,000 |
Child allowance (each) |
50,000 |
Salaries tax rates for the current year (2008/09)
The tax charged will be the lower of:-
(a) the net assessable income less allowable deductions at standard rate of 15%; or
(b) the net assessable income less allowable deductions and personal allowances at progressive rates as follows:-
First HK$40,000 |
@2% |
Next HK$40,000 |
@7% |
Next HK$40,000 |
@12% |
Remainder |
@17% |
Pre-arrival procedures
Expatriates who want to work in Hong Kong must apply for a work visa from the Immigration Department before the commencement of employment. The application for employment visa requires an offer of employment from a Hong Kong company or an overseas company having operations in Hong Kong. In case that the expatriate’s spouse and dependent child would relocate together the expatriate to Hong Kong, they must apply for dependent visas. The expatriate’s spouse entering Hong Kong on dependent visa are not allowed to take up employment in Hong Kong. Alternatively, the spouse should apply for a separate work visa in Hong Kong.
Tax planning opportunities
There are certain preferential tax treatments available on fringe benefits, e.g. free quarter accommodation or rental reimbursements, which can reduce an expatriate’s salaries tax liabilities significantly in Hong Kong. Similarly, working out proper terms of employment before coming to Hong Kong is also very important for efficient tax planning.
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