Who Is Liable For Income Taxes in Hong Kong
Individuals earning income that arises in or is derived from a Hong Kong office or Hong Kong employment, or from services rendered in Hong Kong during visits of more than 60 days in any tax year, are subject to salaries tax.
Hong Kong observes a territorial basis of taxation; therefore, the concept of tax residency has no significance in determining tax liability, except in limited circumstances.
Income subject to tax. The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. Taxable income consists of all cash emoluments, including bonuses and gratuities. Benefits in kind are largely nontaxable, unless they are convertible into cash or specifically relate to holiday travel or the education of a child. The provision of accommodation by an employer creates a taxable benefit equal to an amount ranging from 4% to 10% of the employee’s other taxable income, depending on the type of accommodation.
An employee is subject to salaries tax if his or her employment income is sourced in Hong Kong, even if he or she is not ordinarily resident in the territory. However, except for directors’ fees, a specific statutory exemption applies if an employee renders all his or her services outside Hong Kong or if an employee renders services in Hong Kong during visits to Hong Kong not exceeding a total of 60 days in a year of assessment. Conversely, if a non-resident engaged in non-Hong Kong employment renders services in Hong Kong during visits totaling more than 60 days in a year of assessment, he or she is taxed on a pro rata basis.
Self-employment and business income. Anyone carrying on a profession, trade or business in Hong Kong is subject to profits tax on income arising in or derived from Hong Kong from that profession, trade or business. Taxable income is determined in accordance with generally accepted accounting principles, as modified by the tax code and principles derived from case law.
If an individual receives rental income but the rental activities do not constitute a business, the income is subject to property tax rather than profits tax. Property tax is charged on 80% of rent received from real estate located in Hong Kong at a rate of 15%, resulting in an effective rate of 12%.
Profits tax, salaries tax and property tax are assessed separately. If beneficial, a permanent or temporary Hong Kong resident individual may elect to be assessed under personal assessment (that is, under the salaries tax method on the aggregate of his or her income or losses from all sources.
Investment income. Interest income not derived from investing the funds of a business and all dividend income are exempt from taxation.
No withholding taxes are levied in Hong Kong on dividends or interest paid to nonresidents. However, royalties paid to nonresident individuals for the use of intellectual property rights in Hong Kong are deemed to arise from a Hong Kong business and are subject to an effective 4.5% withholding tax. The withholding tax rate is increased to 15% if the recipient is related to the payer and if the intellectual property rights for which the royalties are paid were previously owned by a person carrying on a profession, trade or business in Hong Kong.
Directors’ fees. Directors’ fees derived from a company that has its central management and control in Hong Kong are subject to salaries tax in Hong Kong. Otherwise, directors’ fees are not taxable.
Taxation of employer-provided stock options. Employer-provided stock options are generally taxable at the time of exercise. However, for an individual who has non-Hong Kong employment and is taxed on a pro rata basis by reference to the number of days of his or her services in Hong Kong only, part or all of the option gain may be excluded from taxable income. The amount excluded depends on various factors including whether the option is granted conditionally or unconditionally, and, if granted conditionally, the number of days on which the individual performed Hong Kong services during the vesting period.
Taxation of employment-related share awards. Employment-related share awards are generally considered to be perquisites from employment and taxed as part of the remuneration. In general, they become taxable when an employee is entitled to the full economic benefit of the shares awarded. If the employee has a non-Hong Kong employment, proration of the income by reference to the number of days of his or her services in Hong Kong that is similar to the proration applicable to stock option benefits may also be allowed.
Capital gains. Hong Kong does not tax capital gains.
Deductions
Deductible expenses. To be deductible for purposes of salaries tax, expenses must be incurred wholly, exclusively and necessarily in the production of a taxpayer’s assessable income.
Depreciation allowances (capital allowances) may also be claimed on plant and machinery used in the production of assessable income.
Personal deductions and allowances. For salaries tax, certain education expenses paid to specified institutions are deductible up to HK$60,000 per year. Approved charitable donations are deductible up to 35% of assessable income. Home mortgage interest is deductible, up to HK$100,000 per year for a maximum of 10 years. Contributions to “recognized retirement schemes,” as defined, are deductible up to HK$12,000 per year.
Personal allowances are also available under salaries tax to individuals with an income level at below the “break-even” point (that is, the point where the standard rate of 15% applies
Business deductions and capital allowances. To be deductible, expenses must be incurred in the production of taxable profits. Certain specified expenses are not deductible, including domestic and private expenses, expenditure of a capital nature or any loss or withdrawal of capital, the cost of improvements and tax paid or payable. The deductibility of interest is determined in accordance with detailed rules.
Capital expenditure for the acquisition of computer hardware or software, plant and machinery used for manufacturing, eligible environmental protection machinery and environment-friendly vehicles qualifies for an immediate 100% deduction. Capital expenditure for most other plant and machinery qualifies for an initial 60% allowance and an annual allowance on the reduced balance at a rate of 10%, 20% or 30%, depending on the relevant class of the asset. An annual allowance (based on costs) of 20% for five years is allowed for certain environmental protection installation and refurbishment of a building or structure other than a domestic building or structure incurred by all businesses.
An initial allowance of 20% and an annual allowance of 4% of the cost or deemed cost of construction are granted on new industrial buildings. However, no initial allowance is granted for used second-hand industrial buildings. An annual allowance of 4% of the cost of construction is available on commercial buildings.
All of the above capital allowances may be subject to recapture if the assets are sold for amounts in excess of their tax-depreciated values.
Rates. Three separate income taxes are levied in Hong Kong instead of a single unified income tax. The following rates are the applicable rates for the three taxes for the period from 1 April 2011 through 31 March 2012:
- Profits tax: levied on non-corporate professional, trade or business income at a flat rate of 15%
- Property tax: levied at a flat rate of 15% on rental income, after a standard deduction of 20%
- Salaries tax: levied on net chargeable income (assessable income less personal deductions and allowances) at progressive rates ranging from 2% to 17%, or at a flat rate (maximum rate) of 15% on assessable income less personal deductions, whichever calculation produces the lower tax liability
Tax rebate. It was proposed in the 2011–12 financial budget that a one-off tax rebate be granted for the 2010–11 tax year. This rebate would equal 75% of the final tax payable with respect to salaries tax and tax under personal assessment, subject to a ceiling of HK$6,000 in each case.
Relief for losses. Business losses of an individual are calculated in the same manner as profits and may be carried forward indefinitely against future income in the same business or may be offset against the individual’s other sources of income under personal assessment. In both cases, losses cannot be carried back.
B. Estate tax
Estate duty was abolished, effective from 11 February 2006. Estates of persons who pass away on or after that date are not subject to estate duty.
C. Social security
Hong Kong does not impose any social security taxes. Employers and employees are each required to contribute the lower of 5% of the employees’ salaries or HK$1,000 per month to approved mandatory provident fund schemes unless the employees are covered by other recognized occupation retirement schemes.
Double tax relief and tax treaties
An employee engaged in Hong Kong employment is exempt from salaries tax on income derived from services performed outside Hong Kong if the income is subject to tax in the foreign jurisdiction and if foreign tax has been paid on the income.
Unless provided for under a double tax agreement, no credit is given in Hong Kong for foreign taxes paid, but in certain circumstances, foreign taxes paid may be deductible for profits tax purposes under the tax code of Hong Kong. A foreign tax credit is available to Hong Kong residents with respect to income that is subject to double tax in all of the double tax agreements entered into by Hong Kong.
Hong Kong has entered into double tax agreements with Austria, Belgium, Brunei Darussalam, Hungary, Ireland, Luxembourg, Mainland China, Thailand, the United Kingdom and Vietnam. It has also signed double tax agreements with the Czech Republic, France, Indonesia, Japan, Kuwait, Liechtenstein, the Netherlands, New Zealand, Portugal, Spain and Switzerland, but these agreements have not yet been ratified.
To learn more about the history, culture, economy and other information about Hong Kong
We have been preparing US income tax returns for US Citizens and permanent residents living in Hong Kong for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Hong Kong and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Hong Kong.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email
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