Newsletter Nr. 81 (EN)

I. Introduction

 

In Hong Kong, personal income tax is known as “Salaries Tax” and is governed by the Inland Revenue Ordi­nance (IRO). Sala­ries Tax is only lev­ied on the annual in­come of an individ­ual deriving from their em­ploy­ment.

 

Income not generated through employ­ment, such as accrued divi­dends or prof­its realised through the sale of shares, is not subject to taxation in Hong Kong.

 

Any employee’s income is subject to Sala­ries Tax, whereas income of a self-employed person is subject to “Profits Tax”.

II. General Information

 

1. Territoriality Principle

Salaries Tax only applies to income arising from or generated through employment in Hong Kong. This is known as the Territorial­ity Principle.

 

Section 8(1) IRO:

(1) Salaries tax shall, subject to the provi­sions of this Ordinance, be charged for each year of assess­ment on every per­son in respect of his in­come arising in or derived from Hong Kong from the follow­ing sources-

(a) any office or employment of profit; and

(b) any pension.

 

The definition of income in this con­text in­cludes remuneration, salary, allow­ances, bo­nuses and amounts representing the em­ployer’s voluntary contributions into pen­sion funds, therefore excluding employer’s mandatory contributions in accordance with the Mandatory Provident Fund Scheme

(MPF). Achieve­ments from pension funds which are not estab­lished under the juris­diction of Hong Kong as well as severance payments and long service payments on termination of employ­ment are also excluded.

 

2. Taxation rates in Hong Kong

There are two different methods of com­put­ing Salaries Tax. It is the taxpayer’s right to opt for the alternative which leads to a lower tax burden:

 

• a flat tax rate of 15 % on the as­sessable income after all deduc­tions; or
• a progressive tax rate levied on the assess­able income after the de­ductions of ex­penses and allow­ances.

The progressive rates for the assess­ment years 2016/17 are as follows:

 

 

III. Salaries tax for services ren­dered offshore

 

1. General view of Hong Kong’s Inland Revenue Department (“IRD”)

When determining whether Hong Kong is the “source” of a person’s employment for Sala­ries Tax purposes, the IRD takes the following three factors into consideration:

• where the contract of employment was negoti­ated and entered into, and is enforceable; and
• the place of residence of the em­ployer; and
• the place of payment of the em­ployee’s remunera­tion.

 

If all three conditions are ful­filled, the IRD will assume Hong Kong is the source of employment, thus subjecting all income arising out of such em­ployment to taxation in Hong Kong.

 

The Hong Kong tax authorities will exam­ine each individ­ual case carefully. In case a taxpayer ob­jects to the assessed tax, it is likely that the IRD will demand substantial documenta­tion supporting the view of the taxpayer.

 

The IRD will normally determine a Hong Kong employ­ment if the employer is a Hong Kong resident, even though the con­tract of em­ployment might have been negoti­ated and signed in another country.

 

The Board of Review, as the independent appellate body of the IRD, issued the follow­ing opinion in the case of an em­ployee from the USA, employed by a Hong Kong company, whose employment contract was negotiated, signed and finalised in the USA:

 

“He (the employee) was not em­ployed by any com­pany in the United States and he was not sub­ject to any master-and-servant rela­tion with any United States com­pany. His master-and-servant relation was clearly with the com­pany in Hong Kong with whom he entered into an employ­ment contract. In the circum­stances of this case the fact that he was physically in the United States when he re­ceived the employ­ment contract is not mate­rial.[1]”

 

2. Services rendered offshore

Hong Kong’s tax law pro­vides clear regulations on taxa­tion of income de­rived from ser­vices rendered outside Hong Kong:

 

Sec­tion 8(1A) (b) IRO:

(1A)  For the purposes of this Part, in­come arising in or derived from Hong Kong from any employ­ment:

(a) […]

(b) excludes income derived from ser­vices rendered by a person who-

(i)   is not employed by the Govern­ment or as master or mem­ber of the crew of a ship or as commander or member of the crew of an aircraft; and

(ii) renders outside Hong Kong all the ser­vices in connection with his employment; and

(c)   excludes income derived by a per­son from services rendered by him in any terri­tory outside Hong Kong where-

(i)   by the laws of the territory where the ser­vices are ren­dered, the income is charge­able to tax of substantially the same na­ture as salaries tax un­der this Ordinance; and

(ii) the Commissioner is satis­fied that that person has, by de­duction or otherwise, paid tax of that na­ture in that territory in re­spect of the income.

 

Consequently, remuneration paid in Hong Kong deriving from services rendered out­side Hong Kong is ex­empted from Sala­ries Tax, how­ever, only if the salary has actually been taxed in a foreign juris­diction.

 

1. Deductions and allow­ances

Hong Kong’s general tax rate is one of the lowest in the world. There­fore, tax de­duc­tions are only available to a limited extent. There are three types of tax deductions avail­able in total:

 

• Outgoings and Expenses;
• Concessionary deductions, and
• Allowances (not applicable for taxpayers paying the flat tax rate).

 

Deductible expenses in the assess­ment pe­riod 2016/17 are

• charitable donations up to 35% of the personal income;
• residential care expenses for par­ents and grandparents up to HKD 46,000 per year (the parents/grand­parents must be aged 60 or above);
• home loan interest up to HKD 100,000 per year, limited to a maxi­mum of 15 years;
• mandatory contributions to recog­nized retirement schemes up to HKD 18,000 per year;
• depreciation on factories and ma­chines, which are necessary for earning per­sonal income;
• personal allowance in the amount of HKD 132,000 (singles) and HKD 264,000 (married persons);
• child allowance in the amount of HKD 100,000 for each child and an additional allowance of HKD 100,000 in the year of birth;
• single parent allowance HKD 132,000;
• dependant parent, dependant grandpar­ent, dependant brothers and sisters allow­ance ranging from HKD 46,000 to HKD 80,000, depending on the age of the parents/grandparents/siblings;
• disabled dependant allowance HKD 75,000;
• Expenses of self-education HKD 100,000.
  

 

V.  Housing Benefits

 

1. Introduction

Housing Benefits are not deductible from tax, which is a factor that has to be considered when calculating an individual’s tax­able in­come.

 

Further, if the employer pays the rent for an apartment in Hong Kong and provides it to his employee rent-free during the term of their employment, the rental value will be included in the employee’s taxable income:

 

According to Section 9(1)(b)(c) IRO, the rental value is part of the employee’s taxable income:

 

(1) Income from any office or employ­ment includes-

(a) […]

(b) the rental value of any place of resi­dence provided rent-free by the employer or an associated cor­pora­tion;

(c)   where a place of residence is pro­vided by an employer or an asso­ciated corporation at a rent less than the rental value, the ex­cess of the rental value over such rent; […]

 

The law makes a distinction between cases in which the employee’s residence is pro­vided by the employer 100 % rent-free, as opposed to cases in which it is provided for less than the normal rental value.

 

2. 100% rent-free

In cases where the residence is provided 100% rent-free, the rental value to be added to the taxable income will depend on the type of accommodation provided.

 

If the residence provided is shared by more than one em­ployee, the surplus rates for a hotel, hostel or boarding house apply.

 

 

3. Provision for less than the normal rental value

In cases where the employer provides resi­dence to the employee for rent less than the normal rent, the difference between the nor­mal rent and the rent actually paid by the employee is added to the employee’s taxable income (Section 9 (1)(c) IRO).

[1] Case No. D8/92, 7 IRBRD 107.