Expatriate tax - Hong Kong

An expatriate who requires a work visa must apply for this before taking up employment in Hong Kong. It is, therefore, important that the expatriate’s employment contract and benefit package are structured tax efficiently before the contract is submitted to the Immigration Department.

Under the requirements of the Immigration Ordinance, an expatriate taking up employment in Hong Kong must apply for an employment visa before commencing employment. The Immigration Department places emphasis on the education level and skills of the employee and the economic benefits to Hong Kong that will flow from the expatriate’s employment.

If the expatriate’s spouse and dependent family will also be relocated to Hong Kong, they will require dependent visas. It should be noted that spouses entering Hong Kong on dependent visas are now allowed to take up employment in Hong Kong and no longer require a separate employment visa if they wish to work in Hong Kong.

The Hong Kong fiscal year runs from 1 April to 31 March.

There are no withholding taxes such as Pay As You Earn (PAYE) imposed on employment income. The employer’s reporting obligations are to notify the Inland Revenue Department (IRD) of employees commencing and ceasing employment and to file an annual return of remuneration (Form IR56B) for each employee within one month of the salaries tax year end (31 March).

Each employees has to file an Individual Tax Return each year, usually by 31 May.

Employees are subject to Salaries Tax in respect of their employment income. The rates of Salaries Tax charged for 2022/23 will be the lower of:

1. net assessable income less allowable deductions at the standard rate of 15%; or
2. net assessable income less allowable deductions and personal allowances at progressive rates as follows:
   • first HK$ 50,000 – 2%
   • next HK$ 50,000 – 6%
   • next HK$ 50,000 – 10%
   • next HK$50,000 – 14%
   • remainder – 17%.

2022/23

Notes

1. The domestic residential rental costs for the employee’s flat are paid for by the employer under a valid lease. The amount is treated as a housing benefit rather than a housing allowance and is subject to Salaries Tax on a deemed benefit basis. The full cost of the rent is a deductible expense for Profits Tax purposes for the employer.
2. If the employer contracts for and pays for the utilities provided to the employee these amounts are not taxable.
3. The employer’s MPF contribution is not a taxable benefit in the hands of the employee.
4. Assuming the spouse is working and no joint assessment is elected (i.e. spouses are taxed separately).
5. Assuming the expatriate has two children and the expatriate (rather than the spouse) claims the allowances.
6. The employee’s MPF contribution is tax deductible up to a maximum of HK$18,000.
7. Salaries Tax charge will be the lower of these two calculations i.e. HK$ 127,180.

Hong Kong’s tax system is territorial and schedular. Accordingly, there is no single income tax in Hong Kong. Instead, Hong Kong levies three taxes on income, all of which are territorial, namely:

1. Salaries Tax – charged on income arising in or derived from Hong Kong from employment, office or pension and on income from services rendered in Hong Kong in connection with employment, office or pension
2. Property Tax – charged on rental income from Hong Kong property
3. Profits Tax – charged on persons carrying on trade, profession or business in Hong Kong and is levied on profits sourced, or deemed to be sourced, in Hong Kong (excluding profits from sale of capital assets).

The concept of residence is not generally of relevance as Hong Kong imposes taxes on a territorial or source basis, so that only income with a Hong Kong source is taxable.

Income from employment is subject to Salaries Tax. Where an expatriate has a Hong Kong source employment, he/she is subject to Salaries Tax on all of the income from that employment unless he/she render his/her employment duties in Hong Kong during visits not exceeding 60 days in an assessment year. If the expatriate has a non-Hong Kong source employment, he/she is subject to Salaries Tax only in respect of days spent in Hong Kong – the so called ‘time basis’ or ‘time claim’.

The definition of income for Salaries Tax purposes includes wages, salaries, bonuses, gratuities, benefits in kind and allowances if these are received as a reward for services.

Where an employee has a Hong Kong source employment he/she is generally subject to Salaries Tax on all of his/her income from that employment. However, where an employee has a non-Hong Kong source employment the employee can claim exemption from Salaries Tax for income attributable to business days spent outside Hong Kong under a time claim.

Whether there is a Hong Kong source or non-Hong Kong source, employment is generally determined by reference to three tests:

• the place where the contract of employment is negotiated, concluded and is enforceable
• the place where the employer is resident
• the place of payment of the taxpayer’s salary.

However, the IRD reserves the right to apply a ‘totality of facts’ test, i.e. to explore the full picture to determine the degree of attachment to a Hong Kong entity, where the source of employment using the above tests is not clear.

The time basis claim does not apply to director’s fees. Director’s fees are subject to salaries tax if the company of which the individual is a director is centrally controlled and managed in Hong Kong.

If the company is not centrally controlled and managed in Hong Kong then director’s fees paid are not subject to Salaries Tax.

The tax treatment of four benefits in kind are specified in the Inland Revenue Ordinance namely, housing, holiday journey benefits, child education and stock options. All other benefits are only subject to Salaries Tax if they fall within one of the following two categories:

• Benefits capable of being converted to money’s worth by the recipient.
• Amounts paid by the employer to discharge the personal liability of the employee.

There are no specific Salaries Tax concessions for expatriates but correct structuring of housing and other benefits as part of the compensation package can result in significant tax savings.

Due to Hong Kong’s territorial system of taxation, employees can claim exemption from Salaries Tax for business days spent outside of Hong Kong if the employee has a non-Hong Kong source employment and is eligible for a time claim. However this relief is not available if the employee has a Hong Kong source employment, as in that case the employee is subject to Salaries Tax on all of his income from that employment, regardless of the time spent outside Hong Kong.

As at 31 August 2022, Hong Kong has negotiated 45 Comprehensive Double Tax Agreements (CDTA) for the avoidance of double taxation, and Hong Kong is in the process of negotiating more CDTA. Reference should be made to the relevant CDTA for details of the relief available to minimise the possibility of double taxation in Hong Kong and the other foreign jurisdictions.

For jurisdictions which have not entered into CDTA, there is also a general relief available where an employee performs services in another jurisdiction and pays tax of a similar nature to Salaries Tax in that jurisdiction. In certain circumstances the employee may be exempted from Salaries Tax in respect of that income.

The relief operates by excluding (from Salaries Tax) the income derived by the employee for services rendered outside Hong Kong if the employee is chargeable to tax in the other jurisdiction in which the employee renders services. The Commissioner of the Inland Revenue must also be satisfied that the employee has actually paid tax in that jurisdiction and that the tax paid is similar in nature to Salaries Tax.

In order for an expense to qualify as a deduction for Salaries Tax purposes, it must be wholly, exclusively and necessarily incurred in the production of assessable income. In practice, the rigid nature of these tests mean that few deductions are available.

Tax deductions

Cash donations to tax-exempt charities or Government for charitable purpose may be deducted for tax purposes up to 35% of the employee’s assessable income.

Home loan interest payments to prescribed lenders (e.g. financial institutions) for acquisition of a dwelling situated in Hong Kong are deductible for Salaries Tax purposes. Owner-occupiers may claim a deduction for mortgage interest payments for one property up to a maximum of HK$100,000 per year and for a maximum of 20 years.

From 2022/23 onwards, a taxpayer is eligible to claim deduction for Salaries Tax purpose of the rent paid by him / her as a tenant under a qualifying tenancy of domestic premises. The maximum deduction is HK$100,000 for each year. However, you are not entitle to the rental deduction if you are utilising the housing benefits.

Mandatory contributions to a Mandatory Provident Fund (MPF) scheme or recognised retirement scheme by an employee are tax deductible up to a maximum of HK$18,000 in 2022/23.

Payments for qualifying annuity premiums and tax deductible MPF voluntary contributions are also tax deductible. The maximum deduction for 2022/23 is HK$60,000.

A tax deduction is available to taxpayers who pay qualifying premiums under a Certified Plan of Voluntary Health Insurance Scheme for themselves or their specified relatives. The maximum deduction for 2022/23 is HK$8,000 for each insured person.

For 2022/23, a Salaries Tax deduction of up to HK$100,000 per annum for expenses of self education is available in respect of tuition fee and the related examination fee paid for a prescribed course of education for gaining or maintaining qualifications for use in either a current or a planned employment.

Personal allowances – 2022/23

There is no capital gains tax in Hong Kong. However individuals who regularly buy and sell Hong Kong property may be subject to Profits Tax on the proceeds if the IRD consider they are carrying on the business of trading in property.

There are no inheritance or gift taxes in Hong Kong and no estate duty.

Interest income, dividends and other investment income arising to individuals are not taxable in Hong Kong.

There are no local taxes imposed on the income of individuals in Hong Kong.

There is no real estate tax in Hong Kong other than stamp duty on the transfer of property. In addition, to cool down the Hong Kong property market, any residential property now acquired but resold within 36 months, unless otherwise exempted is subject to a special stamp duty up to 20% of the property value. Any residential property acquired (except by a Hong Kong permanent resident) is subject to a buyers stamp duty at 15% of the properties value.

There are no social security taxes in Hong Kong. However Hong Kong does operate a MPF schemewhereby both employers and employeescontribute to a mandatory pension plan. Expatriates who are members of an overseas retirement scheme are generally exempted from joining an MPF scheme until such time as they obtain a Hong Kong Permanent Identity Card (which can normally be obtained after seven years).

Mandatory contributions to an MPF scheme are limited to a maximum of HK$1,500 per month for both the employer and employee.

Any gain realised by the exercise, assignment or release of an option to acquire shares is taxable if the option was granted to an individual because of his employment or office in Hong Kong. It should be noted that it is the exercise, assignment or release rather than the granting of the option which is the taxable event.

The taxable gain is the difference between the market value of the shares at the time of exercise, assignment or release of the option and the price paid. Expatriate employees who arrive in Hong Kong with unvested stock options may be subject to Salaries Tax if the options vest and are exercised, assigned or released while the employee is in Hong Kong.

Expatriate employees leaving Hong Kong may be subject to Salaries Tax on options granted for employment in Hong Kong but exercised, assigned or released after the employee has left Hong Kong.

This area is complex and specialist advice should be sought in each case.

There are no wealth taxes in Hong Kong.

Profits Tax is charged on persons carrying on a trade, profession or business in Hong Kong. It is levied on profits with a source, or deemed to have a source, in Hong Kong but excludes profits from the sale of capital assets.

Property tax is charged on rental income from Hong Kong property.