Expatriate tax ebook - Hong Kong

Basis of taxation

Charge to tax
Residence
Income from employment
Source of employment
Benefits (in kind)
Expatriate concessions
Relief for foreign taxes
Deductions against income

Charge to tax
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:

• Salaries Tax – charged on income arising in or derived from Hong Kong from employment and on income from services rendered in Hong Kong in connection with employment
• Property Tax – charged on rental income from Hong Kong property
• Profits Tax – charged on persons carrying on business in Hong Kong and is levied on profits sourced, or deemed to be sourced, in Hong Kong.
  

Residence
The concept of residence is not generally of relevance in Hong Kong 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
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 regardless of where the services are performed. 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.

Source of employment
Where an employee has a Hong Kong source employment he is subject to Salaries Tax on all of his income from that employment, regardless of time spent outside Hong Kong. However, where an employee has a non Hong Kong source employment the employee can claim exemption from Salaries Tax for 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.

Director’s fees
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.

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

(a) benefits capable of being converted to money’s worth by the recipient
(b) amounts paid by the employer to discharge the personal liability of the employee.

Please see our Tax Notes no. 1.2 for details.

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

Relief for foreign taxes

• Relief for working outside of Hong Kong
  
  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.
  
  Hong Kong has four comprehensive double tax agreements (CDTA) for the avoidance of double taxation, with Belgium, Thailand, the People's Republic of China and Luxembourg. 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 these other four jurisdictions.
  
  However, there is also a more 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 and the commissioner of the Inland Revenue is satisfied that the employee has actually paid tax in that jurisdiction and that the tax paid is similar in nature to Salaries Tax.

Deductions against income

a)Deductions against compensation

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.

b)Tax deductions

• Donations to approved educational and charitable organisations may be deducted for tax purposes up to 35% of the employee's assessable income.
• Home mortgage interest payments in respect of Hong Kong property are deductible for Salaries Tax purposes. Owner-occupiers may claim a deduction for mortgage interest payments up to a maximum of HK$100,000 per year for one property for a maximum of ten years.
• Contributions to a Mandatory Provident Fund scheme or recognised retirement scheme by an employee are tax deductible up to a maximum of HK$12,000 per annum.
• A Salaries Tax deduction of up to HK$60,000 per annum is available in respect of training courses provided by authorised institutions.

• introduction
• facts and figures
• basis of taxation
• what taxes?
• tax planning opportunities