Tax returns and compliance

Tax rates

Residence rules

Termination of residence

Economic employer approach

Types of taxable compensation

Tax-exempt income

Expatriate concessions

Salary earned from working abroad

Taxation of investment income and capital gains

Additional capital gains tax (CGT) issues and exceptions

General deductions from income

Tax reimbursement methods

Calculation of estimates/prepayments/withholding

Relief for foreign taxes

General tax credits

Sample tax calculation

All income tax information is based on the Inland Revenue Ordinance and is summarized by KPMG, the Hong Kong (SAR) member firm of KPMG International.

There is no general income tax in Hong Kong (SAR). For income to be subject to tax, it must fall within one of the specific heads of taxation.

• Salaries tax – on income from an office, employment and any pension.
• Profits tax – on income from a trade, profession or business.
• Property tax – on income from land and buildings located in Hong Kong (SAR).

Every taxpayer is required to notify the Commissioner of Inland Revenue that he/she is chargeable to tax no later than four months after the end of the year of assessment in which he/she is chargeable. Notification is not required where a taxpayer has already been issued an Individual Tax Return for the relevant year of assessment.

Upon receipt of notice of commencement of employment of an employee who is or is likely to be chargeable to salaries tax, the Inland Revenue Department may issue a provisional tax return form to the employee requiring him/her to give an estimate of his/her income for the period from commencement to the following 31 March. On the basis of this estimate, the Inland Revenue Department may assess the employee to provisional salaries tax.

Shortly after the end of the tax year, the employer will be issued with a notice requiring him to submit an employer’s return to the Inland Revenue Department, showing the actual remuneration accruing to each employee in the year to the preceding 31 March. In addition, each employee is required (generally in May each year) to complete an individual tax return covering the same period. On the basis of these returns, the employee’s final liability for the year of assessment and provisional tax liability for the succeeding year of assessment will be calculated. Tax payments are generally made in January and April; the balance of the final tax for the preceding year of assessment and 75 percent of the provisional tax for the current year of assessment are paid in January, with the remaining 25 percent of the provisional tax being paid shortly after the end of the year of assessment, in April.

When are tax returns due? That is, what is the tax return due date?

Generally within one month of the date of issue by the Inland Revenue Department.

What is the tax year-end?

31 March.

What are the compliance requirements for tax returns in Hong Kong (SAR)?

See comments above.

What are the current income tax rates for residents and non-residents in Hong Kong (SAR)?

Salaries tax is charged at the lower of:

• net assessable income, less charitable donations and allowable deductions at the standard rate (for 2017/18) of 15 percent
• net assessable income less charitable donations, allowable deductions and personal allowances, charged at the following progressive rates.

Income tax table for 2017/18

For the purposes of taxation, how is an individual defined as a resident of Hong Kong (SAR)?

Taxation in Hong Kong (SAR) is territorial. The residence status of the employee is generally not determinative when considering his/her liability to salaries tax.

Hong Kong (SAR) salaries tax is charged in respect of income arising in or derived from Hong Kong (SAR) from any office or employment of profit (and any pension). In respect of an employment, to determine the extent of salaries tax payable, it is first necessary to determine whether the income is derived from a Hong Kong (SAR)-located employment or a non-Hong Kong (SAR)-located employment. If an employment is located in Hong Kong (SAR), it will be regarded as being a Hong Kong (SAR)-located employment and all income from the employment will fall within the scope of salaries tax. If an employment is located outside Hong Kong (SAR), it will be regarded as being a non-Hong Kong (SAR)-located employment and the liability to salaries tax will be limited to tax on income from services rendered in Hong Kong (SAR) plus the attributable leave. In such a case, the taxpayer generally apportions his/her income between the Hong Kong (SAR) and non-Hong Kong (SAR) services on the basis of days spent inside and outside Hong Kong (SAR).

To determine whether a taxpayer’s employment is located outside Hong Kong (SAR), and therefore regarded as being a non-Hong Kong (SAR)-located employment, the Inland Revenue Department will take into account all of the relevant facts, with particular emphasis on:

• where the contract of employment was negotiated and entered into and is enforceable, whether in Hong Kong (SAR) or outside Hong Kong (SAR)
• where the employer is resident, whether in Hong Kong (SAR) or outside Hong Kong (SAR)
• where the employee’s remuneration is paid to him/her, whether in Hong Kong (SAR) or outside Hong Kong (SAR).
  

(Different rules apply to determine the location of director’s fees and a pension.)

There are a number of exemptions from salaries tax available to employees. If all services with respect to the employment are rendered outside Hong Kong (SAR), regardless of the status of the employment (see earlier), the income will be exempt from tax. In addition, if duties are rendered in Hong Kong (SAR) during visits of 60 days or less in a fiscal year, no liability will arise. The Inland Revenue Department will not recognize as visits periods spent in Hong Kong (SAR) where the individual is based in or has a place of residence in Hong Kong (SAR) (regardless of the actual number of days spent in Hong Kong (SAR)). This 60-day exemption is only available for employments and does not apply to director’s fees.

A further exemption is available to eliminate double taxation of income. This exemption excludes income derived from services rendered in a territory outside Hong Kong (SAR) where the income for the services rendered is subject to a tax of a similar nature as salaries tax in that territory (and the tax has actually been paid).

A proposed change to the exemption referred to above was tabled in December 2017. If enacted, the exemption (often referred to as unilateral relief) will be limited to services rendered / tax paid in jurisdictions where Hong Kong (SAR) does not have a comprehensive double taxation agreement (CDTA). Where Hong Kong (SAR) does have a CDTA, relief will have to be claimed under the relevant CDTA. In practice, this will mean that partical exemption will no longer be available and double taxation will have to be mitigated via tax credit relief.

Is there a de minimus number of days rule when it comes to residency start and end date? For example, a taxpayer can’t come back to the host country for more than 10 days after their assignment is over and they repatriate.

No. See comments above in respect of the basis of taxation.

What if the assignee enters the country before their assignment begins?

See comments earlier in respect of the basis of taxation. Taxation is territorial and liability to tax is not determined by the assignment start date.

Are there any tax compliance requirements when leaving Hong Kong (SAR)?

The employer is required to notify the Inland Revenue Department if he/she ceases or is about to cease to employ an employee in Hong Kong (SAR). The notification should be submitted at least one month before the expected cessation date. The employer of an employee who is about to leave Hong Kong (SAR), for a period exceeding one month, must notify the Inland Revenue Department of the expected date of departure no later than one month before the expected departure date. In the case of departing employees, whom the employer has ceased/will cease to employ, the employer is prohibited from making any payments to or for the benefit of the employee during the one-month period from submission of the notification of departure from Hong Kong (SAR), unless the Inland Revenue Department gives prior clearance.

What if the assignee comes back for a trip after residency has terminated?

See comments earlier in respect of the basis of taxation. Taxation is territorial and liability to tax is not determined by the assignment start date or end date.

Do the immigration authorities in Hong Kong (SAR) provide information to the local taxation authorities regarding when a person enters or leaves Hong Kong (SAR)?

Information can be requested from the immigration authorities by the taxation authorities.

In cases of non-payment of tax, after completing certain procedures, the taxation authorities can request that an individual is prevented from leaving Hong Kong (SAR) by the immigration authorities.

Will an assignee have a filing requirement in the host country after they leave the country and repatriate?

If the assignee has income that is subject to salaries tax, they may have a filing requirement in Hong Kong (SAR) after they leave Hong Kong (SAR).

Do the taxation authorities in Hong Kong (SAR) adopt the economic employer approach to interpreting Article 15 of the OECD treaty? If no, are the taxation authorities in Hong Kong (SAR) considering the adoption of this interpretation of economic employer in the future?

Hong Kong (SAR) has only recently expanded the number of Comprehensive Double Taxation Agreements and the economic employer approach has not been extensively tested in practice. To date, no guidance has been provided by the taxation authorities in Hong Kong on the economic employer approach and it is unclear whether the taxation authorities in Hong Kong (SAR) will adopt this approach.

Are there a de minimus number of days before the local taxation authorities will apply the economic employer approach? If yes, what is the de minimus number of days?

See comments above in respect of economic employer approach.

What categories are subject to income tax in general situations?

Income from any office or employment is defined as including any wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite, or allowance, whether derived from the employer or others.

The following are specifically included as taxable income:

• any amount paid by the employer in connection with the education of an employee’s child
• pecuniary liabilities incurred by the employee and discharged by the employer to the extent of the amount discharged
• benefits-in-kind which are capable of being converted into money by the recipient
• any gain realized by the exercise, assignment, or release of right to acquire shares or stock in a corporation obtained by a person as the holder of an office or an employee of that or any other corporation
• any amount incurred by the employer in connection with a holiday journey of the employee (including home leave)
• accommodation benefits are specifically included as taxable benefits-in-kind but preferential tax treatment may be afforded.

Where an employee occupies rent-free or subsidized accommodation at the expense of the employer, the taxable benefit is the rental value of the residence. (Where some rent is paid by the employee, the taxable benefit is the excess of rental value over the rent paid.) The rental value for a flat or house is 10 percent of the employee’s taxable remuneration (excluding housing benefits). A housing allowance, which may be disbursed at the discretion of the employee, is taxable in full as income (although rental reimbursement arrangements can be structured tax effectively).

Are there any areas of income that are exempt from taxation in Hong Kong (SAR)? If so, please provide a general definition of these areas.

There are no exemptions for specific types of income. However, due to the limited application of the benefit-in-kind provisions, it is possible to provide many benefits to employees tax-free.

Are there any concessions made for expatriates in Hong Kong(SAR) ?

There are no special expatriate concessions.

Is salary earned from working abroad taxed in Hong Kong (SAR)? If so, how?

If the employment is regarded as being a Hong Kong (SAR)-located employment, the employee will be liable to salaries tax on all remuneration (subject to the exemptions noted earlier), even if some of the services are rendered outside Hong Kong (SAR). Relief may be available to mitigate the potential impact of double taxation.

Are investment income and capital gains taxed in Hong Kong (SAR)? If so, how?

Generally, investment income and capital gains are not subject to tax in Hong Kong (SAR). However, income from property (land and buildings) located in Hong Kong (SAR) is subject to property tax.

Any gain realized by the exercise, assignment or release of right to acquire shares or stock in a corporation obtained by a person as the holder of an office or employment of that or any other corporation is subject to salaries tax.

To determine the extent of the liability to tax, the location of the employment and the characteristic of the award are considered.

In general, foreign exchange gains and losses are not subject to taxation.

Foreign exchange gains and losses will only be subject to tax if they are regarded as the Hong Kong (SAR) profits from a trade, profession or business undertaken in Hong Kong (SAR).

There is no capital gains tax in Hong Kong (SAR).

No relief.

There is no capital gains tax in Hong Kong (SAR).

There is no capital gains tax or gift taxes in Hong Kong (SAR).

Are there additional capital gains tax (CGT) issues in Hong Kong (SAR)? If so, please discuss?

No.

Are there capital gains tax exceptions in Hong Kong (SAR)? If so, please discuss?

Not applicable.

What are the general deductions from income allowed in Hong Kong (SAR)?

A deduction may be claimed by the employee for expenses that have been incurred wholly, exclusively and necessarily in the production of assessable income. In practice, an expenditure claim for salaries tax purposes rarely is successful because of the need to establish that the expenditure was incurred wholly, exclusively and necessarily for the employment.

A depreciation allowance may be claimed in respect of plant and machinery, the use of which is essential to the production of assessable income.

The personal allowances, which may be claimed for the year of assessment 2017/18 are:

The allowances are available in full whether the employee is in Hong Kong (SAR) for part or all of a year of assessment. However, these allowances are only available if the employee is subject to tax at the progressive rates of salaries tax rather than the standard 15 percent rate.

Donations to approved charitable organizations may be deducted for tax purposes. The employee may not deduct charitable donations exceeding 35 percent of his/her assessable income.

Home mortgage interest payments are deductible against income subject to salaries tax. Owner-occupiers may claim a deduction for mortgage interest payments up to a maximum of HKD100,000 per year for one property. The deduction can be claimed for 20 years.

A deductible expense (maximum of HKD92,000 each year) is available for expenses of a dependent parent/grandparent in residential care.

Contributions to a mandatory provident fund scheme or recognized retirement scheme by the employee, of up to HKD18,000 for the year of assessment 2017/18, are tax deductible.

A maximum deduction of HKD100,000 for the year of assessment 2017/18 is available in respect of fees for training courses run by approved institutions.

What are the tax reimbursement methods generally used by employers in Hong Kong (SAR)?

The following are the normal methods of recognizing tax reimbursements paid by the employer:

• current year gross-up
• current year reimbursement
• one-year rollover

How are estimates/prepayments/withholding of tax handled in Hong Kong (SAR)? For example, pay-as-you-earn (PAYE), pay-as-you-go (PAYG), and so on.

There is no tax withholding in Hong Kong (SAR).

There is no PAYG in Hong Kong (SAR). See comments earlier regarding tax payments.

When are estimates/prepayments/withholding of tax due in Hong Kong (SAR)? For example: monthly, annually, both, and so on.

Provisional tax is payable in two installments, one of 75 percent in the last quarter of the year of assessment and the remaining 25 percent shortly after the end of the year of assessment. The provisional tax payable is typically estimated based on the income for the previous year of assessment.

The final tax for the previous year of assessment is payable at the same time as the first installment of provisional tax.

Is there any Relief for Foreign Taxes in Hong Kong (SAR)? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on?

Unilateral relief, by way of an exemption of the income from salaries tax, may be available under domestic legislation to employees if they are subject to tax of a similar nature to salaries tax in another jurisdiction in respect of services rendered in that jurisdiction (and the tax has actually been paid). Relief (including foreign tax credit relief) may be available under the relevant double taxation agreements with partner jurisdictions.

What are the general tax credits that may be claimed in Hong Kong (SAR)? Please list below.

See above. Tax credit relief can only be claimed if there is a double taxation agreement in place.

This calculation assumes a married taxpayer resident in Hong Kong (SAR) with two children whose three-year assignment begins 1 April 2015 and ends 31 March 2018. The taxpayer’s base salary is USD100,000 and the calculation covers three years.

Exchange rate used for calculation: USD1.00 = HKD7.7291.

• The spouse does not derive income chargeable to salaries tax during the period from 1 April 2015 to 31 March 2018.
• All earned income is attributable to local sources.
• Bonuses are paid at the end of each year of assessment, and accrue evenly throughout the year.
• Interest income is not remitted to Hong Kong (SAR).
• The company car originally cost USD50,000. The ownership of the company car is not transferred to the employee and it is used for business and private purposes.
• The employee is deemed resident throughout the assignment.
• Tax treaties and totalization agreements are ignored for the purpose of this calculation.
• The one-off tax reductions available have been ignored.
• Contributions to a mandatory provident fund or recognized retirement scheme have been ignored.
• The housing allowance is a cash allowance and does not qualify for the favourable treatment for accommodation provided by the employer.

Calculation of taxable income

Calculation of tax liability