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  • Service: Tax, Global Mobility Services
  • Type: Regulatory update, Survey report
  • Date: 2/20/2014

Income Tax 

Taxation of international executives
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 member firm of KPMG International.


There is no general income tax in Hong Kong. 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.

Tax returns and compliance

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 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?


Residents and non-residents


See comments above.


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Tax rates

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


Residents and non-residents


Salaries tax is charged at the lower of:


  • net assessable income, less charitable donations and allowable deductions at the standard rate (for 2013/14) of 15 percent
  • net assessable income less charitable donations, allowable deductions and personal allowances, charged at the following progressive rates.

Income tax table for 2013/2014


Taxable income bracket Total tax on income below bracket Tax rate on income in bracket
From HKD To HKD HKD Percent
0 40,000 800 2
40,001 80,000 2,800 7
80,001 120,000 4,800 12
120,001 Over 0 17

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Residence rules

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


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


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


To determine whether a taxpayer’s employment is located outside Hong Kong, and therefore regarded as being a non-Hong Kong-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 or outside Hong Kong
  • where the employer is resident, whether in Hong Kong or outside Hong Kong
  • where the employee’s remuneration is paid to him/her, whether in Hong Kong or outside Hong Kong.

(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 no services are rendered in Hong Kong, 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 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 where the individual is based in or has a place of residence in Hong Kong (regardless of the actual number of days spent in Hong Kong). 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 where the income for the services rendered is subject to a tax of a similar nature as salaries tax in that territory (and that tax has actually been paid).


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.


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Termination of residence

Are there any tax compliance requirements when leaving Hong Kong?


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. 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, for a period exceeding one month, must notify the Inland Revenue Department of the expected date of departure no later that 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, 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.


Communication between immigration and taxation authorities


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


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 by the immigration authorities.


Filing requirements


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 after they leave Hong Kong.


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Economic employer approach

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


See comments earlier in respect of the basis of taxation.


De minimus number of days


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 earlier in respect of the basis of taxation.


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Types of taxable compensation

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 an option 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 on a reduced basis

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).


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Tax-exempt income

Are there any areas of income that are exempt from taxation in Hong Kong? 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.


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Expatriate concessions

Are there any concessions made for expatriates in Hong Kong?


There are no special expatriate concessions.


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Salary earned from working abroad

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


If the employment is regarded as being a Hong Kong-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. Relief is available to mitigate the potential impact of double taxation.


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Taxation of investment income and capital gains

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


Dividends, interest, and rental income


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


Gains from stock option exercises


Any gain realized by the exercise, assignment or release of an option 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.


Residency status

Taxable at:

Grant Vest Exercise
Resident N N Y
Non-resident N N Y/N
Other (if applicable) N N Y/N

Foreign exchange gains and losses


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 profits from a trade, profession or business undertaken in Hong Kong.


Principal residence gains and losses


There is no capital gains tax in Hong Kong.


Capital losses


No relief.


Personal use items


There is no capital gains tax in Hong Kong.


Gifts


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


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Additional capital gains tax (CGT) issues and exceptions

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


No.


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


Not applicable.


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General deductions from income

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


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 2013/14 are:


HKD
Personal allowances
  • (basic)
  • (married)

120,000
240,000
Single parent allowance 120,000
Child allowance - 1st to 9th child (each)
  • Year of birth
  • Other years

140,000
63,000
Dependent parent allowance
  • (aged 60 or above)
  • (aged between 55 and 59)

38,000
19,000
Dependent grandparent allowance
  • (aged 60 or above)
  • (aged between 55 and 59)

38,000
19,000
Additional dependent parent and grandparent allowance
  • (aged 60 or above)
  • (aged between 55 and 59)

38,000
19,000
Disabled dependant (spouse/child/parent/ grandparent/brother/sister allowance 66,000
Dependent brother/sister 33,000

The allowances are available in full whether the employee is in Hong Kong 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 loan interest


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 15 years.


Elderly residential care expenses


A deductible expense (maximum of HKD76,000 each year) is available for expenses of a dependent parent/grandparent in residential care.


Contributions to recognized retirement schemes


Contributions to a mandatory provident fund scheme or recognized retirement scheme by the employee, of up to HKD15,000 for the year of assessment 2013/14, are tax deductible.


Self-education expenses


A maximum deduction of HKD80,000 for the year of assessment 2013/14 is available in respect of fees for training courses run by approved institutions.


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Tax reimbursement methods

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


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


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

 


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Calculation of estimates/prepayments/withholding

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


Pay-as-you-go (PAYG) withholding


There is no tax withholding in Hong Kong.


PAYG installments


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


When are estimates/prepayments/withholding of tax due in Hong Kong? 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.


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Relief for foreign taxes

Is there any Relief for Foreign Taxes in Hong Kong? 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, is 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. Relief (including foreign tax credit relief) is also available under the relevant double taxation treaties with partner jurisdictions.


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General tax credits

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


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


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Sample tax calculation

This calculation assumes a married taxpayer resident in Hong Kong with two children whose three-year assignment begins 1 April 2011 and ends 31 March 2014. The taxpayer’s base salary is USD100,000 and the calculation covers three years.


2011/12
USD
2012/13
USD
2013/14
USD
Salary 100,000 100,000 100,000
Bonus 20,000 20,000 20,000
Cost-of-living allowance 10,000 10,000 10,000
Housing allowance 12,000 12,000 12,000
Company car 6,000 6,000 6,000
Moving expense reimbursement 20,000 0 20,000
Home leave 0 5,000 0
Education allowance 3,000 3,000 3,000
Interest income from non-local sources 6,000 6,000 6,000

Exchange rate used for calculation: USD1.00 = HKD7.7272.


Other assumptions


  • The spouse does not derive income chargeable to salaries tax during the period from 1 April 2011 to 31 March 2014.
  • All earned income is attributable to local sources.
  • Bonuses are paid at the end of each year, and accrue evenly throughout the year.
  • Interest income is not remitted to Hong Kong.
  • The company car is used for business and private purposes and originally cost USD50,000.
  • 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


Year-ended 2011/12
USD
2012/13
USD
2013/14
USD
Days in Hong Kong during year 366 365 365
Earned income subject to income tax
Salary 100,000 100,000 100,000
Bonus 20,000 20,000 20,000
Cost-of-living allowance 10,000 10,000 10,000
Housing allowance 12,000 12,000 12,000
Company car 0 0 0
Moving expense reimbursement 20,000 0 20,000
Home leave 0 5,000 0
Education allowance 3,000 3,000 3,000
Total earned income 165,000 150,000 165,000
Other income 0 0 0
Total income 165,000 150,000 165,000
Deductions 0 0 0
Total taxable income 165,000 150,000 165,000

Calculation of tax liability


2011/12
USD
2012/13
USD
2013/14
USD
Taxable income as above 165,000 150,000 165,000
Hong Kong tax thereon 19,105 15,895 18,137
Less:
Domestic tax rebates (dependent spouse rebate) 0 0 0
Foreign tax credits 0 0 0
Total Hong Kong tax 19,105 15,895 18,137


© 2014 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

 

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Taxation of international executives