With some of the lowest corporate and personal tax rates in the world, Hong Kong is an attractive destination for foreign executives. Unlike flat corporate tax rate, Hong Kong’s salary tax rates follow a progressive tax rate system, with five marginal tax brackets of 2%, 6%, 10% and 14% and 17%.
Hong Kong has no capital gains tax, no dividend tax, and no inheritance tax. The city follows a territorial principle of taxation, where individuals are taxed only on income that has been “earned in Hong Kong”.
Hong Kong resident individual taxpayers can potentially reduce their tax burden by electing for personal assessment, under which tax is calculated at progressive tax rates on the aggregated income from all sources. A year of assessment runs from April 1 to March 31 of the following year.
Income tax for employees
In determining whether income arises in Hong Kong, the location of the employment must be examined, under factors such as whether the employment contract was negotiated and executed in Hong Kong; the employer is resident in Hong Kong; and the remuneration is paid to the employee in Hong Kong.
If the employment is in Hong Kong, the income will be chargeable to salaries tax, although an exemption is available if an employee renders no services in Hong Kong during this employment, or if the employee is physically present in Hong Kong for no more than 60 days in total in the year of assessment.
If the employment that is not in Hong Kong, but the employee is physically present in HK for more than 60 days and renders any services during that period, the income arising from the services rendered in HK will still be subject to salaries tax, albeit on a day-in-day-out basis.
The salaries tax charge applies to all employees, regardless of their nationality or residency.
The employer of an employee who is about to leave Hong Kong, for a period exceeding 1 month, must notify the Inland Revenue Department of the expected date of departure no later than 1 month before the expected departure date.
This does not apply to an employee who is required in the course of their employment to leave HK at frequent intervals. 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 1-month period from submission of the notification of departure from HK, unless the Inland Revenue Department gives prior clearance.
If the double taxation arises in a jurisdiction with which Hong Kong does not have a double taxation arrangement, unilateral relief, by way of an exemption of the income from salaries tax, may be available under domestic legislation to the 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).
If the double taxation arises in a jurisdiction with which Hong Kong has a double taxation arrangement, relief should be claimed under the arrangement.
There is no requirement to report foreign financial assets to either the Hong Kong fiscal or banking authorities.
However, Hong Kong has signed up to automatic exchange of information under the Common Reporting Standard - the standard for all automatic exchange of financial information.
Financial institutions in HK are required to identify and report to the Inland Revenue Department the financial accounts held by tax residents of overseas reportable jurisdictions on an annual basis. The Inland Revenue Department will pass this information to the relevant overseas jurisdictions.
Foreign financial assets captured by overseas tax authorities, who have also signed up for the above network of automatic exchange, will also be exchanged with the Inland Revenue Department. The information exchanged will depend on the specifics of the relevant agreement.
Salaries tax will be charged upon the exercise of share options. The tax is levied on the gain realized by the exercise of the option, and this gain is calculated as the difference between the fair market value of the shares at the time of exercise and the consideration paid for the grant of the shares.
If there is no vesting period for restricted stock, salaries tax is charged on the fair market value of the shares at the time of grant. Discounts may be made in determining their fair market value depending on the restrictions applicable.
Any distributions from the shares during a restriction period are not taxable, as they are investment income. If a vesting period applies, salaries tax is charged on the fair market value at the time of vesting. Distributions from the shares during the vesting period are also taxable as employment income.
Restricted stock units
The legal position on restricted stock units (RSUs) is uncertain, but where they are settled completely in cash, they are most likely regarded as phantom share plans, and no salaries tax will be charged at the time the shares are allocated if no value is passed on to the employee.
Salaries tax will be charged when the cash is paid. If RSUs are completely settled using shares, they would most likely be regarded as stock awards, and salaries tax would be charged when the shares vest in the employee. If an RSU is to be settled with a mixture of cash and shares, the tax treatment would depend on the terms of the RSU.
There are no social security/social insurance taxes in Hong Kong. Employers are required to make arrangements for all employees aged between 18 and 65 residing and working in HK to join a mandatory provident fund (MPF) scheme.
However, exemption from the MPF requirements is available to any person entering HK for the purpose of being employed or self-employed (on a valid employment visa) for a limited period (13 months or less) or who is a member of an overseas retirement scheme.
Relevant Income includes wages, salary, leave pay, fee, commissions, bonuses, gratuity, perquisites, or allowances expressed in monetary terms, paid or payable by an employer (directly or indirectly) to the employee, but does not include severance payment or long service payments under the Employment Ordinance.
Employers and employees are each required by law to contribute an amount equivalent to 5% of the employee's relevant income to the scheme. This income is currently capped at a maximum of HK$30,000 per month for the purposes of calculating the contribution.
Accordingly, the maximum mandatory contribution amount required by both employer and employee is HK$1,500 per month.
The requirement applies to all Hong Kong employment, regardless of nationality or residence. An executive director receiving a salary under a contract of employment, will be required to join an MPF scheme; however, a director who receives directors' fees by virtue of being an office holder is not an employee and therefore not required to participate in an MPF scheme.
An employer may operate an Occupational Retirement Schemes Ordinance-exempted scheme instead of participating in an MPF scheme. The contributions for such a scheme are governed by the relevant Occupational Retirement Schemes Ordinance-exempted scheme's rules.
Remuneration in the form of share options and other compensation that is not expressed in monetary form is excluded from the employee's income for the purposes of making MPF contributions.
Employee remuneration is generally deductible by the employer for the purposes of profits tax, including regular contributions to an MPF scheme (up to a limit of 15 per cent of the total remuneration); however, only remuneration that can be shown to be an expense incurred in the production of profits subject to tax in Hong Kong is deductible, and therefore some payments may not be deductible.
Remuneration is deductible during the year of assessment in which it is incurred, but the HK Inland Revenue Department considers that the issue of shares by an employer to employees in fulfilment of share options or stock awards is not an expense, but a movement in the equity reserve account of the employer, and therefore no tax deduction is allowed.
Payments to a third party for the issuance of shares may be deductible under normal rules in relation to deductibility. Where an employer is recharged for shares issued or acquired by another group entity, if there is a written recharge agreement in place, the recharge in relation to both new issues of shares and acquisition of shares from the market by a group entity is allowable for deductions under guidelines by the HK Inland Revenue Department.
However, the employer can claim a deduction for the recharge only at the point of exercise of stock options or the point of vesting of share awards, and the amount claimed must not be excessive.
A well-regulated yet simple tax system and low personal income tax rates have increased Hong Kong’s competitiveness in the region and turned it into an attractive relocation destination for foreign professionals.
Moreover, unlike many western nations, Hong Kong has no capital gains tax – a policy that encourages investment by citizens and foreigners alike.
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