Employment taxation in Hong Kong – Part 1russonxiao
The Hong Kong tax system is generally considered to be one of the most simple, transparent and straightforward tax systems in the world. For many years, Hong Kong has been adopting a territorial tax system under which only Hong Kong sourced income is chargeable to tax. Therefore, it is very important to identify the source of income before determining the tax liability of a person in Hong Kong. Also, capital gains can be exempted from Hong Kong tax provided certain requirements are met, making Hong Kong an attractive jurisdiction for corporations and individuals to set up tax-efficient investment structures.
Since Hong Kong adopts a territorial tax principle, an individual’s nationality and residency are irrelevant when considering his/ her salaries tax liabilities in Hong Kong. Rather, the source of income (i.e. the place where the income is actually derived from) is the determining factor. The same set of tax rules and tax rates apply to both local and foreign residents.
- Salaries tax rates
Salaries tax is charged on an individual in respect of his income arising in or derived from any office, employment or pension in Hong Kong. The amount of tax payable is calculated at the lower of the following:
- The standard rate (i.e. currently at 15%) on chargeable income after the deduction of allowable deductions and charitable donations but before deduction of personal allowances; or
- The applicable progressive rates on net chargeable income after the deduction of allowable deductions, charitable donations and personal allowances. The prevailing progressive salaries tax rates are as follows:
|Net chargeable income in HKD||Progressive tax rate|
|Between 0 and 50k||2 %|
|Between 50k and 100k||6%|
|Between 100k and 150k||10%|
|Between 150k and 200k||14%|
|> 200k||17 %|
- Personal Assessment
In principle, Hong Kong’s tax system does not tax an individual on his total income. Incomes from different sources are usually taxed under different categories (e.g. business income is subject to profits tax, rental income is subject to property tax and employment income is subject to salaries tax).
Sometimes, it may be advantageous for an individual to elect for personal assessment whereby income chargeable to salaries tax, profits tax and property tax will be aggregated in a single assessment.
Personal assessment enables an individual to offset a business loss against income subject to salaries tax or property tax and to claim loan interest on rental properties which is not available under property tax. Losses sustained by an individual and brought forward from previous tax years under personal assessment may be used to offset against taxable income in subsequent years. Appropriate personal allowances and allowable deductions are granted under personal assessment and the tax payable is calculated on the balance in the same manner as for salaries tax.
In order to benefit from personal assessment, applicants must be permanent or temporary residents in Hong Kong. An election for personal assessment must be made within a stipulated time limit.
A directorship is regarded as an office. The director fees received by a director of a Hong Kong resident company are generally chargeable to salaries tax regardless of the number of days the director stays in Hong Kong in a particular year of assessment. No tax exemption or tax relief is available for director’s fees.
The above article explained the different types of taxes depending on personal situation. We will describe in our next article what are the tax obligations of employers and employee in Hong Kong which are also very specific and depend on different parameters. Some of these obligations will have to be declared to the local tax regulator called “Inland Revenue Department” or “IRD”.
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