Tax in Hong Kong

Tax authority: Inland Revenue Department (IRD)

Website: www.ird.gov.hk

Tax year: 1 April to 31 March

Tax return due date: Within 1 month of the date of issue

Joint filing: Joint filing is possible (you may choose to be assessed on a joint basis if more beneficial)

Tax return extensions: Extensions are possible, depending on accounting dates for sole-proprietors of unincorporated businesses.

Individuals earning income that arises in, or is derived from, a Hong Kong office or Hong Kong employment, or from services rendered in Hong Kong during visits of more than 60 days in any tax year, are subject to salaries tax.

Hong Kong observes a territorial basis of taxation; therefore, the concept of tax residency has no significance in determining tax liability, except in limited circumstances.

Taxable income consists of all cash emoluments, including bonuses and gratuities. Benefits in kind are largely non-taxable, unless they are convertible into cash or specifically relate to holiday travel or the education of a child. The provision of accommodation by an employer creates a taxable benefit equal to an amount ranging from 4% to 10% of the employee’s other taxable income, depending on the type of accommodation.

An employee is subject to salaries tax if their employment income is sourced in Hong Kong, even if they're not usually resident in the territory. However, except for directors’ fees, a specific statutory exemption applies if an employee renders all of their services outside Hong Kong, or if an employee renders services in Hong Kong during visits to Hong Kong not exceeding a total of 60 days in a year of assessment. Conversely, if a non-resident engaged in non-Hong Kong employment renders services in Hong Kong during visits totalling more than 60 days in a year of assessment, they will be taxed on a pro rata basis.

Anyone carrying on a profession, trade or business in Hong Kong is subject to profits tax on income arising in or derived from Hong Kong from that profession, trade or business. Taxable income is determined in accordance with generally accepted accounting principles, as modified by the tax code and principles derived from case law.

Business losses of an individual are calculated in the same manner as profits and may be carried forward indefinitely against future income in the same business or may be offset against the individual’s other sources of income under personal assessment. In both cases, losses cannot be carried back.

If an individual receives rental income but the rental activities do not constitute a business, the income is subject to property tax rather than profits tax. Property tax is levied at a flat rate of 15% on rental income, after a standard deduction of 20%.

Interest income not derived from investing the funds of a business and all dividend income are exempt from taxation.

No withholding taxes are levied in Hong Kong on dividends or interest paid to non-residents. However, royalties paid to non-resident individuals for the use of intellectual property rights in Hong Kong are deemed to arise from a Hong Kong business and are subject to an effective withholding tax rate of 2.25% (for the first HKD2 million of royalty income) and 4.5% (for the remaining royalty income), if the individuals have elected to be subject to the two-tiered profits tax rates regime. The withholding tax rate is increased to 7.5% and 15% if the recipient is related to the payer, and if the intellectual property rights for which the royalties are paid were previously owned by a person carrying on a profession, trade, or business in Hong Kong (subject to the application of the two-tiered profits tax regime).

Directors' fees derived from a company that has its central management and control in Hong Kong are subject to salaries tax in Hong Kong. Otherwise, directors’ fees are not taxable.

Employer-provided stock options are generally taxable at the time of exercise. However, for an individual who has non-Hong Kong employment and is taxed on a pro rata basis by reference to the number of days of his or her services in Hong Kong only, part or all of the option gain may be excluded from taxable income. The amount excluded depends on various factors including whether the option is granted conditionally or unconditionally, and, if granted conditionally, the number of days on which the individual performed Hong Kong services during the vesting period.

Employment-related share awards are generally considered to be perquisites from employment and taxed as part of the remuneration. In general, they become taxable when an employee is entitled to the full economic benefit of the shares awarded. If the employee has a non-Hong Kong employment, proration of the income by reference to the number of days of their services in Hong Kong that is similar to the proration applicable to stock option benefits may also be allowed.

Hong Kong does not tax capital gains.

Estate duty was abolished on 2006. Estates of persons who pass away on or after that date are not subject to estate duty.

Individual taxpayers are usually issued composite tax returns and are required to report all income from the various sources subject to profits tax, salaries tax or property tax. Salaries tax is automatically levied separately on the employment income of married couples and is paid separately by each spouse. However, a married couple not wishing to be assessed separately may elect joint assessment on their salaries, or, if beneficial, elect a combined assessment of their income from all sources under personal assessment.

No payroll or withholding tax requirements apply for purposes of salaries tax, except for a taxpayer who is about to leave Hong Kong for more than a month (other than in the course of their employment). Profits, property and salaries tax all operate under a system of prepaid tax, known as provisional tax. The provisional assessment for a tax year is an estimate, normally based on the preceding year’s assessment, and is payable in two instalments: one equal to 75% of the preceding year’s tax liability, usually payable in the final quarter of the relevant tax year, with the remaining 25% payable three months later. When the actual income for the tax year is determined, a final tax assessment is issued, giving credit for provisional tax already paid. The final tax assessment is combined with a provisional tax assessment for the following year. The final tax is payable at the same time as the 75% instalment of provisional tax for the following year.

Employment income derived from services rendered outside Hong Kong is exempt from salaries tax if the person is chargeable to and has paid tax of substantially the same nature as salaries tax with respect to that income.

For employment income derived outside Hong Kong in a territory that has entered into a double tax agreement with Hong Kong, any relief from double tax is by way of a tax credit rather than an income exemption.

The income exemption or tax credit allowable must not exceed the relief that would be allowed if the taxpayer had taken reasonable steps to minimise the foreign tax payable. Subsequently, if the relief is excessive, the taxpayer has an obligation to inform the Hong Kong tax authority to have the Hong Kong salaries tax correctly adjusted.

Hong Kong has entered into double tax agreements with 45 countries.