Disclaimer
Tax law is complex and every effort has been made to offer information that is current, correct and clearly expressed. The information in this summary is intended to be no more than a general overview of the position and certain details have been deliberately omitted. The contents of this page should not be taken as an authoritative statement of Hong Kong tax law and practice. Neither the author nor the publisher are responsible for the results of actions taken on the basis of information contained in this summary, nor for any errors or omissions. This text is not intended to render legal, accounting or tax advice. Readers are encouraged to seek professional advice concerning specific matters before making any decision.

The taxation system is administered by The Hong Kong Inland Revenue Department.

Hong Kong is a tax haven that only taxes Hong Kong sourced income which falls within specified types of income – namely, salaries, property and profits. Capital gains, gifts, inheritances and social security are not taxed in Hong Kong.

Hong Kong does not tax capital gains and does not impose VAT or Goods & Services Tax (GST).

Hong Kong has a maximum average tax rate of 16 percent (marginal rates of 2%-17%). Due to the significant personal allowances and generous progressive tax rates most taxpayers pay less than the top average rate – government estimates show that fewer than 35 percent of all taxpayers are required to pay any salaries tax, with the top 100,000 taxpayers paying 60 percent of the total salaries tax due in Hong Kong.

Example (2007/08 tax year):

• single taxpayers are only taxed at average tax rate of 16 percent  if income exceeds HKD 2.75m
• married person with two children (with only one spouse working) is only taxed at average tax rate of 16 percent if income exceeds HKD 6.15m

Taxpayers are taxed individually, though joint assessment is available for married people if beneficial. In addition, salaries, property and profits tax are usually subject to separate assessment but can be assessed together if beneficial (called "personal assessment").

Income Tax

Hong Kong taxes on a "source" basis (that is, not the common residence basis of other locations). The source of employment income is determined based on the source of the underlying employment.

If an individual's employer is Hong Kong-resident, all the worker's employment income is taxed in Hong Kong.

If an individual's employer is non-Hong Kong-resident (for example, the worker is on assignment in Hong Kong for a foreign company), employment income for services performed outside Hong Kong may be exempt from tax in Hong Kong (a so-called time basis claim).

Most employment income and benefits (cash and non-cash) are taxed including:

• salary
• incentive income (including bonuses, stock options exercised, share awards, and so on)
• home leave
• children's education expenses reimbursed by employer
• cost of living allowances

Housing benefits, however, can be structured by employers so that they are taxed at a deemed 10 percent of other income, rather than the actual amount reimbursed. Given the historic high cost of housing in Hong Kong (which is commonly considered a type of tax in Hong Kong), such planning can result in significant personal tax savings.

Example:
If total remuneration is HKD 2m, including a taxable housing benefit of HKD 600,000, income tax payable can be reduced by up to 28 percent if the employer implements a tax efficient housing arrangement.

Deductions & Allowances

Deductions (2007/08 tax year onwards)

Given Hong Kong's historic low tax rates and simple structure, there are few deductions allowed. The main ones include:

• employee contributions to a recognised pension scheme – up to HKD 12,000 per annum
• taxpayer's education expenses – up to HKD 60,000 per annum
• Hong Kong charitable donations – up to 25% of income (after certain deductions)
• home loan interest – HKD 100,000 per annum for up to ten years
• professional membership (one only)

Allowances (2007/08 tax year onwards)

Hong Kong has significant personal allowances including:

• Basic allowance (for the taxpayer) - HKD 100,000
• Married person's allowance - HKD 100,000
• Single parent allowance - HKD 100,000
• Child allowances (these depend on the age of the child):
• Year of birth: first to ninth child (per child) - HKD 100,000
• All other years: first to ninth child (per child) - HKD 50,000
• Dependent parent/grandparent allowance
• residing with taxpayer - HKD 60,000
• not residing with taxpayer - HKD 30,000
• Dependent brother/sister - HKD 30,000
• Disabled dependant allowance - HKD 60,000

Procedure & Timetable

The Hong Kong tax year is 1 April to 31 March.

Tax reporting must be done on the specific tax return issued by the Inland Revenue Department (IRD), as this has a unique bar code. Income tax returns are typically mailed to taxpayers in early May and must be returned within one month after the issue date, although a time extension may be requested.

The IRD then reviews the tax return and issues an assessment approximately two months later. The assessment will indicate the tax for the current tax year and will include provisional tax for the next year – with the provisional tax usually being 100 percent of the tax for the current year. All assessments should be reviewed immediately to ensure they are correct because assessments are considered "final" if the taxpayer does not object within one month. It can be very costly if a taxpayer does not object in time as there is no way to undo a final assessment.

Tax is payable according to the assessment and likely will be payable early in the following year in two instalments.

Example 2006/07 Tax Year (year ended 31 March 2007)

• 2006/07 tax due = HKD 100
  2006/07 provisional tax (already paid) = HKD 20
  2007/08 provisional tax = HKD 100
  • First instalment due early January 2008
    100% of 2006/07 net tax (HKD 100 - 80) = HKD 20
    75% of 2007/08 tax = HKD 75
    Total first instalment = HKD 95
  • Second instalment due early April 2008
    25% of 2007/08 provisional tax = HKD 25

Saving for Tax

Hong Kong does not require withholding on employment income, so taxpayers need to pay tax in lump sums. In addition, the first instalment of tax will usually include provisional tax for the next tax year, so the tax due is typically double what most taxpayers expect.

Another option is to buy Tax Reserve Certificates from the IRD. These pay a basic interest rate (2.6% at June 2007) and they can be used to mirror tax withholding regimes of other countries.

• For further information on Tax Reserve Certificates: Click here

Provisional Tax Return

For highly paid individuals who arrive in Hong Kong during a tax year, a provisional tax return may be issued by the IRD and tax paid in advance.

Other Taxes

Estate (inheritance) tax was abolished in early 2006 and there are no wealth or gift taxes. 

Investment Income (interest and dividend income)

Hong Kong does not generally tax interest or dividend income. However, rent from a Hong Kong rental property is subject to tax at 16 percent, with a statutory allowance for repairs and maintenance of 20 percent. Rent from properties outside Hong Kong is not subject to Hong Kong tax.

Prepared by Rodney Ross, CPA (US), CA (Aust)
Personal tax expert including Hong Kong and US tax return preparation, employment structuring
(sign-on and termination issues) and incentive income matters.
ITAX Limited

Tel: 2815 9772 / e-mail / Website

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