Hong Kong Salaries TaxSalaries Tax Sunday, August 21st, 2011
Personal tax in Hong Kong is often referred to as “salary tax”. Both corporate and personal tax rates of Hong Kong are considered as one of the lowest in the world. Unlike flat corporate tax rate, Hong Kong’s salary tax rates follow a progressive tax rate system. There are four marginal tax brackets of 2%, 7%, 12% and 17%.
Key features of Hong Kong’s salary tax:
- Individuals are taxed at progressive rates on their net chargeable income (i.e. assessable income after deductions and allowances) starting at 2% and ending at 17%; or at a standard rate of 15% on net income (i.e. income after deductions), whichever is lower.
- There is no capital gains tax, no dividend tax and no inheritance tax in Hong Kong.
- Hong Kong follows a territorial principle of taxation. 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 personal assessment, tax is calculated at progressive tax rates on the aggregated income from all sources. More detailed information on this is provided later in this guide.
- A year of assessment runs from April 1st to March 31st of the following year.
Personal Income Tax Rates
The progressive rates of tax imposed on an individual’s net chargeable income in Hong Kong are:
|Net Chargeable Income (in HKD)||Rate|
|0 – 40,000 HKD||2%|
|41,001 – 80,000 HKD||7%|
|80,001 – 120,000 HKD||12%|
|Above 120,001 HKD||17%|
The Salaries Tax Concession
The following explains the process for claiming the 75% salaries tax reduction announced in the 2010/11 budget:
Individuals having business profits or rental income, if eligible, can enjoy the reduction by electing personal assessment. These taxpayers can make the election to make a personal assessment when completing their 2009/10 tax returns. Individuals having salaries income only, but no business profits and rental income, are not required to elect personal assessment.
Under the salaries tax reduction scheme, the ceiling of HKD6,000 per case is applied on an individual taxpayer basis. For couples electing to be jointly assessed, the ceiling is applied on each couple. Under personal assessment, single taxpayers will each be subject to the ceiling. Married couples must make their personal assessment election together and the ceiling will therefore apply to each couple.
According to the Hong Kong Inland Revenue Department, the tax reduction will be reflected in the tax bill for the coming year. Taxpayers must file their tax returns as usual. The Hong Kong IRS began issuing tax returns in May 2010. Taxpayers need not make any application to obtain the reduction. Most taxpayers will receive their tax bills, with the reduction duly reflected, starting from the third quarter in 2010. As in previous years, salaries tax will generally fall due in January 2011.
The one-off reduction will only apply to the 2009/10 final tax, but not to the provisional tax of the same year. For most taxpayers, the second installment of their 2009/10 provisional tax will fall due in April 2010, which should be paid on time despite the proposed reduction. The provisional tax paid will, in accordance with the Inland Revenue Ordinance, be applied in payment of the final tax for 2009/10 and provisional tax for 2010/11. Excess balance, if any, will be refunded.
2009/10 tax bills issued before enactment of the relevant legislation will not reflect the tax reduction. The Inland Revenue Department will revise them after the enactment. Excess tax paid will be refunded from late July 2010 onwards. Taxpayers are not required to apply for such refund or make phone enquiry in this regard.
Benefits In Kind
The following benefits in kind provided by an employer are deemed taxable emoluments:
- Where the employer provides housing this is assessed as an emolument which has a value of 10% of the employee’s wage for salary tax purposes;
- Capital gains on realised share options;
- Payments in connection with an employee’s children;
- ‘Benefits capable of being turned into money by the recipient’. Thus a medical insurance policy or an air ticket would not be taxable under this heading since they are not assignable at a price.
Allowances and Deductions
For the 2009/10 year of assessment, the following allowances are deductible from assessable income for salaries tax purposes:
Charitable contributions representing up to 35% of an individual’s income after allowable expenses and depreciation allowances or assessable profits.
A residential care allowance in respect of a parent or grandparent of up to HKD60,000 per annum.
Home loan interest deductions from 2003/4 of up to HKD100,000 in any one year of assessment.
A current pension allowance of up to HKD12,000 for each year of assessment, not including contributions made by a self-employed person in respect of his employees.
Depreciation allowances on all plant and machinery essential to the production of income subject to salaries tax.
A single person’s allowance of HKD108,000 (2009/10).
A married persons’ allowance of HKD2165,000 (2009/10).
Child allowances of HKD50,000 for each dependant on the 1st to the 9th child (2009/10).
Dependent parent, grandparent,sister, brother sibling (to include more than one where necessary) – allowances HKD30,000 each (2009/10).
Dependent disabled person’s allowance of HKD60,000 (2009/10).
Education allowance of HKD60,000 for any course which educates or assists an employee in his profession.
What income is considered “earn in Hong Kong”?
Salaries tax is imposed on all employmentincome arising in or derived from Hong Kong.In other words, if your source of employment is in Hong Kong, i.e. you are employed by a Hong Kong company to work in Hong Kong; your full income is chargeable to salaries tax. However, you can claim full or partial exemption of income or tax relief, under the following circumstances:
- If all services are rendered outside Hong Kong during a year of assessment (unless you are a civil servant or a crew member of a ship or an aircraft) you are exempt from paying salaries tax for that particular year of assessment. Income from services rendered in Hong Kong during visits not exceeding a total of 60 days in the year is also exempt from tax. Whether the nature of a trip to Hong Kong is a “visit” or not is assessed by authorities on a case-by-case basis.
- If part of your income has already been charged to tax in another territory during the year of assessment, you can claim partial exemption of income from salaries tax in Hong Kong. However, you will have to furnish evidence of foreign tax payment.
If your source of employment is outside Hong Kong, i.e. you are employed by an overseas company but are assigned to work in Hong Kong for a few years by your overseas employer; you are only assessed on the income attributable to the services you render in Hong Kong.
Tax treatment of employer benefits
Most gains and profits derived by you in respect of your employment are taxable. The gains or profits include benefits, whether in money or otherwise, paid or granted to you in respect of employment. Some common examples of taxable benefits include:
- Accommodation and housing allowance
- Meal allowance
- Education benefits for your children
- Company gifted car
- Transport allowance or private carsmileage reimbursements
- Holiday journey allowances
- Share awards and share options
Filing personal tax return
Every taxpayer has to file annual tax returns with the Inland Revenue Department (IRD). The year of assessment runs from April 1 through March 31 of the following year. IRD sends out individual tax returns by May 1. Tax returns normally have to be submitted within one month from the date of issue. Note that even if you do not have any income to report, you still need to declare zero income in your tax form. A married couple can elect to receive a joint assessment, if the single assessment based on their combined income results in a lesser tax liability.
If you are a sole-proprietor of a business, you can file the returns within 3 months from the date of issue.
You can choose to file your returns online or by postal mail. After you have filed your returns, you will receive your ‘Notice of Assessment’ or tax bill from the Inland Revenue Department. The tax bill will indicate the amount of tax you are liable to pay for the given year of assessment. It will also state the provisional salaries tax payable for the succeeding year of assessment.
If you disagree withthe tax bill, you need to inform the tax department within 30 days from the date of your tax bill and state your reasons for objection. Notwithstanding any notice of objection lodged by you, tax must be paid on or before the due date specified in the notice of assessment.
The Commissioner of Inland Revenue may impose penalties or issue an estimated assessment if there is a delay in filing the return.
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