Thinking beyond borders
Visitors1 who do not exceed 60 days of presence in Hong Kong in a year of assessment may be exempt from salaries tax. Extended business travelers who exceed 60 days of presence in a year of assessment may be assessed on employment income derived from services rendered in Hong Kong plus the attributable leave only, provided that they hold a non-Hong Kong-located employment.
Residence status is generally not determinative when considering a person’s liability to salaries tax.
Taxation in Hong Kong is territorial. The residence status of an employee is generally not determinative when considering the individual’s liability to salaries tax. Hong Kong salaries tax is charged on income arising in, or derived from, Hong Kong from any office or employment of profit. To determine the extent of salaries tax payable, it is first necessary to determine whether the income is derived from a Hong Kong-located employment or a non-Hong Kong-located employment.
If an individual’s employment is fundamentally located in Hong Kong, all income from the employment will fall within the scope of salaries tax. If an individual’s employment is fundamentally located outside Hong Kong, the liability to salaries tax will be limited to tax on income for services rendered in Hong Kong, plus the attributable leave. The above does not apply to income derived from the holding of an office (such as fees paid to company directors).
The source of employment income is determined by the location of the employment. To determine the location of an employment, the Inland Revenue Department (IRD) will consider all the relevant facts, with particular emphasis on:
The IRD will look further than the external or superficial features of the employment to determine the location of the employment.
A full exemption from salaries tax can be claimed where an individual visits Hong Kong for not more than 60 days during the year of assessment (1 April to 31 March). This 60-day exemption is available only for income from employment2 and does not apply to directors’ fees.
Until recently, Hong Kong did not have an extensive network of comprehensive double taxation agreements. However, it is a stated government policy that agreements will be entered into, and the government has recently done so with a number of countries. If a double taxation agreement is in place, an employee may be able to claim full exemption from salaries tax or tax credit relief under the relevant agreement.
For salaries tax purposes, income from any office or employment includes any wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite, or allowance, whether derived from the employer or others. In addition, certain benefits (such as accommodation benefits, holiday journey benefits, and amounts paid in connection with the education of an employee’s child) are specifically taxable under the legislation.
The maximum effective salaries tax rate is currently 15 percent.
Hong Kong does not have a social security tax system. However, all employees and self-employed persons over the age of 18 but below 65, normally residing and working in Hong Kong, are required to join a Mandatory Provident Fund (MPF) scheme. Exemption from the MPF requirements can be claimed where an individual is entering Hong Kong for the purpose of being employed or self-employed (i.e., on a valid employment visa) for a limited period (13 months or less) or is a member of an overseas retirement scheme.
Tax returns are generally due within one month of the date of issue.
Every taxpayer is required to notify the Commissioner of Inland Revenue that the taxpayer is chargeable for tax no later than four months after the end of the year of assessment in which the taxpayer is chargeable unless the taxpayer has already been issued an individual tax return. In general, individual tax returns are issued on the first working day of May following the tax year-end, which is 31 March. Extensions to the filing deadline are at the discretion of the IRD.
A visa must be applied for before an individual enters Hong Kong. The type of visa required will depend on the purpose of the individual’s entry into Hong Kong (i.e., employment, investment, study, dependant, visitor, training and study visas).
In general, foreign nationals coming to Hong Kong for employment should obtain an employment visa. The individual should have a good educational background and proven professional qualifications. In addition, the sponsoring company must demonstrate that there is a genuine job vacancy in Hong Kong, the job cannot be readily taken up by the local workforce and it is a confirmed offer of employment with the applicant. Accompanying spouses and dependent children under the age of 18 can apply for a dependant visa.
In general, applications are processed by the Hong Kong Immigration Department within four to six weeks and both the individual and sponsoring company in Hong Kong are required to submit supporting documents to apply for an employment visa. Applications can be submitted in person or via mail to the Immigration Department in Hong Kong or by visiting the nearest Chinese Diplomatic and Consular Mission in the individual’s country of residence.
Individuals residing in Hong Kong on an employment visa are subject to limit of stay in Hong Kong. Individuals are required to apply for an extension of stay within four weeks of the expiration of their limit of stay in Hong Kong.
Under the “One Country Two Systems”, Hong Kong and Mainland China maintain their own legal systems (including immigration law and policy) independent of each other. As such, separate applications are required to be made directly with the relevant authorities of the Mainland China should employees be relocated or be required to visit or work in Mainland China.
As of 25 April 2016, Hong Kong has entered into double taxation arrangements with 35 countries to mitigate double taxation and allow cooperation between Hong Kong and overseas tax authorities in enforcing their respective tax laws. Negotiations are currently being held with other countries. As of 25 April 2016, the effective dates of Korea, Latvia, Romania and Russia has yet to be announced.
The issue of whether a business is carried on in Hong Kong or whether profits are considered to be sourced in Hong Kong is a question of fact. Case law has established that very little actual activity needs to be performed in Hong Kong for an offshore entity to be regarded as carrying on business in Hong Kong. Depending on the nature of the particular income concerned, the source of profits is usually ascertained by looking at the operations that produce the profits in question and where those operations take place.
There is currently no value-added tax (VAT) or goods and services tax (GST) levied in Hong Kong.
In December 2009, the IRD released Departmental Interpretation and Practice Notes (DIPN) Number 46, which sets out its interpretation and practice regarding transfer pricing methodologies and related issues. DIPN 46 provides, for the first time, a comprehensive transfer pricing framework in Hong Kong.
DIPN 46 is generally consistent with the Organisation for Economic Co-operation and Development (OECD) guidelines and international transfer pricing practices. DIPN 46 states that the IRD will apply the arm’s length principle to determine the appropriate price in the context of controlled transactions entered into by taxpayers and related parties located in other tax jurisdictions (whether or not Hong Kong has a double taxation agreement signed with those jurisdictions).
Hong Kong has data protection laws.
There are currently no foreign exchange controls on fund transfers.
In general, a corporate deduction for expenses is allowed to the extent to which the expenses are incurred and related to profits assessable in Hong Kong. A deduction is only available for expenses that are related to revenue.
1This exemption is applicable to employees only. It does not apply to individuals who hold an office in a Hong Kong-resident company.
2For aircrews/shipping crews, the test is slightly modified to consider both the current year of assessment and two consecutive years of assessment (one of which is the current year of assessment).