Hong Kong: Personal Taxation
In Hong Kong personal income tax is known as salaries tax. Individuals are only assessed on annual employment income. Non-employment source income such as share dividends and capital gains realized on the sale of shares are not taxable in the territory. Salaries tax is governed by the provisions of the Inland Revenue Ordinance. Income received by an employee is subject to salaries tax whilst income received by a self employed person is subject to profits tax. Salary tax rates are among the lowest in the world and remain one of the major attractions of locating to the territory.
The territorial principle governs salaries tax with the consequence that salaries tax is only levied on income "arising in or derived from a Hong Kong employment". The definition of income includes wages, salaries, bonuses, commissions, payments by the employer into a pension fund for the employee and gratuities. It does not include either a pension from a source outside Hong Kong or compensation for loss of employment.
The assessment to salaries tax is provisional and is based on the previous year's income with a tax credit being given in the subsequent year in the event of the assessment exceeding the actual income. 75% of the provisional assessment is payable in the 3rd quarter with the final 25% being payable in the final quarter.
The salaries tax rate is the lower of either:
- 15% of "assessable income" after the deduction of allowances; or
- A progressive rate levied on "assessable income" after the deduction of allowances. For the 2009/10 tax year onwards, these progressive rates are:
- Nil to HKD40,000 - 2%
- HKD40,000 to HKD80,000 – 7%
- HKD80,000 to HKD120,000 – 12%
- HKD120,000 upwards – 17%
Recent budgets have introduced several personal tax relief measures.
The Revenue Bill 2006, tabled in the 2006/7 budget, lowered the marginal rates of the second, third and top tax bands by 1% from the existing levels of 8%, 14% and 20%. These were lowered to 7%, 13% and 19% for 2006/7 and to their present levels from the 2007/8 tax year. The Revenue Bill 2007 widened each marginal tax band from HKD30,000 to HKD35,000. Each band was widened to HKD40,000 from the 2008/9 tax year
In the 2007/8 budget further relief was announced: 50% of the 2006-07 salaries tax or tax charged under personal assessment was waived subject to a ceiling of HKD15,000 per assessment. This measure was intended to be a 'one-off,' but its has been extended in subsequent budgets thus:
- For 2007/08, 75% of the final tax payable under salaries tax and tax under personal assessment would be waived, subject to a ceiling of HKD25,000 per case;
- For 2008/09, 100% of the final tax payable under salaries tax and tax under personal assessment would be waived, subject to a ceiling of HKD8,000 per case; and
- For 2009/10, 75% of the final tax payable under salaries tax and tax under personal assessment would be waived, subject to a ceiling of HKD6,000 per case.
The tax concession available for 2009/10 has been extended to 2010/11 after Hong Kong’s Legislative Council passed the Inland Revenue (Amendment) (No. 3) Bill 2011 in June 2011, which implements the government’s concessionary revenue measures announced as part of its 2011-12 Budget. Tsang had initially left this measure out of the 2011/12 budget, announced in the previous month, but was forced to change his mind after an outcry from taxpayer representatives disappointed at the budget's lack of tax cuts with tax revenues soaring. In addition, every Hong Kong permanent resident aged 18 or over will get a cash grant of HKD6,000 (US$770), a measure which replaces the original proposal in the 2011/12 budget to inject HKD6,000 into individual Mandatory Provident Fund accounts. As of June 2011, the government has yet to work out the details of this proposal however.
Other recent tax cuts include the following:
- The Revenue Bill 2006 extended the limit for deduction for home loan interest from seven to 10 years, subject to the maximum annual deduction of HKD100,000.
- The Revenue (No.2) Bill 2007 provided additional personal tax relief in the 2007-08 year: an increased child allowance under salaries tax from HKD40,000 to HKD50,000 for each child; an additional child allowance of HKD50,000 in the year of assessment in which the child was born; and an increased maximum salaries tax deduction for self-education expenses from HKD40,000 to HKD60,000.
- Salaries Tax was cut from 16% to 15% in 2008/9 as a result of Hong Kong Special Administrative Region (HKSAR) Chief Executive, Donald Tsang's Policy Address to the Legislative Council in October 2007. He also announced a cut in profits taxes for 2008-09.
Tsang also proposed in the 2007 Policy Address to:
- Waive rates (property taxes) for the first two quarters of 2009-10, subject to a ceiling of HKD1,500 (HKD193) per quarter for each rateable tenement;
- Introduce a 20% rental reduction for most government properties and short-term tenancies of government land for three months which will benefit more than 17,000 tenants; and
- Extend the freeze on government fees and charges related to people's livelihood until March 31, 2010.
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.
A simple Salaries Tax computation tool is provided by the Hong Kong Inland Revenue Department
Vehicle Registration Tax
The tax on first registration of cars in Hong Kong is high relative to many other countries, and on June 15, 2011, the Legislative Council approved further increases this tax.
Under the new measures, first-registration tax rates will be 40% of the taxable value of cars for the first HKD150,000 (US$19,200), increased from 35%; 75% on the next HKD150,000, up from 65%; 100% on the next HKD200,000, increased from 85%; and 115% on the remainder, a rise of 15%.
On the other hand, tax concessions for environmentally-friendly petrol cars will also rise from the current level of 30%, subject to a cap of HKD50,000 per car, to 45%, subject to a cap of HKD75,000 per car.
Tax and Residence
- Income paid in Hong Kong but which relates to services rendered outside the islands is exempt from salaries tax if the fiscal authorities are satisfied that tax has already been paid on that income in a foreign jurisdiction.
- An individual with Hong Kong source employment who works abroad but renders services in Hong Kong for less than 60 days in any tax year is exempt from salaries tax in the jurisdiction.
- An individual with Hong Kong source employment who works abroad but renders services in Hong Kong for more than 60 days in any tax year is assessed to tax on that proportion of his income as is represented by the number of days he worked in Hong Kong as a proportion of 365.
- Tax is not payable on that proportion of income earned in relation to work done outside Hong Kong by the Hong Kong based employee of a non resident corporation on a contract governed by the laws of a foreign jurisdiction, where the employees are paid outside Hong Kong and where the employee's activities are not limited to working within the territory.
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 HKD216,5000 (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.