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 percent of the provisional assessment is payable in the 3rd quarter with the final 25 percent being payable in the final quarter.
The salaries tax rate is the lower of either:
- 15 percent 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 percent
- HKD40,000 to HKD80,000 – 7 percent
- HKD80,000 to HKD120,000 – 12 percent
- HKD120,000 upwards – 17 percent
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 percent from the existing levels of 8 percent, 14 percent and 20 percent. These were lowered to 7 percent, 13 percent and 19 percent 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 percent 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 has been extended in subsequent budgets thus:
- For 2007/08, 75 percent 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 percent 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 and 2010/11, 75 percent 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.
- For 2011/12, 75 percent of the final tax payable under salaries tax and tax under personal assessment would be waived, subject to a ceiling of HKD12,000 per case.
- For 2012/13 and 2013/14, 75 percent of the final tax payable under salaries tax and tax under personal assessment would be waived, subject to a ceiling of HKD10,000 per case.
- 75 percent of the final tax payable under salaries tax and tax under personal assessment would be waived, subject to a ceiling of HKD20,000 per case.
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 percent to 15 percent 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.
- The 2012 Budget increased the basic tax allowance and the single parent allowance from HKD108,000 to HKD120,000; and the married person's allowance from HKD216,000 to HKD240,000. The child allowance was increased from HKD60,000 to HKD63,000 for each child.
- The basic and additional child allowances were increased again in the 2013 Budget, from current HKD63,000 to HKD70,000 for each child. In addition, the deduction ceiling for self-education expenses will be raised from HKD60,000 to HKD80,000.
- The 2014 Budget increased the dependent parent/grandparent allowance to HKD40,000 (the additional allowance for residing with dependent parent/grandparent was also increased to HKD40,000). The deduction ceiling for elderly residential care expenses was increased to HKD80,000.
- The 2015 Budget included an increase in basic and additional child allowances from HKD70,000 to HKD100,000, beginning in 2015/16.
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 is 40 percent of the taxable value of cars for the first HKD150,000, increased from 35 percent; 75 percent on the next HKD150,000, up from 65 percent; 100 percent on the next HKD200,000, increased from 85 percent; and 115 percent on the remainder, a rise of 15 percent.
On the other hand, tax concessions for environmentally-friendly petrol cars rose from 30 percent, subject to a cap of HKD50,000 per car, to 45 percent, subject to a cap of HKD75,000 per car. However, the scheme was terminated on April 1, 2015.<
Effective December 5, 2005, the annual licence tax ranges from HKD3,929 to HKD11,329 on petrol-powered cars, and from HKD5,389 to HKD12,789 on diesel-powered cars, depending on engine capacity.
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 percent 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
The following allowances are deductible from assessable income for salaries tax purposes:
- Charitable contributions representing up to 35 percent 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 HKD80,000 per annum (from 2014/15).
- Home loan interest deductions from 2008/09 of up to HKD100,000 in any one year of assessment.
- A current pension allowance of up to HKD18,000 (from 2015/16) 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 HKD120,000 (2015/16).
- A married persons' allowance of HKD240,000 (2015/16).
- Child allowances of HKD100,000 for each dependant on the 1st to the 9th child (2015/16).
- Dependent parent, grandparent allowances HKD40,000 each (2014/15).
- Dependent disabled person's allowance of HKD66,000 (2015/16).
- Education allowance of HKD80,000 (2015/16) for any course which educates or assists an employee in his profession.