Hong Kong Personal Taxation

Hong Kong Salaries Tax

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 (raised to 16% in the 2003/2004 budget); or
A progressive rate levied on "assessable income" after the deduction of allowances. (But see below for later changes.) These progressive rates were:
- Nil to HKD30,000 - 2%
- HKD30,000 to HKD60,000 – 8%
- HKD60,000 to HKD90,000 – 14%
- HKD90,000 upwards – 20%

The first measure in 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%. In the following year's budget further relief was announced: 50% of the 2006-07 salaries tax or tax charged under personal assessment is waived subject to a ceiling of HKD15,000 per assessment. The standard rate will remain unchanged.

The second measure 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 contained the following changes to provide personal tax relief in the 2007-08 year.

The first measure is to revert the marginal tax bands and rates of salaries tax to their 2002-03 levels. Each marginal tax band was widened from HKD30,000 to HKD35,000, and the highest two marginal tax rates were reduced from 13% and 19% to 12% and 17%.

The second measure increased the child allowance under salaries tax from HKD40,000 to HKD50,000 for each child and introduce an additional child allowance of HKD50,000 in the year of assessment in which the child was born.

The third measure increased the maximum amount of salaries tax deduction for self-education expenses from HKD40,000 to HKD60,000.

Hong Kong Special Administrative Region (HKSAR) Chief Executive, Donald Tsang, announced during his Policy Address to the Legislative Council in October 2007, cuts in both salaries and profits taxes in 2008-09.

"Hong Kong will reduce Salaries Tax To 15% in 2008-09," he said.

The territorial principle of only taxing income arising or derived from a trade within Hong Kong has resulted in reduced or nil tax being levied in a variety of situations. Thus:

In the February 2009 budget announcement, Financial Secretary John Tsang proposed a one-off tax reduction of 50% of salary tax, and tax under personal assessment for 2008-09, subject to a ceiling of HKD6,000.

Individuals having business profits or rental income, if eligible, can enjoy the reduction by electing personal assessment. Under personal assessment, they will enjoy a reduction of 50% of the 2008-09 final tax, subject to a ceiling of HKD6,000 per case.

Under salaries tax, the ceiling of HKD6,000 per case is applied on 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.

The tax reduction will be reflected in the tax bill in 2009-10. Most taxpayers will receive their tax bills, with the reduction duly reflected, starting from the third quarter in 2009. As in previous years, salaries tax will generally fall due in January 2010.

Tsang also proposed to:

The following information describes Hong Kong personal taxes prior to the 2009 budget.

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.

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.

The following allowances are deductible from assessable income for salaries tax purposes:

Charitable contributions representing up to 10% of an individual's income;
A residential care allowance in respect of a parent or grandparent of up to USD7,700 per annum.
Home loan interest deductions of up to USD12,800 per annum, for 7 years.
A current pension allowance of up to USD1,550 per annum conditional on the monies being invested in a recognized pension fund.
Depreciation allowances on all plant and machinery essential to the production of income subject to salaries tax.
A single person's allowance of USD12,500
A married persons' allowance of USD25,000
Child allowances of USD3,850 on the first and second child and USD1,925 thereafter.
Dependent parent, grandparent,sister, brother sibling (to include more than one where necessary) - allowances USD3,850 each.
Dependent disabled person's allowance of USD7,700
Education allowance of USD3,850 for any course which educates or assists an employee in his profession.

Hong Kong Estate Duty

The Revenue (Abolition of Estate Duty) Ordinance 2005 ["the Ordinance"] came into effect on February 11, 2006. No estate duty affidavits and accounts need to be filed and no estate duty clearance papers are needed for the application for a grant of representation in respect of deaths occurring on or after that date. The estate duty chargeable in respect of estates of persons dying on or after July15, 2005 and before February 11, 2006 ("transitional estates") with the principal value exceeding $7.5 million will be reduced to a nominal amount of $100.

The old law is set out in the Estate Duty Ordinance. Estate duty had the following characteristics:

It was based on the territorial principle and was thus only levied on property situate in Hong Kong. The deceased's nationality, residence or domicile were completely irrelevant in determining whether or not an estate duty charge arose. The following examples show when a charge arose and when a charge did not arise:
- Bank accounts: A charge arose if the bank account was located in the territory.
- Contract Debts: A charge arose on monies owing to the deceased by way of a contract debt if the debtor resided in Hong Kong.
- Registered Shares: Registered shares were located in Hong Kong if the share register is situated there.
- Bearer Instruments: were located at the place in which they were physically present at the time of death.
- Patents and Trademarks: were located in the jurisdiction in which they can be transferred according to the law under which they were created or registered.

Estate Duty Tax Rates: The tax was levied at progressive rates with no estate duty being payable where the value of the estate situate in Hong Kong was less than USD962,000 and a maximum rate of 15% being levied on the value of assets exceeding USD1,350,000.
Controlled Company Legislation: A deceased shareholder could be assessed to estate duty on the value of Hong Kong situate assets owned by a resident or non resident company in which the deceased had a shareholding provided the company was deemed a "controlled company". The purpose of this legislation was to prevent avoidance of estate duty by the misuse of the corporate structure.
Quick succession relief was available and meant that lower rates of estate duty were payable where assets changed hands frequently as a result of several deaths closely connected in time (under 5 years).
Penalties for delayed payment are severe and include an interest rate of 8% per annum and the doubling of the rate of estate duty payable.
For estate duty purposes no deduction was allowed for debts owing by the deceased except where those debts were contracted in Hong Kong to a person ordinarily resident in Hong Kong or alternatively charged on property situate in Hong Kong.
Assets which passed up to 3 years prior to death by way of an inter-vivos gift are deemed to be part of the estate for estate duty purposes. However such gifts were exempt from estate duty if either:
- Their value was less than USD26,000 or
- The gift was made in consideration of marriage or
- The gift was part of the deceased normal expenditure.
The following were exempt from an estate duty assessment:
- The deceased's matrimonial home was not included in the computation where he left the same to a surviving spouse.
- The proceeds of any life insurance policy paid out in Hong Kong were considered a separate estate in themselves. Thus if the value of the life insurance payment was less than USD962,000 no estate duty is payable on it irrespective of the value of the other assets comprising the estate.
- Assets which were located outside the territory of Hong Kong;
- Assets which were disposed of for a charitable purpose more than one year before death.
- Any property passing on death and held by the deceased as a trustee under a trust formed more than 3 years before death. Alternatively any property passing on the death of the deceased and held by the deceased under a trust not formed by the deceased.
- Property consisting of a pension, annuity, lump sum gratuity, or other similar benefit passing on the death member of a recognized occupational retirement scheme under the terms of that scheme.

Legislation that sought to abolish estate tax in Hong Kong was gazetted in May, 2005.

According to a government spokesman, the move was seen as vital in attracting and retaining foreign investment in Hong Kong, and was supported by the majority of respondents to a public consultation on the proposals, carried out in 2004.

"In recent years, global financial services have experienced phenomenal growth. The financial markets in the Asia-Pacific region have also quickened the pace of their development. Hong Kong is looking at unprecedented opportunities in this sector, but at the same time faces increasing competition," the spokesman observed, continuing:

"A number of countries in the region, including India, Malaysia, New Zealand and Australia, have abolished estate duty over the past 20 years. Hong Kong must not lose out in this race.

"The abolition will encourage people, including overseas investors, to hold assets in Hong Kong through a Hong Kong corporate vehicle or trust. Those who currently avoid the tax through overseas investments will also be encouraged to transfer their investments back to Hong Kong.

"The further development of the high value-added asset-management industry will foster growth in a number of professional services, and other industries will also benefit, bringing significant economic benefits to the community as a whole.

"Apart from attracting or retaining capital to promote the development of Hong Kong's financial services industry, the proposed abolition of estate duty will also reduce the time taken for obtaining the grant of probate or letters of administration, thereby helping to ease cash-flow problems heirs to an estate currently face, particularly for operators of small and medium enterprises."

It is estimated that the abolition of estate duty will cost the Government annual tax revenues of around $1.5 billion. However, the abolition of estate duty is expected to encourage investments in both financial assets and the property market in Hong Kong, thereby contributing additional revenue from stamp duty and other taxes.

Hong Kong Gifts Tax

Gift tax is levied at a progressive rate. Inter-vivos gifts which are not made for valuable consideration attract stamp duty of up to 2.75% where the gift has a value in excess of USD513,000 whereas no tax is payable if the gift is worth less than USD128,000 or where the recipient is a charitable organization.

Hong Kong Property Tax

Property tax is levied annually on the owner or occupier of real estate located in Hong Kong. Since ownership may be split (eg an entity with a 100 year lease may grant a 50 year sublease to a 3rd party) separate assessments may be made on the same parcel of land. Property tax, which is governed by the provisions of the Inland Revenue Ordinance, has the following characteristics for individuals:

The annual assessment to property tax is based on 100% of the annual rental income of the property less any rates paid, any bad debts, a repairs and outgoings allowance constituting a maximum of 20% of the annual rental income (irrespective of whether or not more was actually spent) and other allowable deductions. In determining "rental income" the Inland Revenue will include any premiums, service charges, management fees, rates, repairs and outgoings paid by the tenant either to the owner or on behalf of the owner under the terms of the lease. In order to assist the inland revenue to assess the rental income the owner is obliged to keep records for up to 7 years and inform the tax authorities of the actual sums received.
Property tax is based on the territorial principle and is levied on buildings, parts of buildings, wharves, piers and other structures located in Hong Kong. The fact that the owner is non resident, non domiciled or a national of a foreign country is completely irrelevant and does not exempt him from having to pay this tax.
The tax rate is 15% (2008/9) of the assessed annual rental income.
Property tax is levied on a provisional assessment basis which takes into account the previous year's rental income with a tax credit being granted where the previous year's rental income exceeds the current year's rental income. Relief is also given where part of the assessed rental income is a bad debt.
It is advisable for properties to be owned by Hong Kong corporate entities since property tax does not make allowances for either depreciation or interest costs on a loan to finance the purchase, while such costs are deductible for corporate profits tax purposes.

Rates are levied annually and are payable by the occupier of premises (although the owner retains legal responsibility for payment of the same in the event of default by the occupier). The value of a property is based on its rental value. The annual rates tax is 4.5% of the annual value of the premises as determined under the Rating Ordinance.

Hong Kong Social Insurance

Social insurance payments in Hong Kong are in the nature of a private arrangement. However, in 2000 the government passed the Mandatory Provident Fund Ordinance. As from December 1, 2000 all employees and self employed individuals earning more than HKD4,000 per month had to contribute a minimum of 5% of their salary up to maximum amount.

Sums paid in are tax deductible for the purposes of profit tax where paid in by the employer and tax deductible for the purposes of salaries tax where paid in by the employee.

Currently payments to retirement schemes registered under the Occupational Retirement Schemes Ordinance can be made and are tax deductible so long as they do not exceed 15% of the taxable remuneration of the employee. Lump sum contributions are tax deductible on a straight-line basis over a 5 year period.

Hong Kong Stamp Duty

The laws on stamp duty are set out in the Stamp Duty Ordinance. Stamp duty is either a fixed fee or is calculated ad valorem depending on the nature of the transaction. As far as individuals are concerned, it is payable on:

Leases, assignments and conveyances of immovable property.
The transfer of shares or marketable securities
The transfer of bearer instruments (being instruments under which ownership is transferred through physical delivery).

Immovable Property Stamp Duty Rates

2 separate rates of stamp duty are payable on immovable property:

The Conveyance of a Freehold or the Assignment of a Leasehold: The rate of stamp duty is progressive and varies from HKD100 to 3.75% if the value of the transferred interest is more than HKD6,720,000. The 2007 Finance bill reduced the stamp duty rate on transactions of properties with a value between HKD1 million and HKD2 million from 0.75% to a fixed amount of HKD100.
The Granting of a Short-Term Lease: The stamp duty rate is progressive and varies between 0.25% and 1% of the annual rental value depending on whether the lease is for less than one year or more than 3 years. Any agreement which increases the rent reserved by a chargeable stamped lease is itself chargeable to stamp duty in respect of the additional rent which it makes payable.

The following immovable property transactions are exempt from stamp duty:

Non-Residential Property: Instruments transferring "non residential property" are exempt from stamp duty. Non-residential property is defined as property which may not by law be used at any time for residential purposes.
Gifts to Charitable Institutions or Public Trusts: Instruments transferring immovable property by way of gift to a charitable institution or public trust are exempt from stamp duty.
Approved conveyances on sale to diplomatic or consular bodies.
Mortgages: Mortgages are free of stamp duty.

Immoveable Property Stamp Duty Anti-Avoidance Provisions

There are elaborate anti avoidance provisions in place aimed at deterring speculation. Thus where the beneficial owner of real estate executes an instrument in favor of a third party under which he undertakes to hold the real estate on trust for the third party duty is payable on this instrument as if a conveyance had taken place. Likewise stamp duty is payable where under an uncompleted contract of sale the vendor is deemed by law to hold on trust for the purchaser.

Stamp Duty Payable on Shares & Marketable Securities

Stamp duty of 0.1% is payable on the transfer of shares or marketable securities, unless the transfer is a voluntary disposition inter vivos in which case the rate is double.

Securities Transactions Exempted from Stamp Duty

The following transactions are exempt from stamp duty:

Loan capital transactions, bills of exchange, promissory notes, certificates of deposit, exchange fund debt instruments and Hong Kong multilateral agency debt instruments.
Transactions involving debentures, loan stocks, funds bonds or notes that are not denominated in Hong Kong currency except to the extent that they are redeemable in that currency.
Stock donated to charitable bodies or public trusts which are exempt from taxation in Hong Kong.

Stamp Duty Payable on Bearer Instruments