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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.
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.
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.
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 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.
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
HKD7.5 million will be reduced to a nominal
amount of HKD100.
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 HKD962,000 and a
maximum rate of 15% being levied on the
value of assets exceeding HKD1,350,000.
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 HKD26,000 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 HKD962,000 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.
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 HKD513,000 whereas no tax is payable if
the gift is worth less than HKD128,000 or
where the recipient is a charitable organization.
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% (from 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.
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.
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.
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
The
amount of stamp duty payable is 3% of the value
of the instrument transferred.
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