Hong Kong’s favorable salary tax regime helps to make it an attractive destination for relocation. Capital gains and overseas income are not taxed. Hong Kong’s personal income tax, or salary tax, falls into four brackets: 2%, 7%, 12% and 17%. Hong Kong’s salary taxation regime is transparent and effective while not being onerous.
Personal Income Tax in Hong Kong: Who pays salary tax?
Any individual earning income from a place of employment, office or pension is subject to Salary Tax. However, self-employed individuals will pay profit tax instead.
The territorial principle of taxation ensures that only income, which has its primary source in Hong Kong, is subject to salary tax. The application of this principle to salary tax is usually much more straightforward than its application to profit tax. If your employer is a Hong Kong entity, your income from that employer will be subject to Hong Kong tax. However, if you offer consulting services internationally to overseas clients and fully conduct your service overseas, then your income from this work will not be subject to Hong Kong salary tax. If remuneration is paid within Hong Kong, the inland revenue department may be less inclined to accept it as foreign-sourced. Additionally, the contract governing the income should be negotiated, signed, and enforceable outside of Hong Kong.
Personal Taxable Income in Hong Kong
Assessable income in calculated as:
Total income – non-assessable income – permitted deductions – personal allowances = net taxable (or chargeable) income
- Payments in lieu of notice from an employer.
- Statutory severance payments: payment beyond the statutory minimum are taxable.
Permitted deductions include the following:
- Expenses of Self-education – This may include tuition and examination fees for courses.
- Approved Charitable Donations – The deduction of an approved charitable donation may not be less than HK$100. Details of tax-exempt charities are listed in Section 88 of the Internal Revenue Ordinance.
- Contributions to a Mandatory Provident Fund Scheme – Deductions for mandatory contributions to a mandatory provident fund scheme or contributions to a recognized occupational retirement scheme may be claimed. Voluntary contributions may not be claimed as deduction.
- Home Loan Interest – For the acquisition of a home in Hong Kong, interest paid on such loans are deductible expenses. In order to be eligible for this deduction, you must be the owner of property as shows in the land registry, the dwelling is your personal place of residence (either wholly or partly), you pay home loan insurance for that property, the lender is either the government, a financial institution, a registered credit union, a licensed money lender, the Hong Kong Housing Society, your employer, or an organization or association approved by the Commissioner of Inland Revenue.
- Expenses on Elderly Residential Care – Fees paid to a residential care home are eligible for deduction.
- Depreciation – Depreciation of capital machinery used to generate taxable income is deductible.
Allowances Claimable Under Salary Tax
- Basic Allowance – Non-married individuals are entitled to a basic allowance.
- Married Person’s Allowance – To claim a married person’s allowance you must not be living apart from your spouse and your spouse may not have income chargeable to salaries tax. The internal revenue ordinance states that “marriage” refers to heterosexual marriages. It further states that a “husband” is a married man and a “wife” is a married woman and a “spouse” refers to either husband or wife.
- Child Allowance – You may claim a child allowance if you have a child that is unmarried, under the age of 18, or between the ages of 18 and 25 and receiving full time education at a university, college, school or other similar educational establishment. You may also claim a child allowance if you have a child over the age 18 that is disabled and unable to work due to physical or mental impairments. A child is defined as your own child, your adopted child, your step child, or the child/adopted child/step child of your spouse or former spouse.
- Dependent Brother or Sister Allowance – You may claim a dependent brother or system allowance if you or your spouse has a sibling that is under the age of 18, or between the ages of 18 and 25 and receiving full time education at a university, college, school or other similar educational establishment. A “brother” or “sister” in the Inland Revenue Ordinance refers to your natural, adopted, or step brother or sister, or the natural, adopted, or step brother or sister of your spouse or deceased spouse.
- Dependent Parent or Grandparent Allowance – To be eligible for this allowance, you must have a parent or grandparent that is at least partially a resident of Hong Kong, 55 years of age or older (or eligible to claim this allowance under the Government’s Disability Allowance Scheme).
Expatriates working in Hong Kong, often accustomed to expensive benefits from a multinational corporation employer, should remain aware that most employer benefits are considered taxable income. These include but are not limited to a car given by the company, holiday journey allowances, share awards, share options, meal allowance, education benefits for your children, and housing allowances. Non-cash allowances may be taxed, though using special methods.
Individual tax returns are issued by the Inland Revenue Department on May 1st and individuals must file the tax returns within one month.
Filing an Objection
If you disagree with the tax bill, objections may be lodged within 30 days. Failure to file tax returns on time may result in penalties issued by the Inland Revenue Department. If you have an eTax account, you may lodge an electronic objection.
The tax year of assessment is from April 1st through March 31st.
Notification of Changed Circumstances
A taxpayer should notify the Inland Revenue Department within one month in the event of a change in relevant circumstances. This may include a change of address listed on the tax return or intention to department from Hong Kong.