Hong Kong Personal Income Tax's Contents:
1. Introduction to Salary Tax
2. Introduction to Property Tax
3. Hong Kong Estate Duty
Now the following is the details of HK Personal Income Tax:
HONG KONG INDIVIDUAL INCOME TAX
Hong Kong Personal Income Tax
1. Introduction to Salary Tax
2. Introduction to Property Tax
3. Hong Kong Estate Duty
HONG KONG SALARIES TAX
General
Salaries tax (Individual Income Tax) is charged on income arising in or derived from Hong Kong from:
• any office of employment or profit
• any pension.
Income that Subject to Salary Tax in Hong Kong
The income which is subject to salaries tax includes wages, salary, leave pay, fees, commission, bonus, gratuity, perquisites and allowance. Examples of payments which are not subject to salaries tax include severance payments and long service payments and employers' mandatory provident fund contributions up to 15% of the employees annual emoluments.
Source of Income
The rules which have been established for determining whether income derived from employment arises in or is derived from Hong Kong can be summarised as follows:
(1) Employees with Hong Kong employment are subject to salaries tax on all their income, irrespective of where they work, except in resp•ect of any income earned for services rendered in another territory which is taxed in that territory or unless the employee visits Hong Kong for not more than 60 days in any tax year.
(2) Employees with non-Hong Kong employment are only subject to salaries tax on that part of their income which is derived from services performed in Hong Kong. Therefore, employees with non-Hong Kong employment who work partly in Hong Kong and partly outside Hong Kong will be subject to Hong Kong salaries tax only in respect of income attributable to the proportion of their income which relates to services performed in Hong Kong. The apportionment can be done by reference to days in/out of Hong Kong or the value of the services performed in Hong Kong. If an employee is a visitor to Hong Kong who spends not more than 60 days on such visits in any tax year, no salaries tax will be payable in respect of services rendered during such visits.
For the purpose of these rules, a "non-Hong Kong employment" will normally only be found to exist where the following three factors (or at least the first two) are present:
(1) the contract of employment was negotiated and entered into outside Hong Kong and is enforceable outside Hong Kong
(2) the employer is resident outside Hong Kong
(3) the employee’s remuneration is paid outside Hong Kong.
The Commissioner generally takes the view that a resident cannot be a "visitor" and therefore a resident who is physically present in Hong Kong for not more than 60 days in a year of assessment is normally chargeable to salaries tax.
Directors’ Fees
Directors’ fees paid to the directors of a company which is controlled and managed in Hong Kong are chargeable to salaries tax irrespective of where the director resides. For this purpose any person holding a position similar to that of a director will be regarded as a director.
Deductions
Deductions from assessable income may be made for certain outgoings and expenses which have been wholly, exclusively and necessarily incurred in the production of the assessable income. It is, however, rare for an employee to succeed in making a claim for such a deduction. Accordingly, in Hong Kong, emphasis is placed on reducing assessable income by the use of non-taxable benefits rather than expenses in the case of salaries tax.
Non-salary Benefits
Non-salary benefits should be tax-deductible expenses for the employer and will, generally speaking, not be subject to salaries tax if:
• the benefit is not in the form of "money or money’s worth"
• in the case of a payment made by the employer for the benefit of an employee, the employer (and not the employee) has the primary obligation to pay for the benefit and no other person has guaranteed payment
• the benefit is not in connection with the education of a child of the employee.
Special tax rules apply to accommodation. The taxable amount is generally restricted to a maximum of 10% of the employee’s remuneration provided that certain conditions are observed. Holiday travel allowances are generally exempt provided the allowance is spent on travel.
Rates of Salaries Tax
Tax is charged on a progressive scale up to 17% after generous personal allowances but this is subject to a maximum effective rate of 15% applied to gross income. The amount of personal allowances to which a salaries tax payer is entitled depends on a person’s marital status and the number of children and other dependents.
Individual Income Tax Returns
Employers must file returns of remuneration paid to and benefits provided for employees and must notify the Commissioner of Inland Revenue when employees are employed or are about to leave employment. The procedure to be followed by an employer where an employee is about to leave employment is important and should be closely observed.
Provisional Salaries Tax
There is a system of provisional salaries tax in Hong Kong. A provisional assessment for the current year is made based on the previous year’s final assessment and tax is charged accordingly. Once the actual income for the year of assessment is known, a final assessment is issued based on the actual income crediting the provisional salaries tax already paid.
Salary Tax Rates
A person's income from an office, employment or any pension, less allowable expenses, charitable donations and personal allowances (see below), is chargeable to salaries tax at the following progressive rates:
Year of Assessment
2006/2007 Rates Year of Assessment
2005/2006 Rates
First $30,000 at 2% First $35,000 at 2%
Next $30,000 at 7% Next $35,000 at 8%
Next $30,000 at 13% Next $35,000 at 14%
On the remainder 19% On the remainder 20%
The maximum tax payable is, however, limited to tax at the standard rate of 16% on the person's income from employment less allowable expenses and charitable donations, but without a deduction for personal allowances.
Personal Allowances
Year of Assessment
2006/2007 Year of Assessmnt
2005/2006
HK$ HK$
Basic allowance 100,000 100,000
Married persons allowance 200,000 200,000
Child allowances
1st and 2nd child (each) 40,000 40,000
3rd to 9th child (each) 40,000 40,000
Dependent parent / grandparent allowance
not residing with taxpayer 30,000 30,000
residing with taxpayer 60,000 60,000
Dependent brother / sister allowance
(for whom no child allowance claimed) 30,000 30,000
Single parent allowance 100,000 100,000
Disabled dependant allowance (in addition to any allowances already granted for the disabled person) 60,000 60,000
Deductions Allowed
Training expenses 40,000 40,000
Home mortgage interest 100,000 100,000
Elderly residential care expenses 60,000 60,000
Tax Thresholds (assuming no deduction)
Income Level
2006/2007 2005/2006
No tax payable HK$ HK$
Single person / no children up to 100,000 up to 100,000
Married person / no children 200,000 200,000
Married person / two children 280,000 280,000
Married person / two children and two dependents 340,000 340,000
Tax at standard rate
Single person / no children over 983,334 over 770,000
Married person / no children 1,616,667 1,270,000
Married person / two children 2,123,334 1,670,000
Married person / two children and two dependents 2,503,334 1,970,000
HONG KONG PROPERTY TAX
The Scope of the Charge
Property Tax is charged on the owners of land and/or buildings in Hong Kong and is computed at the standard rate of 15% on the net assessable value of the property.
The Basis of Assessment
The assessable value is computed by reference to the actual rental income payable to the owner in respect of the right of use of the property. Examples of consideration to be included in the assessable value are rent, payment for the right of use of premises under licence, lump sum premium, service charges and management fee paid to the owner, and owner's expenditure (e.g. repairs) borne by the tenant. The net assessable value is the assessable value (after deduction of rates paid by the owner) less an allowance of 20% for repairs and outgoings.
Deductions Allowed
The following items can be claimed as deductions:-
(1) Rates if the owner is responsible for the payment of rates of the property;
(2) Consideration chargeable to tax which has become irrecoverable during the year of assessment (sums so deducted as irrecoverable rent and later recovered should be included in arriving at the assessable value in the year of recovery);
(3) A 20% notional allowance for repair and outgoings. This is a flat rate deduction irrespective of the actual amount spent and is to be given after deduction of rates and irrecoverable consideration.
Note: No other expenses are allowable for Property Tax purposes.
Properties for Owner's Business Use
If the income from property chargeable to Property Tax is included in the taxpayer's profits for Profits Tax purposes, or if the property owned by the taxpayer is occupied by him/her for business purposes, the amount of Property Tax paid may be deducted from the amount of Profits Tax assessed. Corporations carrying on a trade, profession or business in Hong Kong, on application made in writing to the Commissioner, may be exempt from paying the Property Tax which would otherwise be set off against their Profits Tax.
Hong Kong Estate Duty
The law governing Estate Duty in Hong Kong is set out in the Estate Duty Ordinance. Estate duty has the following characteristics:
1. It is based on the territorial principle and is thus only levied on property situate in Hong Kong. The deceased's nationality, residence or domicile are completely irrelevant in determining whether or not an estate duty charge arises. The following examples show when a charge arises and when a charge does not arise:
(1) Bank accounts: A charge arises if the bank account is located in the territory.
(2) Contract Debts: A charge arises on monies owing to the deceased by way of a contract debt if the debtor resides in Hong Kong.
(3) Registered Shares: Registered shares are located in Hong Kong if the share register is situated there.
(4) Bearer Instruments: are located at the place in which they are physically present at the time of death.
(5) Patents and Trademarks: are located in the jurisdiction in which they can be transferred according to the law under which they were created or registered.
2. Estate Duty Tax Rates: The tax is levied at progressive rates with no estate duty being payable where the value of the estate situate in Hong Kong is less than US$962,000 and a maximum rate of 15% being levied on the value of assets exceeding US$1,350,000.
3. Controlled Company Legislation: A deceased shareholder can 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 is deemed a "controlled company". The purpose of this legislation is to prevent avoidance of estate duty by the misuse of the corporate structure.
4. Quick succession relief is available and means that lower rates of estate duty are payable where assets change hands frequently as a result of several deaths closely connected in time (under 5 years).
5. 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.
6. For estate duty purposes no deduction is 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.
7. Assets which pass 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 are exempt from estate duty if either:
(1) Their value is less than US$26,000 or
(2) The gift was made in consideration of marriage or
(3) The gift was part of the deceased normal expenditure.
8. The following are exempt from an estate duty assessment:
(1) The deceased's matrimonial home is not included in the computation where he leaves the same to a surviving spouse.
(2) The proceeds of any life insurance policy paid out in Hong Kong are considered a separate estate in themselves.
(3) Thus if the value of the life insurance payment is less than US$962,000 no estate duty is payable on it irrespective of the value of the other assets comprising the estate.
(4) Assets which are located outside the territory of Hong Kong;
(5) Assets which are disposed of for a charitable purpose more than one year before death.
(6) 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.
(7) 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.
Remark:
On 2 November 2005, the Legislative Council in Hong Kong passed the Revenue (Abolition of Estate Duty) Bill 2005 seeking to amend the Estate Duty Ordinance ("EDO") with a view to abolish estate duty in Hong Kong. Please refer to the updates on Hong Kong tax law: Hong Kong Abolished Estate Duty.
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