Income from employment includes salary, bonuses, commission, leave pay, fees, gratuities, living allowances, foreign services allowances, education benefits and reimbursement of salaries tax. Ten percent of the income is calculated as the rental value of employer-provided accommodation which is taxable to the employee.
SOURCE OF INCOME
Hong Kong Employment
Service rendered for a Hong Kong employer are deemed Hong Kong source and are subject to salaries tax regardless of where the services are performed unless all the services are rendered outside Hong Kong.
An exemption from tax is allowed on income from services rendered outside Hong Kong where foreign tax of substantially the same nature as salaries tax has been paid on that income.
Only income derived from services performed in Hong Kong for a foreign employer is subject to salaries tax. If an individual works both in Hong Kong and overseas, it may be possible to exclude income related to services performed overseas by apportionment of the total income on a time basis. To be eligible for time-apportionment, the following factors must be met:
- The employer must be resident outside Hong Kong.
- The employment contract, must be entered into, negotiated, and concluded outside Hong Kong.
- The employee's salary must be paid to a bank account outside Hong Kong.
If a person derives income from an employment and renders services during a visit or visits to Hong Kong which do not exceed a total of 60 days in a year of assessment then that income will be exempt from Hong Kong salaries tax. This rule applies for both Hong Kong and foreign employments.
Directors' services are deemed to be rendered in the place where the central management and control of the company is located. The 60 days rule does not apply.
DEDUCTIONS AND EXEMPTIONS
To claim a deduction from income, an expense must be wholly, exclusively and necessarily incurred in the production of assessable income. Capital allowances can be
claimed on plant and machinery used in the production of taxable income. Charitable donations are also deductible.
Certain employer-provided benefits may be tax-free.
Generally, employer provided accommodation is assessed on a deemed value equal to 10% of the employee's salary income. Due to the high cost of housing in Hong Kong, employer provided accommodation usually results in less income chargeable to tax.
The value of holiday passage granted to an employee and his or her family is exempt from salaries tax. An allowance for the purchase of holiday passage is also exempt provided the allowance is actually expended for that purpose.
Other fringe benefits including a company car, club memberships, medical benefits may be structured tax free. Stock options granted to employees will be taxed at the time when it is exercised. The value to be assessed is the excess of the market price of share at that time over the price paid to the employer.
Individuals with different sources of income such as employment, business and property income may elect to be taxed under personal assessment. Income from all sources is aggregated in a single assessment. Personal assessment is only available to Hong Kong residents who make an election. Personal assessment will generally benefit those taxpayers with low income, business losses or loan interest paid to earn the property income.
Tax payable under salaries tax and personal assessment are calculated under the same method. The income reduced by personal allowances is taxed at progressive tax rate scale ranged from 2% to 20% in the year 1995. It is compared with a flat rate of 15% on the total income and the lower amount of tax is payable. The personal allowances available are basic personal allowance, married person, children, dependent parent/grandparent, single parent and disable dependent allowance.
Employers are required to file the following returns in respect of their employees:
- The commencement return must be filed on each new employee within 90 days of commencement of employment;
- The annual return must be filed to report the actual remuneration of each employee during the past tax year. The filing is required to be done within one month of issue and is usually due on April 30; and
- The employer is required to file a cessation/departure return for employees who leave Hong Kong for a period longer than one month. The notice is required to be filed one month prior to departure.
There is no withholding requirement on payments to employees, except where the employee is departing Hong Kong. In this case, payments must be withheld for one month unless the Commissioner has given a tax clearance.
Employees are required to file their own individual tax return forms, reporting all their assessable income. The tax forms are issued around May 1 of each year, and due for filing within one month.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
For further information contact Yvonne Chan on tel: +852 2852 0315, fax: +852 2541 2936, or e-mail directly to Yvonne.S.Chan@arthurandersen.com or enter a text search 'Arthur Andersen' and 'Business Monitor'.