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Income Tax Liability for Hong Kong Employees Who Render Services

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Income Tax Liability for Hong Kong Employees Who Render Services Newsletter Nr. 81 (EN ) Income Tax Liability for Hong Kong Employees Who Render Services Outside Hong Kong June 2017 All rights reserved © LORENZ & PARTNERS 2017 Newsletter Nr. 81 (EN) L&P Legal, Tax and Business Consultants Although Lorenz & Partners always pays great attention on updating information provided in news- letters and brochures we cannot take responsibility for the completeness, correctness or quality of the information provided. None of the information contained in this newsletter is meant to replace a per- sonal consultation with a qualified lawyer. Liability claims regarding damage caused by the use or dis- use of any information provided, including any kind of information which is incomplete or incorrect, will therefore be rejected, if not generated deliberately or grossly negligent. I. Introduction (MPF). Achievements from pension funds which are not established under the juris- In Hong Kong, personal income tax is diction of Hong Kong as well as severance known as “Salaries Tax” and is governed by payments and long service payments on the Inland Revenue Ordinance (IRO). Sala- termination of employment are also exclud- ries Tax is only levied on the annual income ed. of an individual deriving from their employ- ment. 2. Taxation rates in Hong Kong Income not generated through employ- There are two different methods of comput- ment, such as accrued dividends or profits ing Salaries Tax. It is the taxpayer’s right to realised through the sale of shares, is not opt for the alternative which leads to a lower subject to taxation in Hong Kong. tax burden: Any employee’s income is subject to Sala- a flat tax rate of 15 % on the as- ries Tax, whereas income of a self-employed sessable income after all deductions; or person is subject to “Profits Tax”. a progressive tax rate levied on the as- II. General Information sessable income after the deductions of expenses and allowances. 1. Territoriality Principle The progressive rates for the assess- Salaries Tax only applies to income arising ment years 2016/17 are as follows: from or generated through employment in Hong Kong. This is known as the Territori- HK$ 0 – 40,000 2% ality Principle. HK$40,000 – 80,000 7% HK$80,000 – 120,000 12% Section 8(1) IRO: (1) Salaries tax shall, subject to the provi- HK$120,000 and more 17% sions of this Ordinance, be charged for each year of assessment on every person in respect III. Salaries tax for services rendered of his income arising in or derived from Hong offshore Kong from the following sources- (a) any office or employment of profit; and 1. General view of Hong Kong’s In- (b) any pension. land Revenue Department (“IRD”) The definition of income in this context in- When determining whether Hong Kong is cludes remuneration, salary, allowances, bo- the “source” of a person’s employment for nuses and amounts representing the em- Salaries Tax purposes, the IRD takes the ployer’s voluntary contributions into pen- following three factors into consideration: sion funds, therefore excluding employer’s where the contract of employment was mandatory contributions in accordance with negotiated and entered into, and is en- the Mandatory Provident Fund Scheme forceable; and Lorenz & Partners June 2017 Page 2 of 5 Tel.: +852 252 814 33 e-mail: [email protected] Newsletter Nr. 81 (EN) L&P Legal, Tax and Business Consultants the place of residence of the em- 2. Services rendered offshore ployer; and the place of payment of the em- Hong Kong’s tax law provides clear regula- ployee’s remuneration. tions on taxation of income derived from services rendered outside Hong Kong: If all three conditions are fulfilled, the IRD will assume Hong Kong is the source of Section 8(1A) (b) IRO: employment, thus subjecting all income (1A) For the purposes of this Part, income arising out of such employment to taxation arising in or derived from Hong Kong from in Hong Kong. any employment: (a) […] The Hong Kong tax authorities will exam- (b) excludes income derived from services ine each individual case carefully. In case a rendered by a person who- taxpayer objects to the assessed tax, it is (i) is not employed by the Government likely that the IRD will demand substantial or as master or member of the crew documentation supporting the view of the of a ship or as commander or mem- taxpayer. ber of the crew of an aircraft; and (ii) renders outside Hong Kong all the The IRD will normally determine a Hong services in connection with his em- Kong employment if the employer is a ployment; and Hong Kong resident, even though the con- (c) excludes income derived by a person from tract of employment might have been nego- services rendered by him in any territory tiated and signed in another country. outside Hong Kong where- (i) by the laws of the territory where the The Board of Review, as the independent services are rendered, the income is appellate body of the IRD, issued the fol- chargeable to tax of substantially the lowing opinion in the case of an employee same nature as salaries tax under from the USA, employed by a Hong Kong this Ordinance; and company, whose employment contract was (ii) the Commissioner is satisfied that negotiated, signed and finalised in the USA: that person has, by deduction or oth- erwise, paid tax of that nature in “He (the employee) was not employed by any that territory in respect of the income. company in the United States and he was not subject to any master-and-servant relation Consequently, remuneration paid in Hong with any United States company. His mas- Kong deriving from services rendered out- ter-and-servant relation was clearly with the side Hong Kong is exempted from Salaries company in Hong Kong with whom he en- Tax, however, only if the salary has actually tered into an employment contract. In the cir- been taxed in a foreign jurisdiction. cumstances of this case the fact that he was physically in the United States when he re- IV. Deductions and allowances ceived the employment contract is not mate- rial.1” Hong Kong’s general tax rate is one of the lowest in the world. Therefore, tax deduc- tions are only available to a limited extent. There are three types of tax deductions available in total: Outgoings and Expenses; 1 Case No. D8/92, 7 IRBRD 107. Concessionary deductions, and Lorenz & Partners June 2017 Page 3 of 5 Tel.: +852 252 814 33 e-mail: [email protected] Newsletter Nr. 81 (EN) L&P Legal, Tax and Business Consultants Allowances (not applicable for tax- Further, if the employer pays the rent for an payers paying the flat tax rate). apartment in Hong Kong and provides it to his employee rent-free during the term of Deductible expenses in the assessment pe- their employment, the rental value will be riod 2016/17 are included in the employee’s taxable income: charitable donations up to 35% of the personal income; According to Section 9(1)(b)(c) IRO, the residential care expenses for parents rental value is part of the employee’s taxable and grandparents up to HKD 46,000 income: per year (the parents/grandparents must be aged 60 or above); (1) Income from any office or employment in- home loan interest up to HKD cludes- 100,000 per year, limited to a maxi- (a) […] mum of 15 years; (b) the rental value of any place of residence mandatory contributions to recog- provided rent-free by the employer or an as- nized retirement schemes up to HKD sociated corporation; 18,000 per year; (c) where a place of residence is provided by an depreciation on factories and ma- employer or an associated corporation at a chines, which are necessary for earn- rent less than the rental value, the excess of ing personal income; the rental value over such rent; […] personal allowance in the amount of HKD 132,000 (singles) and The law makes a distinction between cases HKD 264,000 (married persons); in which the employee’s residence is pro- child allowance in the amount of vided by the employer 100 % rent-free, as HKD 100,000 for each child and an opposed to cases in which it is provided for additional allowance of HKD 100,000 less than the normal rental value. in the year of birth; single parent allowance HKD 2. 100% rent-free 132,000; dependant parent, dependant grand- In cases where the residence is provided parent, dependant brothers and sisters 100% rent-free, the rental value to be added allowance ranging from HKD 46,000 to the taxable income will depend on the to HKD 80,000, depending on the age type of accommodation provided. of the parents/grandparents/siblings; disabled dependant allowance Type of Surplus in % HKD 75,000; accommodation (of total net Expenses of self-education income) HKD 100,000. Flat or serviced apartment 10% Two rooms in a hotel, 8% V. Housing Benefits hostel or boarding house One room in a hotel, hostel 4% 1. Introduction or boarding house Housing Benefits are not deductible from If the residence provided is shared by more tax, which is a factor that has to be consid- than one employee, the surplus rates for a ered when calculating an individual’s taxable hotel, hostel or boarding house apply. income. Lorenz & Partners June 2017 Page 4 of 5 Tel.: +852 252 814 33 e-mail: [email protected] Newsletter Nr. 81 (EN) L&P Legal, Tax and Business Consultants 3. Provision for less than the normal normal rent and the rent actually paid by the rental value employee is added to the employee’s taxable income (Section 9 (1)(c) IRO).
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