General

Salaries tax (Individual Income Tax) is charged on income arising in or derived from Hong Kong from:

¡P any office of employment or profit

¡P 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 respect 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:

¡P the benefit is not in the form of "money or money's worth"

¡P 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

¡P 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:

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

Deductions Allowed

Tax Thresholds (assuming no deduction)