Hong Kong adopts a territorial source system. Only income from employment arising in or derived from Hong Kong would be subject to salaries tax in Hong Kong. The source of employment, whether it is Hong Kong sourced or non-Hong Kong sourced, would typically be a key factor in determining the taxability of employment income in Hong Kong.
Hong Kong employment vs non-Hong Kong employment
To determine the source of employment, the IRD would usually take into considerations the following three factors:
- The place of residence of employer
- The place where the employment contract is negotiated, entered into and is enforceable
- The place of payment of the employment remuneration.
The employment would generally be regarded as non-Hong Kong sourced if the above three factors are performed outside of Hong Kong; nevertheless, the IRD may also take the totality of facts approach and look at other relevant factors when determining the source of an employment.
For Hong Kong sourced employment, the income derived would generally be regarded as sourced in Hong Kong and fully subject to Hong Kong salaries tax. Exemption claims, for example, the 60-days exemption claim for visitors, the unilateral tax relief credit claim and claim of no services rendered in Hong Kong, would be available if the exemption criteria are met; while for non-Hong Kong employment, time-basis apportionment with reference to the number of days spent outside Hong Kong would be allowed and only those income derived from services rendered in Hong Kong would be subject to salaries tax in Hong Kong. In view of the different tax treatments for Hong Kong and non-Hong Kong employments, expatriates are recommended to properly structure the Hong Kong assignment with employers before the commencement of employment in Hong Kong.
Kindly note that the expatriates would have to lodge the tax exemption or time apportionment claim on a year-by-year basis during the annual tax filing, and keep sufficient documentation to substantiate the claim to the IRD; otherwise, the employment income may be fully subject to salaries tax in Hong Kong.
Tax treatment for housing benefits
Expatriates would usually be provided with housing benefits during the term of employment in Hong Kong. Tax efficiency could be enhanced if the housing benefits are well structured.
For housing benefits offered by employers in form of provision of a rent-free/rent-subsidized accommodation rather than a cash allowance, the taxable amount of the housing benefits would potentially be reduced since the former would be taxed based on a deemed rental value (usually at 10%, of the taxpayer’s assessable income) or at the actual housing benefits received, whichever is lower. On the other hand, if housing would be provided in the form of cash allowance, the amount would be fully considered as a taxable income in Hong Kong.
Kindly note that the IRD may review details of the housing benefits arrangement during the tax filing review. The documents/information to be requested usually include, but not limited to, the employment contract together with the Hong Kong assignment contract (if any), the tenancy agreement, rent payment receipts, details of the housing benefit scheme, and the control taken by the employer over the rental reimbursement (if applicable). It is, therefore, important to have the employment/assignment contract properly drafted to include the terms for housing benefits in order to successfully enhance tax efficiency.
Tax treatment for stock option
Salaries tax is payable on benefits associated with stock-based awards arising from your office or employment in the form of share awards and share options. If expatriates are granted the right to acquire shares within a period of time in the future (i.e. a share option), he/she will be assessed on a notional gain at the time he/she exercises, assigns or releases that option, but not when the option is granted. Shares awarded not in the form of options may also give rise to a benefit assessable as a perquisite (e.g. vesting period). If so, it would be assessed in the year the benefits of the shares become fully entitled. Kindly note any gain or loss realized from the subsequent sale of the shares would usually be non-taxable or non-deductible.
Tax treatment for travelling allowances
If expatriates receive a first appointment passage or take a home journey immediately after the termination of employment in Hong Kong, the relocation allowance should not be considered as a taxable income. However, any amount paid by employer in connection with a holiday journey would be taxable. The taxable amount includes expenses for air, land or sea transportation, accommodation, meals, sightseeing tours, travel insurance, and visa fees, etc. paid or reimbursed by employer. Nevertheless, journeys for business purpose would not trigger a taxable event.
Tax treatment for directorship
If expatriates hold the capacity of a director rather than an employee in Hong Kong, the tax treatment of directorship would be different from employment discussed above. In general, if the expatriate is a director of a company resident in Hong Kong, the full director fee derived would be chargeable to salaries tax in Hong Kong, regardless of the number of days during the year of assessment that the expatriate stays in Hong Kong, and no exemptions or relief would be available.
For cases with dual capacity in Hong Kong, that is, when the expatriate acts as both the director and employee of a Hong Kong resident company, a proper classification of director fee and employment income should be established and well documented due to the different tax treatments of the two types of income.
Double tax relief
Double taxation may arise when the employment remuneration earned by an expatriate is taxed both in Hong Kong and in the foreign tax jurisdiction(s), for example, in his/her home country due to taxation of worldwide income in home country. Nevertheless, expatriates may be entitled to claim unilateral tax credit relief, or given that the expatriate is a Hong Kong resident person, he/she may claim double taxation relief by way of tax credit in respect of the income derived from services rendered by him/her in a territory which has made a comprehensive double taxation agreement or arrangement with Hong Kong.
In view of the above, tax efficiency could be enhanced if the Hong Kong assignment is well planned and structured in advance.