Tax Facts - Hong Kong

Gerard Associates Ltd. Financial Advisory Services does not provide individual tax advice, and nothing contained in this briefing should be construed as such. We make every effort to ensure the accuracy of the information but cannot be held responsible for any liability arising.

It is essential that all clients seek tax advice specific to their own personal circumstances with the relevant tax professional of the jurisdiction(s) in which you are liable to tax.

This has been prepared based on our understanding of current legislation and tax practice as at the date above. However, these are subject to change, and may result in income tax consequences different from those detailed below.

We cannot accept responsibility for its interpretation or any future changes to law.

Introduction

As the Special Administrative Region of China, taxation in Hong Kong is very different to the tax regime in China.

Taxes are collected by the Inland Revenue Department (IRD). There are three categories of income taxes in Hong Kong, i.e. Salaries Tax (“HKST”), Property Tax and

Profits Tax.

Tax Year

1st April to 31st March.

Assessment Basis

Taxation in Hong Kong is based on a territorial source principle, therefore only income sourced in Hong Kong is taxed.

Prior to 1 April 1990, married couples submitted joint/aggregated assessments, since then separate taxation applies. Married couples who are disadvantaged by separate assessment may elect to carry on with aggregated assessments.

Income Tax

In Hong Kong HKST is only levied on income "arising in or derived from a Hong Kong employment". The definition of income includes wages, salaries, bonuses, commissions, pensions, gratuities and “deemed rental value” of property provided to an employee by an employer and other assessable benefits. There are various allowable deductions including charitable donations, elderly residential care, self-education expenses and mortgage interest. There are also a series of allowances dependent on family structure.

The tax levied is the lesser of:

• 16% (2007/08) of "assessable income" after allowable deductions but before allowances or
• A progressive rate levied on "assessable income" after deductions and allowances. The rates range from 2% to 17% (2007/08).

Taxation of Investment Income

There are no investment income taxes in Hong Kong.

Tax on Property Rental Income

Property tax is also based on the territorial principle and is levied annually on the owner of rent-producing real estate located in Hong Kong. The annual assessment to property tax is based on 100% of the annual rental income of the property less any rates paid, and a flat allowance of 20% of the annual rental income after deduction of rates in respect of repairs and other costs (irrespective of the amount actually spent) is available. The tax rate is 16% of the assessable income for 2007/08.

Wealth Taxes

There are no wealth taxes in Hong Kong.

Capital Gains Tax

There is no capital gains tax in Hong Kong.

Inheritance and Gift Tax

Estate Duty was abolished effective 11 February 2006, therefore estates of persons who passed away on or after this date are not subject to estate duty.

Estate duty chargeable in respect of deaths occurring between the period from 15 July 2005 to

10 February 2006 with the taxable estate value exceeding $7.5 million is reduced to a nominal duty of $100. In respect of deaths occurring prior to 15 July 2005, estate duty is levied at progressive rates with a tax- free allowance (HK$7.5million), then at 5%, 10% or 15%. There are a series of exemptions and reliefs available depending upon the circumstances.

Inheritance tax or Estate Duty in Hong Kong is based on the territorial principle and is only levied on property situated in Hong Kong. The deceased's nationality, residence or domicile is irrelevant in determining whether or not an estate duty charge arises.

Regional and Municipal Taxes

Rates are levied annually and are payable by the occupier of premises (although the owner retains legal responsibility for payment). The value of a property is based on its rateable value (which usually approximates its market rental value). The annual rates tax is 5% of the annual rateable value of the premises.

Property Taxes

A tax, known as property tax, is applied to rental income the details of which are shown under the taxation of rental income above.

Stamp Duty/Transfer Tax

Stamp Duty in Hong Kong is based on the territorial principle and is payable on Hong Kong-situs leases, assignments and conveyances of immovable property, the transfer of shares or marketable securities and the transfer of bearer instruments.

Stamp duty is either a fixed fee or is calculated as a proportion of the asset value depending on the nature of the transaction. Stamp Duty in respect of share transfers is 0.2%, whilst immovable property transfers are taxed at progressive rates to a maximum of 3.75%. A series of exemptions exist for stamp duty transactions.

Sales Tax

There is no sales tax in Hong Kong.

Social Security Contributions

Social insurance payments in Hong Kong are in the nature of a private arrangement. However, in 2000 the Government passed the Mandatory Provident Fund Ordinance to make pension contributions compulsory for qualifying individuals.

As from 1st December 2000 all employees and self employed individuals who are aged between

18 and 65 earning more than HK$5000 per month generally have had to contribute a minimum of

5% of their relevant income up to a maximum level of income of HK$20,000 per month for contribution purposes therefore the maximum amount payable is HK$1,000 per month. The employer usually has to contribute the same amount each month also.

Taxation of Expatriates Living in Hong Kong

As taxes in Hong Kong are based on the territorial principle, nationality, residency or domicile are not relevant in determining whether an individual is liable to tax.

Liability to tax is assessed on an individual’s employment income to the extent that it arises in or is derived from Hong Kong. Income arises in, or is derived from, Hong Kong if it is earned from employment bearing a locality in Hong Kong or if it relates to services performed in Hong Kong. Whether a person has a Hong Kong employment is determined by a number of factors, including whether that person has entered into a contract with a Hong Kong employer or resident company.

Hong Kong has comprehensive double taxation agreements in place with Belgium, China and Thailand only. The Hong Kong government is currently negotiating a number of double taxation agreements of various types.

Taxation of ‘Non-Residents’ in Hong Kong

The liability to HKST on employment for an individual depends on whether the remuneration is received from an office in Hong Kong, from Hong Kong employment or from non-Hong Kong employment.

If remuneration is from Hong Kong employment an individual is fully taxable unless they render services entirely outside Hong Kong or spend not more than 60 days on visits to Hong Kong during any tax year, of which a full income exemption is available. Where an individual renders services partly in Hong Kong and partly in foreign territories, and the foreign services are subject to a tax which is similar to HKST in that particular country, only that part of income relating to the Hong Kong services will be subject to Hong Kong tax.

If remuneration is from non-Hong Kong employment, an individual will only be liable to tax in Hong Kong if their visits to Hong Kong exceed 60 days during any tax year. Where an individual stationed in Hong Kong on regional duties is required to travel frequently outside Hong Kong, they may apply to pay tax on a time apportionment basis by reference to the number of days spent

in Hong Kong during the tax year. In this case the individual's income for foreign duties does not have to be subject to tax.

A person will generally be regarded as having a non-Hong Kong employment where:

• Their employer is resident outside Hong Kong; and
• The contract of employment has been negotiated and concluded and is enforceable outside Hong Kong; and
• The remuneration is paid to the employee outside Hong Kong.

However, the IRD reserves the right to look beyond these three factors when appropriate.