Mitigation of Taxes for Expats in Hong Kong
One of their major concerns of relocations to Hong Kong is taxes for expats. These expatriates are usually concerned about their individual tax position and exposures, not only in Hong Kong itself, but also in foreign tax jurisdiction(s) such as their home country.
In particular, they may wonder whether there are any possible ways to mitigate their tax liabilities and whether they will become subject to any double taxation.
Taxes for Expats & Hong Kong Jurisdiction
Hong Kong adopts a territorial source system whereby income from employment is only liable to Hong Kong salaries tax if it is arising in or derived from Hong Kong (i.e. sourced in Hong Kong). The source of an employment (i.e. a Hong Kong sourced employment or a non-Hong Kong sourced employment) is usually relevant in determining the taxability of employment income in Hong Kong.
Under a Hong Kong sourced employment, employment income is generally regarded as sourced in Hong Kong and hence wholly subject to Hong Kong salaries tax, unless certain tax exemption claims can be satisfied, such as the claim of no services rendered in Hong Kong, the 60-days exemption claim and the unilateral tax relief credit claim.
On the other hand, if an employment is satisfied as non-Hong Kong sourced, only those income derived from services rendered in Hong Kong including leave pay attributable to such services will be taxable in Hong Kong. Please note that the aforesaid tax claim of no services rendered in Hong Kong and 60-days exemption claim are also applicable to a non-Hong Kong sourced employment.
As such, it is usually tax beneficial for an employment to be qualified as non-Hong Kong sourced from a Hong Kong tax point of view. According to case law, the major factors for determining the source of an employment are:
- The place of residence of employer
- The place where the employment contract is negotiated and entered into, and is enforceable
- The place of payment of the employment remuneration. If the above three factors take place outside of Hong Kong, there are grounds to claim the employment as non-Hong Kong sourced. Having said that, every tax case has its own facts and circumstances and the Hong Kong Inland Revenue Department (“IRD”) may also look at other relevant factors when determining the source of an employment.
One has to be well aware that taxpayers are required to lodge any tax exemption claim, if eligible, in their individual tax returns. The IRD would then usually raise enquiries to the taxpayers to ascertain the validity of the tax exemption claim lodged.
It is, therefore, recommended for an expatriate and his/her employer to properly structure the employment/Hong Kong assignment. The relevant information and supporting documents for the tax exemption claim have to be well maintained and a reply to the IRD’s tax enquiries have to be well prepared in order not to jeopardise the tax exemption claim.
Remuneration not Subject to Hong Kong Tax
While salaries, commissions, bonus and cash allowances are taxable income, certain remunerations, such as repatriation benefits, utility benefits, club membership benefits, insurance and medical benefits, can potentially be claimed as non-taxable in Hong Kong if certain conditions can be met.
Moreover, if housing benefits offered by employers are in form of provision of a rent-free/rent-subsidised accommodation, instead of cash allowance, the taxable amount of the housing benefits would potentially be reduced since the former will be taxed based on a deemed rental value (i.e. a certain percentage of the taxpayer’s assessable income) rather than the actual housing benefits received.
Please note however that the IRD may review the details/arrangements of the housing benefits provided by the employers, such as the employment/assignment contract and tenancy agreement, the housing benefit policy/scheme of the employer, how the rental is paid to landlord, whether strict control has been exercised by the employer over the rental reimbursement, if any.
Therefore, in order to successfully obtain any benefits in taxes for Expats, it is important to have the employment/assignment contract well drafted and have a good remuneration structure in place.
Taxes for Expats & Double Taxation
The employment remuneration earned by an expatriate may be taxed in Hong Kong and also the foreign tax jurisdiction(s) such as his/her home country, say due to his/her worldwide income subject to tax in home country. This is called double taxation and Hong Kong has several international double taxation agreements.
Nevertheless, the expatriate may be entitled to claim unilateral tax credit relief in certain foreign tax jurisdictions in respect of the Hong Kong salaries tax paid on his/her employment remuneration derived from out of Hong Kong.
Moreover, the double tax treaties entered into between Hong Kong and 38 foreign tax jurisdictions including the Netherlands contain certain clauses which could also provide relief on double taxation.
Relocating to Hong Kong?
As seen, the Hong Kong salaries tax system might look simple, but it is not straightforward. Since Hong Kong is an international business hub with relatively lower taxes than other jurisdictions such as Singapore from where various multinational corporations operate their companies, branches or other forms of establishments, such operational activity often also involves the employment of management personnel and/or experts from abroad, being assigned to Hong Kong, for several months or years.
Therefore, qualified and experienced tax law knowledge is required to avoid painful mistakes and misreporting as well as mitigate tax liability. At HKWJ Tax Law & Partners, we have been assisting with tax management the expat community for over 10 years and we would be delighted to assist you.