Hong Kong Tax Foreign Income

Hong Kong Tax Foreign Income

Hong Kong does not impose income tax based on an individual’s total income. There are three main income tax bands.

– Business or trading profits are taxed under Profits Tax

– Income from employment is taxed under Salaries Tax and

– Rental income from property is taxed under Property Tax.

An individual’s residence status is not a determining factor concerning an individual’s liability to Salary Tax, except in a tax treaty context.

Ex-pats living in or moving to Hong Kong need to understand the local and international tax rules surrounding Double Taxation Treaties (DTAs), as well as specific legislation that applies to ex-pats in Hong Kong.

What are the basics of Hong Kong tax on UK income?

As property accountants serving thousands of UK landlords that purchase buy to let properties, we know that the subject of Hong Kong tax on the UK and other foreign income can seem complex and daunting.

The taxation system in Hong Kong is considered one of the most transparent and straightforward tax regimes in the world.

Hong Kong adopts the territorial basis of taxation.

This means that income or profit sourced in Hong Kong is subject to tax, while if derived from a source outside Hong Kong by a local resident is not usually taxed in Hong Kong.

Hong Kong residents do not generally suffer from double taxation.

Many countries that tax their residents worldwide also operate businesses in Hong Kong with unilateral tax credit relief for any Hong Kong tax paid on income and/or profit derived from Hong Kong.

Hong Kong allows a deduction for foreign tax paid on a turnover basis regarding an income that is also subject to tax in Hong Kong.

Businesses operating in Hong Kong do not generally have double taxation issues on their income. Taxes in Hong Kong are derived under the territorial principle, so they are only levied on income deriving from or arising in Hong Kong and don’t on income sourced outside of the island.

A person who carries on a business in Hong Kong but derives profit from another place is not required to pay tax in Hong Kong on those profits.

No tax is levied on profits arising abroad, even if they are remitted to Hong Kong.

Whether a business is carried on in Hong Kong and whether profits are derived from Hong Kong are essentially questions of fact.

US residents that read this may feel differently. That is because The Inland Revenue Service (IRS) will apply a tax charge on worldwide income. The same applies to those that live in the UK and do not use the remittance basis. Spain also taxes Hong Kong income if the person is a resident there.

Who pays tax in Hong Kong? 

Non-residents working in Hong Kong are liable to pay Salaries Tax.

Salaries Tax is charged on every person regarding their income arising in or derived from Hong Kong from any office or employment.

Income includes all income from an employer.

Residents and non-residents may also be liable to Salaries Tax in Hong Kong and are taxed in the same way.

Ex-pats with income that arises in or is derived from a Hong Kong office or employment in Hong Kong or from services rendered in Hong Kong during visits of more than 60 days in any tax year are subject to Salaries Tax.

Hong Kong has a territorial basis of taxation, so the concept of ex-pat tax residency has no significance in determining tax liability in Hong Kong except in limited circumstances.

How is income taxed in Hong Kong? Hong Kong Wages & Salaries tax

Only income sourced in Hong Kong is subject to Hong Kong tax.

There are different types of taxation on income in Hong Kong to be aware of.

Ex-pat tax on employment income: taxable income consists of cash payments, including bonuses and gratuities. Ex-pats’ benefits in kind are largely non-taxable unless they are convertible into cash.

An ex-pat employee is subject to Salaries Tax if their employment is sourced in Hong Kong, even if they are not usually resident in the territory.

If an ex-pat stays in Hong Kong for less than 60 days in any tax year, they will not be subject to Salaries Tax.

A non-resident engaged in non-Hong Kong employment who stays for more than 60 days in a tax year is taxed on a pro-rata basis, sometimes called the ‘day-in-day-out’ basis.

Directors’ Fees: Directors’ fees derived from a company that has its central management and control in Hong Kong are subject to Salaries Tax.

How is income taxed in Hong Kong? Self-employment Income

Self-employment and business income: anyone carrying out a profession, trade or business in Hong Kong is subject to Profits Tax on income arising in or derived from Hong Kong.

Business losses of an individual are calculated in the same way as profits and carried forward against future income in the same business or offset against an individual’s other sources of income under personal assessment.

How is income taxed in Hong Kong? Rental income

Rental income: If an individual received rental income but the rental activities do not constitute a business, the income is subject to Property Tax rather than Profits Tax.

Property Tax is charged at 80% of rent received from real estate located in Hong Kong at a rate of 15%.

How is income taxed in Hong Kong? Savings interest and dividends.

Investment income: interest income not derived from investing the funds of a business, and all dividend income are exempt from taxation in Hong Kong.

No withholding taxes are levied in Hong Kong on dividends or interest paid to non-residents.

Stock Options: the intrinsic value of the stock options, calculated at the market price of the date of exercise less the exercise price, forms part of the total salaries income and is subject to Salaries Tax.

Do ex-pats pay tax in Hong Kong?

Non-residents working in Hong Kong are liable to Salaries Tax. Hong Kong observes a territorial basis of taxation, so the concept of ex-pat tax residency has no significance in determining tax liability.

Only income sourced in Hong Kong is subject to Hong Kong tax.

An ex-pat employee engaged in Hong Kong employment is exempt from Salaries Tax on income derived from services performed outside Hong Kong if the income is subject to tax in the foreign jurisdiction and if foreign tax has been paid.

Unless provider for under a Double Tax Agreement (DTA), no credit is given in hong Kong for foreign taxes paid. In some circumstances, foreign taxes paid may be deductible for Profits Tax purposes under Hong Kong tax law.

A foreign tax credit is available to Hong Kong ex-pats regarding the income that is subject to double taxation in all of the double taxation agreements entered into by Hong Kong.

Hong Kong has several such agreements in place, including with the UK.

The UK government has published the following documents concerning the UK and Hong Kong tax treaties.

Are there double taxation treaties in Hong Kong? 

Hong Kong has 37 tax treaties with different jurisdictions, all of which have been ratified and are effective.

The most recently updated Hong Kong and UK Double Taxation Agreement (DTA) came into effect on 20 December 2010.

DTAs are tax treaties between two countries that avoid international double taxation of income and property.

Under Article 151 of the Basic Law, Hong Kong can negotiate its double taxation treaties independently of Mainland China.

The territory may not take advantage of any double taxation treaties that China may enter into because only Mainland taxes are mentioned.

Mainland China does not impose the terms of any double taxation treaties on Hong Kong because Articles 106-108 of the Basic Law guaranteed Hong Kong the right to maintain an independent taxation system free of interference from Mainland China until 2047.

Until June 2001, Hong Kong had no comprehensive double taxation agreements in place.

Visit here to learn everything you need to know about the Hong Kong and UK tax treaty.

Why is Hong Kong considered a tax haven? 

Tax havens are countries with low tax rates, especially for foreign investors, that makes them attractive places to invest.

Hong Kong is considered a tax haven due to its laws limiting taxation on the island’s wealthy foreign residents and corporations.

Residents who earn income in Hong Kong pay taxes of between 2-17% depending on salary, while residents who earn income outside of Hong Kong pay no tax on those earnings.

The Corporate Tax for companies in Hong Kong is either 8.25% or 16.5%, depending on how much was earned in Hong Kong.

There are no taxes levied on Capital Gains, interest or dividends.

Shoppers in Hong Kong also enjoy higher purchasing power as there is no sales tax.

Hong Kong is one of the leading financial capitals in the world.

Many of the world’s leading banks operate there, and Hong Kong has one of the largest stock exchanges in the world.

It has its own currency, the Hong Kong dollar, so foreign investors do not need to worry about transacting in the lesser-valued Chinese Yuan.

Hong Kong does not tax income earned beyond its borders, making it a desirable location for British ex-pats and property investors.

Those who earn salaries in the region pay an income tax between 2-17%, significantly lower than in the UK.

Foreigners who keep their money in Hong Kong pay no net-worth taxes and no public benefits taxes.

Hong Kong’s favourable tax structure makes it an attractive place for foreigners to deposit their money and a place for corporations to do business.

The tax structure and Hong Kong’s ongoing dedication to preserving secrecy for investors have contributed to it becoming a hugely popular tax haven, establishing it as one of the world’s premier financial hubs.