Salaries Tax in Hong Kong

Individuals pay income tax on their earnings, with rates ranging from two percent to a maximum of 17 percent after deductions and allowances or 15 percent on net income after deductions. 

Contributing Advisor

Mil Lui

Manager, Corporate Accounting Services

Taxable income

Taxable income includes various forms of compensation, such as: 

• Allowances;
• Bonuses;
• Commissions;
• Salaries; and,
• Company benefits. 

Hong Kong does not tax dividends, interest, or capital gains for individuals. However, the SAR has specific income tax categories:

• Profits tax for business profits;
• Salaries tax for employment income, office income, or pensions; and,
• Property tax for rental income from property. 

An individual's residency status is typically not the sole factor for salaries tax liability unless it relates to a tax treaty.

Employment income taxation

Employment income taxation is straightforward and taxpayer-friendly. The city follows a territorial taxation system, meaning only income earned within Hong Kong is subject to tax.

Employment income scope

Salaries tax is primarily applicable to individuals in an employment relationship. It covers both local and expatriate employees.

The Hong Kong Inland Revenue Department (HKIRD) will generally accept that employment is non-Hong Kong employment if all the following three conditions are met:

• The employment contract was negotiated and entered and is enforceable outside Hong Kong SAR.
• The employer is a resident outside Hong Kong SAR.
• The employee’s remuneration is paid outside Hong Kong SAR.

If any of the above conditions are not met, the employment will likely be considered by the HKIRD as Hong Kong employment.

For Hong Kong employment, income is tax-free if all employment services in a tax year are performed outside of Hong Kong SAR. Services provided within Hong Kong SAR for less than 60 days during the assessment year (known as the '60-day rule') are not counted.

For non-Hong Kong employment, only income related to services within Hong Kong SAR is subject to Hong Kong salaries tax, following the 'time apportionment basis.' The 60-day rule also applies here, meaning services performed within Hong Kong SAR for up to 60 days during the assessment year are disregarded.

Chargeable income includes:

• Salaries, Wages, and Director's fees;
• Commissions, Bonuses, Leave Pay, Contract Gratuities, and Payments in place of Notice accrued on or after 1 April 2012;
• Allowances, Perquisites, and Fringe Benefits;
• Tips;
• Salaries Tax Paid by Employer;
• Value of a Place of Residence;
• Stock Awards and Share Options;
• Back Pay, Gratuities, Deferred Pay, and Pay in Debts
• Termination Payments and Retirement Benefits; and,

Non-chargeable income include:

• Severance Payments and Long Service Payments; and,
• Jury Fees.

Deductions

Expenses that qualify for deduction under salaries tax are limited to those directly related to generating income subject to salaries tax, excluding domestic, personal, or capital expenses. Meeting the strict criteria of being wholly, exclusively, and unavoidably incurred for income production is a rare occurrence in practice.

Deductible employment costs

Certain work-related travel and entertainment expenses (excluding personal commuting expenses like from home to the workplace) may be eligible for deductions under income tax, provided they meet the specified criteria mentioned earlier. Depreciation allowances may be allowed on capital expenditure incurred on plant and machinery, which is essential in the production of assessable income.

Tax rates and calculations

The Budget 2024-25 will implement a new two-tiered tax rate regime for salaries and personal assessment tax from the 2024 to 2025 assessment year onward. 

Under the two-tiered system, taxpayers with net income exceeding HK$5 million (US$638,630) would see a 16 percent standard rate applied to the portion exceeding HK$5 million. This would affect around 12,000 taxpayers, boosting government revenue by approximately HK$910 million (US$116.23 million) annually. Under the previous system, the rate was capped at 15 percent.

All individuals earning income from or derived from Hong Kong from an office, employment, or pension are subject to salaries tax in Hong Kong.

Tax payable is calculated at a progressive rate on the “net chargeable income” or a standard rate on the “net income” (before deduction of the allowances), depending on which is lower. The tax reduction, subject to a maximum, further reduces it.

Net Chargeable Income = Total Income – Deductions – Allowances

Net Income = Total Income – Deductions

Provisional salaries tax

Salaries tax is chargeable on the assessable income for each year of assessment.

As the assessable income for any particular year cannot be known until after the end of the year concerned, a provisional tax charge must be raised. When the assessable income for the year of assessment is subsequently ascertained, an assessment will be made, and the provisional salaries tax paid will be utilized to offset the tax liability under the assessment.

The taxpayer can apply in writing for holding over the whole or part of the provisional salaries tax on the grounds specified in the Inland Revenue Ordinance.

Application grounds

You can request an extension of your provisional salaries tax payment for several reasons:

• You can request a holdover if you've become eligible for an additional allowance not initially considered in your provisional tax, like child or dependent parent allowance. For a successful application, include essential details such as the child's name and birthdate or the dependent parent's name, birthdate, and Hong Kong Identity Card number, along with proof of their Hong Kong residency in the relevant year.
• In case your net chargeable income for the assessment year, for which provisional tax is due, is expected to be less than 90 percent of your net chargeable income for the preceding year or the estimated sum you're liable to pay as provisional tax; you can apply for a holdover.
• You can apply for a holdover if you pay or expect to pay substantial expenses such as self-education, retirement scheme contributions, home loan interest, and more during the assessment year while being subject to provisional salaries tax, and these expenses surpass the previous year's threshold.
• If you've stopped earning income subject to salaries tax or plan to cease this income before the end of the assessment year for which provisional tax was assessed, you can apply for a holdover. It would help to estimate your income for the entire assessment year in your application. For example, if you want to delay provisional tax payment for 2023/24, include your estimated income from April 1, 2023, to March 31, 2024, and explain the reasons for the income reduction, such as unemployment, retirement, or salaries reductions.
• Finally, suppose you've raised objections against your salaries tax assessment for the previous year preceding the assessment year for which provisional tax was levied. In that case, you can also apply for a holdover of your provisional tax payment.

 Application time limit

Your application for holding over of provisional tax should be lodged no later than:

• 28 days before the due date for payment of the provisional tax or
• 14 days after the date of issue of the notice for payment of the provisional tax, whichever is later.

If the provisional tax is payable in two installments and the first installment has been settled by the due date, an application for holding over the whole or part of the second installment may be made subject to the prescribed time limit and grounds for the application.

Employer obligation

The employer must inform the Inland Revenue Department (IRD) within three months if it anticipates the employee will likely be charged to salaries tax. The employer also needs to file the Employer’s Return one month before the termination date when an employee is terminated and file the Employer’s Return one month before the expected departure date for employees leaving Hong Kong permanently or for a substantial period.

In addition, any post-departure payments (e.g., bonuses, option gain, share awards, tax equalization settlements) paid to an employee after their departure regarding the employee’s employment/assignment/secondment in Hong Kong shall be subject to Hong Kong’s salaries tax. As such, the employer must report the relevant post-departure payments (if any) to the IRD accordingly.

Employee obligation

Employees are also legally responsible for the Annual Tax Return to the Inland Revenue Department.

If the employee receives an individual tax return from the Inland Revenue Department, they must complete and submit it by the due date for filing, even if they have no income that can be charged to salaries tax. The reporting should include total income, allowance, deductions, etc.

If the employee doesn’t receive a tax return, they should notify the Inland Revenue Department that the income could be taxable.

The Inland Revenue Department will evaluate the employee’s situation and decide on a tax rate that the employee must pay for the past tax period (from April 1 each year to March 31 of next year).

Case study

From 1st Oct 2023, the subject’s monthly salary is HK$45,000 (US$5,100), and MPF contribution is HK$1,500 (US$191). The financial year is April 1 to March 31 of the following year. Tax is filed and paid on an annual base. No pre-deductions were required. Then, how do we calculate the subject’s salaries tax for the year of assessment 2023/24 under the progressive rate and standard rate?

 1. Under progressive tax rate 

2. Under standard tax rate

Through the comparison, the employee should better use a progressive tax rate to calculate the annual tax, and the tax amount is shown in the above table.

Also, in practice, there are some other deductible-related considerations:

• Family status (spouse income status, children or dependents);
• Residential status;
• Foreign staff (no need to pay MPF in the first 12 months);
• Home loan interests;
• Loss from other personal business; and
• Double tax treaties.

Maximum tax reductions

Salaries tax for the 2023/24 assessment year is further reduced by a one-off tax reduction of 100 percent, subject to a ceiling of HK$3,000 (US$384) per case. For single taxpayers, the ceiling is applied to each individual; for couples jointly assessed, the ceiling is applied to each married couple (that is, capped at HK$3,000 in total). Married individuals may elect personal assessment separately to reduce tax liability.

Tax reduction for domestic rental expenses

The Hong Kong 2022-23 Budget proposed a tax reduction for domestic rental expenses starting from the year of assessment 2022/23, subject to a ceiling of HK$100,000 (US$12,700) for a year of assessment. This is to ease the burden of renting a private property on taxpayers liable to salaries tax and tax under personal assessment who are not owners of domestic properties. This measure will be affected by amending the Inland Revenue Ordinance.

Further information supplemented by the IRD is noted in the table below:

Capital gains tax

Any profits made by an individual from capital gains are exempt from taxation in Hong Kong.

However, although Hong Kong does not impose a capital gains tax, profits earned from selling assets within the SAR may be regarded as trading gains and are subject to taxation under profits tax. 

• Resident individuals who receive royalties from Hong Kong sources are also taxable on these amounts as business profits under profits tax. 
• Non-resident individuals who receive royalties may be subject to withholding tax if the intellectual property associated with the royalties is used within Hong Kong or if the use occurs outside the SAR. However, the royalties paid are deductible under profits tax by the payer.

Inheritance tax or estate duty

The inheritance tax has been eliminated in Hong Kong. This condition means that when a person passes away, their assets can be transferred to their beneficiaries without tax obligations. Furthermore, certain taxes that are typically applicable are exempted upon death. 

There is an exemption on stamp duty for property and stock transfers due to inheritance, which typically applies to transfers during the person's lifetime. It provides reassurance regarding the treatment of your assets after your passing. 

Estate duty is charged on the total value of property located in Hong Kong that is transferred or deemed to be transferred in connection with a person's death, based on a progressive scale of rates determined by the date of the deceased's death. For transitional estates, the duty amount is set at US$100.

The term "passes" refers to the transfer of beneficial ownership, possession, or enjoyment of property from one person to another due to the former's death.

Properties subject to estate duty include:

• All assets owned by the deceased
• The deceased's portion of jointly owned property
• Property that the deceased gave away within the three years preceding their death. 

The recipients of these gifts are responsible for paying the duty.

Even if ownership of jointly owned property automatically transfers to the surviving joint owner upon the death of another joint owner, estate duty is still applicable. Therefore, the surviving joint owner must submit an Account for the Commissioner (IRED 12) to settle the estate duty for the jointly owned properties before obtaining clearance.