Hong Kong Company Formation- Company Formation, offshore company formation, offshore company, limited company
Hong Kong Company Formation: Salaries Tax
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Company Formation Hong Kong: Salaries Tax
The Scope of the Charge
This tax is imposed on all income arising in or derived from Hong Kong from an office, employment or pension. In deciding whether income “arises in or is derived from Hong Kong”, it is necessary to establish where the employment, i.e. the source of income, is located. “Income arising in or derived from Hong Kong from any employment” includes all income derived from services rendered in Hong Kong, without in any way limiting the meaning of the expression. Special provisions apply to crews of ships and aircrafts who visit Hong Kong for short spans of time and persons who have paid tax of substantially the same nature as Hong Kong Salaries Tax in any territory outside Hong Kong.
“Income from any office or employment” includes all forms of income and perquisites from an employer and others. Award of shares and share option gain are chargeable income. For share option gains, the gain will be taxable when the option is exercised, assigned or released. Even if the share option is exercised after the employee has ceased the employment, the gain is still taxable.
Income also includes “rental value” in respect of a place of residence provided rent-free by the employer or an associated corporation of the employer (including cases of reimbursements of rent paid by employees directly to their landlords). If the place of residence provided is a flat or a serviced apartment, the “rental value” to be included in the assessment is 10% of the total income (after deducting outgoings (except expenses of self-education), depreciation, etc.) from the employer and the associated corporation of the employer. If the place of residence is in a hotel, hostel or boarding house, the rental value is 8% (accommodation with no more than 2 rooms) or 4% (accommodation with no more than one room) of the total income after appropriate deductions. If the employer provided a flat and specified that it was to be shared by more than one employee, the computation of the rental value is the same as that for a hotel, hostel or boarding house.
With effect from 1 April 2003, provisions relating to tax exemptions in respect of holiday passage and warrant provided by the employer were repealed. From this date onwards, all holiday journey benefits provided by the employer are chargeable to tax.
The Basis of Assessment
Liability to Salaries Tax is based on the chargeable income of the year of assessment, but the total amount of income for the year cannot be ascertained until the year is past. Hence, the Inland Revenue Department will first demand for payment of Provisional Salaries Tax during the year of assessment and then make adjustments in the following year. 8 Any provisional tax paid for a year of assessment is applied firstly against the Salaries Tax payable on the income for that year and if there is excess, apply the excess against the following year’s provisional tax liability.
For example, a taxpayer who commenced employment on 1 July 2010 and earned income for 9 months during year of assessment 2010/11, will be charged provisional tax for 2011/12 and the estimated income will be grossed up to 12 months. If after receipt of the tax assessment this taxpayer’s net chargeable income (income – deductions – allowances) is reduced by more than 10% (for instance, this taxpayer ceased to be employed on 31 October 2011), this taxpayer may apply for the holdover of provisional tax – not later than 28 days before the due date for payment of the provisional tax or 14 days after the issue date of the notice of payment of the provisional tax (whichever is the later).
Under Salaries Tax, taxpayers may claim deductions and allowances. Entitlement to a new allowance is also a ground for applying holdover of tax.
Income of Husband and Wife
A married person is responsible for all aspects of his or her own salaries tax affairs including lodgement of returns and payment of tax assessed. However, if the total tax liability of a married couple under two separate assessments is greater than it would have otherwise been when their incomes are aggregated, they may elect to be jointly assessed.
The following deductions are allowable:
(a) Expenses wholly, exclusively and necessarily incurred in the production of assessable income, not being expenses of a private or domestic nature and capital expenditure.
(b) Donations paid to approved charities if the amount is not less than $100 and with the limitation that such allowance shall not exceed 35% (25% for years of assessment 2005/06 to 2007/08) of the income after allowable expenses and depreciation allowances.
(c) Expenses of self-education paid on fees (including tuition and examination fees) in connection with a ‘prescribed course of education’, or on fees in respect of an examination set by the specified education providers or trade, professional or business associations. The course and examination must be for gaining or maintaining qualification for use in any employment. A ‘prescribed course of education’ is one undertaken at specified education providers, such as university, college, school, technical institution, training centre, or a training or development course provided by a trade, professional or business association or one accredited or recognised by specified professional bodies or institutions. 9 The amount deducted should exclude any amount that has been and will be reimbursed by the employer or any other persons. The maximum amount that can be deducted is as follows:
|Year of Assessment|
2005/06 to 2006/07
2007/08 and onwards
(d) Elderly residential care expenses paid by the person or his/her spouse to a residential care home in respect of the person’s or his/her spouse’s parent or grandparent. To be eligible for the deduction, the parent/grandparent must be aged 60 or above at any time in the year of assessment, or under 60 but is entitled to claim an allowance under the Government’s Disability Allowance Scheme; and the residential care home must be situated in Hong Kong and is licensed or exempted from licensing under the Residential Care Homes (Elderly Persons) Ordinance or Residential Care Homes (Persons with Disabilities) Ordinance, or is a nursing home registered under the Hospital Nursing Homes and Maternity Homes Registration Ordinances.
Should the deduction be allowed to a person, he or any other person is not entitled to claim Dependent Parent/Grandparent Allowance and Additional Dependent Parent/Grandparent Allowance for the same parent/grandparent for the same year of assessment. The maximum amount that can be deducted for each parent or grandparent is as follows:
|Year of Assessment|
2005/06 to 2010/11
2011/12 and onwards
(e) A taxpayer can, for any 10 years of assessment of choice (continuous or otherwise), claim deductions for “home loan interest” paid on a home loan for the acquisition of property unit which must be situated in Hong Kong and must be used as his place of residence during the year of assessment.
In addition, a taxpayer can claim deductions for “home loan interest” paid for the acquisition of car parking space, regardless of whether the car parking space is valued together with the dwelling acquired as a single tenement under the Rating Ordinance. However, the car parking space must be located in the same development of the dwelling in respect of which home loan interest is also claimed for the same year of assessment and the car parking space must be for use by the owner.
If a taxpayer is the sole owner of the dwelling/car parking space, the maximum amount deductible is $100,000 from 2005/06 onwards.
If a taxpayer is a joint owner or tenant in common of the dwelling/car parking space, the maximum amount deductible for each year is to be 10 apportioned amongst the joint tenants or tenants in common, respectively in accordance with the number of joint-tenants or his/her share of ownership in the dwelling/car parking space.
(f) For mandatory contributions paid to a mandatory provident fund scheme (MPFS) by a taxpayer as an employee, the maximum deduction for a year of assessment is $12,000 per individual.
(g) Contributions paid to a recognized occupational retirement scheme (RORS) are subject to the following restrictions:
(i) the amount deductible is the lesser of the actual amount contributed to the RORS or the amount of mandatory contribution that person would have been required to pay had that scheme been a MPFS; and
(ii) the maximum deduction is $12,000 for a year of assessment.
(The maximum deduction under items (f) and (g) is $12,000 for a year of assessment per individual irrespective of the number of employments and businesses.)