Hong Kong: Tax Efficient Structuring Of Salary Packages

Last Updated: 31 January 2010
Article by Howard Bilton

Although tax on salaries in Hong Kong is very low there are a number of steps which an employee, with the co-operation of a sympathetic employer, can take which will make a significant difference to their end of year tax bill. You won't be surprised to hear that the difference is a substantial reduction in tax.

Those with a "non Hong Kong employment" who travel outside Hong Kong extensively, as many do, can avoid paying tax on a percentage of their salary equal to the percentage of days spent outside Hong Kong. For example, an employee who earns US$100,000 per annum but spends 40% of their time outside Hong Kong would only be taxed in Hong Kong on 60% of their salary. To be considered a non Hong Kong employee their contract of employment must be with a non Hong Kong company and must be both signed and negotiated outside Hong Kong. So this tax break is only available to those who work for multi-national companies and who can be contracted to another group company outside Hong Kong or to a branch of a foreign company registered under part XI of the Companies Ordinance. Such entities are not Hong Kong companies. They are a foreign company registered in Hong Kong. This might be only a technical difference but it is an important one.
There is no difficulty with the contract stating that the employee will work in Hong Kong for the Hong Kong branch or subsidiary. It is easy enough to arrange for the contract to be signed outside Hong Kong. The employee could go to Macao for the day, play some golf or just relax a bit in time honoured fashion and sign the contract while he is there. But it must also be demonstrated that the contract was negotiated outside Hong Kong. It may well be necessary to prove this by producing details of conversations had with persons outside Hong Kong on a stated date or dates and to match those with plane or ferry tickets, passport stamps, hotel receipts or whatever else evidences that the employee was outside Hong Kong at that time.

It is not generally possible to change your status from Hong Kong employee to non Hong Kong employee whilst in the same job so if you could have been a non Hong Kong employee but didn't claim to be so there is probably nothing to be done about that. But if an employee moves jobs within the same company or moves company then this would represent an opportunity to change status and cut taxes.

Hong Kong gives generous tax treatment to the provision of accommodation by an employer. Under most foreign tax regimes an employee who is paid that same US$100,000 salary but also gets a housing allowance of US$60,000 would pay tax on the total benefit of that package i.e. US$160,000 as most benefits are taxed upon their value in cash. Not so in Hong Kong. Accommodation paid by the company on behalf of an employee is taxed at whichever is the lesser of the actual cash value or 10% of salary whichever is the lower. So in this example the employee would only be taxed on an additional US$10,000 (10% of his salary of US$100,000).. For the housing allowance to be treated in this beneficial manner it is wise, if not essential, for the employer to pay the landlord direct. Ideally the lease would also be between the employer and the landlord although that it is not generally considered essential. If the employer paid the employee the housing allowance of US$60,000 then it will rarely be possible for the employee to avoid paying tax on the whole of the US$60,000.

Interest on a loan used to purchase a property for the occupation of the employee would also be deductible. Capital repayments will not be deductible. Increasingly employees are looking to invest in their own residential property. It's a good idea.

Amounts paid to an MPF fund or approved retirement scheme can be deducted up to a certain specified maximum. The maximum is not large.

Donations to Hong Kong charities (but not foreign charities) are deductible up to a maximum of 25% of salary. You must not receive any benefit in return so the purchase of a ticket to a charity dinner would not generally be deductible because you get the benefit of a good feed and enough booze to float a small warship-you hope. A donation made at the dinner would be deductible. I see that Goldman Sachs have asked all their employees who are receiving bonuses to give money to charity. What a fine institution. There are some very worthy causes looking for patrons at the moment. I can particularly recommend those working in the field of the arts!

Expenses incurred in the care of an elderly relative are also deductible so look after your granny.

Costs incurred taking a prescribed course of education are also deductible. The government describe this has "expenses of self-education". Odd. It sounds like you have got to teach yourself (you don't) which won't really increase your knowledge a lot.

As always it is important to get the detail right to successfully claim these deductions so care should be taken over the drafting of contracts and taxpayers should be ready and able to provide full documentary evidence to support a claim for any deduction. Interestingly, I have come across some clients who think it somewhat immoral to try and reduce their already low tax bills. I would argue that they might still wish to claim deductions, work out how much tax they are saving and then donate the saved amounts to a charity of their choice or simply volunteer another cheque to the Inland Revenue Department and give them a nice present. Choice is a wonderful thing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Howard Bilton
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