Hong Kong has been attracting businesses and investors from around the globe with its low tax regime – one of the lowest personal and corporate tax rates in the world. Corporate tax is fixed at 16.5% of assessable profits for companies and 15% for unincorporated business. As a free port, Hong Kong has no custom tariff on imported goods; only an excise duty on tobacco, alcoholic beverages, hydrocarbon oil and methyl alcohol, whether imported or manufactured locally. There is no dividend tax, inheritance tax and capital gains tax.
Starting a business in Hong Kong? Links HR Outsourcing has created a company set up guide that includes the main employment laws, systems and best business practices in Hong Kong.
It is of fundamental importance for an employer to understand the tax obligations and taxation system where the business is. To help employers and HR leaders grasp the basics of taxation in Hong Kong, Links has put together some essentials of what you need to know about Hong Kong tax rates, corporate tax, and income tax.
Tax Obligations as An Employer in Hong Kong
An employer’s tax obligations commence upon hiring the first employee of the company.
Tax obligations of employers in Hong Kong include:
- Keeping payroll records
- Reporting remuneration paid to an employee
- Informing the Inland Revenue Department (IRD) of changes in employment terms and employee’s personal particulars
Employers Must Keep Payroll Records
As industry-leading specialists in providing payroll outsourcing services, we understand keeping payroll records can be a mundane and time-consuming task, yet, these records are the backbone of a business, in addition to meeting regulations of governance bodies and for taxation and legal purposes. That is also why many of our clients, after learning the benefits of outsourcing, passed their payroll tasks to Links HR Outsourcing so they can focus on value-adding activities and avoid payroll mistakes.
As a requirement from the Inland Revenue Department, businesses must keep sufficient records in English or Chinese to ascertain assessable profits. Failing to keep adequate records can be penalized and fined up to HK$100,000. Business records, including payroll records, must be retained for at least 7 years from the transaction date.
In Hong Kong, an employer must keep a record for each employee, including:
- Personal details (name, address, ID card or passport number, marital status)
- Capacity and nature of the employment
- Amount of cash remuneration
- Non-cash and fringe benefits
- Contribution to the Mandatory Provident Fund (MPF) by the employee and employer
- Employment contract and employment terms stating the period of employment
Any changes in the employee’s personal particulars and terms of employment would require an employer to write in and inform the Inland Revenue Department as soon as possible.
Reporting Remuneration Paid to An Employee
In Hong Kong, a tax year or year of assessment runs from 1 April to 31 March the following year. Normally, by mid-April each year, employers receive an Employer’s Return (BIR56A) to report remuneration paid to an employee which should be completed and lodged with IRD within 1 month.
In cases of continuous employment, the employer has to report the employee’s received remuneration if he/she meets one of the following conditions:
- single and earn HK$132,000 or more in an annum,
- a part-time employee, or
- a director
|Employment Condition||Form to Complete||Statutory Period for Notification||Remarks|
|Commencement of employment||IR56E||Within 3 months||Both IR56E & IR56B are required for the commencement year|
|Still under employment as at 31 March||IE56B||Within 1 month||Must be submitted annually|
together with a BIR56A
|Cessation of employment||IR56F||Not later than 1 month before cessation||IR56B for the cessation year is not required|
|Departure from Hong Kong||IR56G||Not later than 1 month before departure and withhold money for tax clearance||IR56B for the cessation year is not required|
*Reference to Obligations of An Employer by Inland Revenue Department
Tax Obligation Under MPF Schemes
Under the Mandatory Provident Fund Schemes Ordinance, all employees and self-employed persons, except persons granted an exemption, are required to participate in a registered MPF scheme.
A mandatory contribution of 5% of the employee’s relevant income is payable by both the employer and employee, subject to a maximum of HK$1,500 monthly contribution. However, an employee is not required to contribute if his/her relevant income in less than HK$7,100 each month. Both employees and employers can choose to contribute more, the amount in excess is a voluntary contribution.
Most employees receive the salary net of their MPF contribution; when reporting remuneration to the IRD, the amount should be their gross monthly salary, i.e. income before the deduction of MPF contribution. However, some employers voluntarily pay for the employee’s part, meaning the employee receives his/her salary without any deduction of MPF contribution. In this scenario, the employee’s contribution is an additional remuneration and therefore has to be reported as income to the IRD.
Hong Kong Corporate Tax Rates
Two-tiered Profits Tax Rates
In 2018, the enactment of Inland Revenue (Amendment) (No. 3) Ordinance 2018 introduced a two-tiered profits tax rates that are lower for the first HK$2 million of assessable profits. Generally speaking, for corporations in Hong Kong, corporate tax rates are in two tiers – 8.25% on assessable profits up to HK$2 million; and 16.5% on any part of assessable profits over HK$2 million. Rates for unincorporated businesses such as sole proprietorships and partnerships are 7.5% on assessable profits up to HK$2 million, and 15% on any part of assessable profits over HK$2 million.
Provisional Profits Tax
Businesses with assessable profits that cannot be known until after the end of the year of assessment are charged with a provisional profits tax. When the assessable profits are known and assessed, the provisional profits tax paid will be used to offset the liable amount.
Employees’ Income Tax in Hong Kong
As an employer, it is important, and a responsibility, to understand and facilitate your employee’s tax obligations in addition to your own.
Employers are required to provide to employees, a copy of the I.R.56B form showing his/her annual remuneration at the end of the tax year which employees can then arrange their own payment of taxes.
Hong Kong’s Income Tax is charged at a progressive rate based on an individual’s Net Chargeable Income, which is one’s assessable income after allowances and deductions; or at a standard rate of 15% of Net Total Income, i.e. total income minus deductions, whichever the lowest.
Net Chargeable Income = Assessable Income – Allowances – Deductions
Net Total Income= Assessable Income – Deductions
Hong Kong Income Tax Rate
|Net Chargeable Income||Rate|
|HK$0 – HK$50,000||2%|
|HK$50,001 – HK$100,000||6%|
|HK$100,001 – HK$150,000||10%|
|HK$150,001 – HK$200,000||14%|
|HK$200,001 and above||17%|
An individual with a Net Chargeable Income of HK$100,000
HK$50,000 x 2% + HK$50,000 x 6% = HK$4,000
Inland Revenue Department’s Tax Calculator is a useful tool for computing personal salaries tax.
Want more HR support or need more advice on Hong Kong payrolls? Get in touch with one of our representatives to see how we can help you elevate your HR function today.