What are different tax schemes recognized by taxation department of Hong Kong and conditions a taxpayer as individual or having company incorporation HK can be exempted?

In this blog we will have discussion on the mandatory conditions that are to be fulfilled in order to be exempted from tax in Hong Kong. Then we will further discuss the different types of tax schemes that are recognized by Hong Kong tax department like ORSO and mandatory provident fund that provide benefits to a person by keeping his accrued benefits exempted at the time of retirement. We will also discuss some special cases for which these exemptions are not provided to taxpayers while he/she also availed these schemes. And this would complete our discussion on income tax on individual or having set up company in HK.

Constitutional Exemptions

Given below are the income that are excluded from charge to salaries tax by Inland Revenue ordinance.

• The pension of a person that is attained by him/her as a result of services provided to any office or employment is exempted by IRO, in respect of his services that he rendered outside in Hong Kong. These services do not include Hong Kong employment. As described in Section 8 (2) (ca) of law.
• A lump sum instead of periodic pension that is received under a registered retirement scheme approved by government of Hong Kong or mandatory provident fund upon:
• Legal termination of services.
• Death.
• Retirement.
• Incapacity.
• And this income should be provided to him as result of acknowledgement of employee’s contribution. These contributions of employee can be mandatory or voluntarily. These remunerations that are exempted by IRO also include proportionate benefits. These proportional benefits include the lump sums that is to be paid to the person as a result of his/her voluntary contributions. Pension of an employee that renders his services to Hong Kong are taxable.
• The scholarships that are received by students are also not taxable. These scholarships may include grant, exhibition and other educational findings, as given in Section 8 (2) (g).
• The remuneration that a person receives from his/her spouse or former spouse in the form of maintenance or support is not exempted, in Section 8 (2) (i).
• Income gained by a person who rendered his services as aircrew or seaman. But for this exemption he should not present in Hong Kong for
• 60 days’ exemption period.
• And 120 days over the exemption period for two consecutive assessment years. In these YAs, one assessment year is that of concerned year, given in Section 8 (2) (j).
• The salary or income of individual is also exempted that is derived from the trade or business which is carried out by that individual or his/her spouse or in which that individual is partner, from Section 8 (2) (k).

In the below example we will consider such case to have a practical observation on exemption of tax from incomes obtained by one of above mentioned sources.

A shipping company employed Mr. Lee as sailor. He was working in that company since 2000. The brief detail of his presence in the Hong Kong for two assessment years 2013 to 14 and 2015 to 16 is given below.

According to first condition of Section 8 (2) (j), it is necessary for a person to not present in Hong Kong for 60 days in basis period to be exempted from tax. As Mr. Lee stayed there for 70 days so all of his income for assessment year 2013 to 14 was subjected to tax.

While during second assessment year of 2014 to 2015 he was only present for 55 days. And for assessment year 2015 to 16 he was present for only 50 days hence exempted from tax. As described earlier that exemption period is of 60 days so he was exempted from paying tax. Because the condition under Section 8 (2) (j) was fulfilled. Although he was present in Hong Kong for (70+55 = 125) total 125 days during assessment years 2013 to 14 and 2014 to 15, and for (55 + 50 = 105) days during assessment year 2014 to 15 and 2015 to 16 so he was exempted from paying income tax in later case as under second point of Section 8 (2) (j) a person is exempted from paying tax if he is present in Hong Kong for more than 120 days for two consecutive year assessments. By summarizing the case it can be seen that his whole employment income for year 2013 to 14 was exempted from income tax.

For year assessment 2015 to 16 he only stayed in Hong Kong for just 50 days so he fulfilled the first condition under Section 8 (2) (j). As the total number of days for his present in Hong Kong were just 105 days so the second condition for Section 8 (2) (j) was also satisfied. So due to fulfillment of both of these conditions he was fully exempted from income tax.

It has to be verified that whether employment of a person in Hong Kong as part of Hong Kong incorporation or overseas in case if he is not exempted to pay income tax. If his/her services render outside Hong Kong, then income tax is calculated based on the number of days he stayed in the Hong Kong during an assessment year while having foreign employment. The full income is taxable if a person renders all of his/her services in Hong Kong.

As discuss in D 45/09, it was stance of a crew member named ‘T’ that during income tax calculation under Section 8 (2) (j) for assessment years 2006 to 07 and 2007 to 08, his ‘transit days’ should not have been counted as days of his presence in Hong Kong. According to T transit days were the days on which he flew in Hong Kong for departing to Macau but did not pass through passport control and Hong Kong border before his departure. The appeal of person T was dismissed by BoR and it was stated that:

• By considering the ordinary meanings of word ‘present’ as described in Section 8 (2) (j) of law, once he landed in Hong Kong he must be considered as present.
• As during the transit days as departing to Macau he was neither present in Macau nor in no man’s land so it is obvious that he was and must have been present in Hong Kong.
• In order to calculate the precise time on which T comes to be present in Hong Kong can be exactly determined by considering the time at which airplane touches down Hong Kong soil as being the specific time.

In a similar D 11/13 a person T was employed by foreign branch of Hong Kong incorporation as a member of crew. This company was an international consignment company. He asked for exemption from salaries tax and his stance was that as he was present in Hong Kong for 59 days and 58 days for two consecutive years A and B respectively, so he is not eligible to pay income tax under 60 days base period according to first point of Section 8 (2) (j). During calculation of days by him he did not calculated the days of transitions that were 35 days and 37 days in total for both assessment years respectively. According to him he should not be considered as present in Hong Kong for these days as during these days he did not pass through passport control. The Board of Revenue discharged his appeal and it was stated by it that as Hong Kong international airport is situated in the boundary of Hong Kong so he would be considered as present in Hong Kong. Because T spent his time before taking off and after landing in the airport so he must be considered as present in Hong Kong.

So up to this discussion it should be clear that for business registration Hong Kong or to work as an individual in Hong Kong tax payment is major consideration and taxation department pay special attention to collect the tax from each taxpayer. But there are also some scenarios defined for which there can be exemption from tax and major one of these is retirement. 

Retirement Schemes Authorized by Tax Department

An authorized retirement scheme that could available for a person after retiring from his job may be:

• Occupational retirement scheme that is recognized under Occupational Retirement Schemes Ordinance (ORSO scheme) by an MPF is exempted. Or
• MPF scheme as termed, mandatory provident fund scheme.

Mandatory Provident Fund Scheme

There are three sources from which can generate the occurred benefits in an MPF scheme for an employee:

• Benefits that occurred in the form of lump sums and are obtained from own voluntary and mandatory contributions of an employee.
• The benefits that occurred due to investment earnings.
• Benefits that occurred and are attributable to employee’s mandatory and voluntary contributions.

A lump sum is assessable if it is received from a mandatory provident fund scheme, whether attributable to voluntary or mandatory contributions of employee excluding the circumstances like, other than on retirement, termination of service, incapacity and death. It is defined under Section 9 (1) (ad) of Inland Revenue ordinance and in DIPN23. While the lump sum that is not exempted is the one that is received from mandatory provident fund scheme upon death, inability, termination of services and retirement. Mandatory provident fund scheme subjects to proportionate benefit rule in case of termination of services D 83/04.

Services Termination

The benefits that are attributable as a result of voluntary contribution of an employee and are to be received or considered to be received by mandatory provident fund scheme on termination of services should not exceed the specified proportionate benefits. These proportionate benefits are described thoroughly in Section 8 (4), 8 (5) and 8 (2) (cc) (ii) of the Inland Revenue ordinance). If these benefits exceed the limits defined by IRO than would applicable to tax under Section 9 (1) (ae).

The Benefits under Proportionate Rule   

The proportionate benefit rule is also regarded as 10 years’ rule. It is applicable in the case if an employee provided his services to employer for less than 10 years then accrued financial benefits that are attributable to voluntary contribution of a person as professional or employee as part of company incorporation HK are withdrawn from scheme on the termination of services. These benefits would be exempted. And these exempted benefits would be in the proportion of number of completed months for which employee served the employee. And in case of 10 years these would be less than 120 months.    

Accrued benefits are those maximum benefits that have to be given to a person from the scheme as same as a person had retired after termination of his/her employment. And this definition of accrued benefits is in case the person is member of BORS. And accrued benefits for a person would be referred to those benefits that are to be given to person as result of his/her voluntary contribution of the person in case person is member of MPF scheme.

In the following example we will distinguish between accrued benefits under BORS and MPF scheme.

Mr. Cheung was working in a company in Hong Kong and after working as employer for 7 years and 20 days he resigned. He also remained member of MPF scheme for 2 years and 20 days and ORSO scheme for 5 years. The amount that was to be paid under these schemes as accrued benefits for employer’s voluntary contributions is:

The only income would be entitled as taxable that would be greater than $140,000 and received by Mr. Cheung in the form of accumulated benefits attributable to voluntary contributions. As discussed in Section 8(4).

Without Termination of services, permanent departure from HK

The benefits that are received by a person under mandatory provident fund scheme if he/she departures permanently from Hong Kong without termination all of his/her services would be assessed. But the sum of benefits that are purely based on employer’s mandatory contributions for employer would be exempt.

Occupational Retirement Scheme Ordinance

In the case if lump sum is received as a result of ORSO scheme upon incapacity, termination of service, death and retirement then it would not be assessable by BIR. In case of termination of services, it is known as proportionate benefit rule.

If lump sums are received as a result of ORSO scheme without taking into account incapacity, termination of service, death and retirement then these would be assessable by BIR.

If benefits are not as a commutation of pension, then pension from ORSO scheme would be subjected to tax but in case of benefits are commutation of pension then it would not.

If sum received from ORSO scheme by an employee and is attributable to his/her contribution while employee is going to departure permanently from Hong Kong without termination of services, then it would be subjected to assessment by BIR.    

This ends our discussion on the income tax and scope of charges. So it is concluded that Hong Kong is country where tax payment is mandatory for a person who want to work as an employer or want business registration Hong Kong.