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Expat Investor : January February 2009
QUOTE, UNQUOTE Relocating abroad – the financial implications In a four-part series, The Fry Group looks at the financial implications for UK residents who are relocating from the UK. This article, focusing on Hong Kong, is co-authored by Irene Luo and WY Lam, Dominic Chan & Co and The Fry Group. The financial system in Hong Kong Hong Kong is known as a leading international financial centre and a business and cultural hub. It operates a free capitalist economy driven by market forces, with the government taking on a passive role. Hong Kong continues to follow the common law system which was established during the British rule. Over time the economy has changed from being a manufacturing centre to a service based economy. The Inland Revenue Department of Hong Kong (IRD) is the governmental authority responsible for administering taxes levied under the Inland Revenue Ordinance. The tax structure in Hong Kong is simple and tax rates are low in comparison to other countries. The structure operates under the territorial system in which income sourced from Hong Kong is subject to tax. Individuals are subject to salaries tax on Hong Kong sourced income obtained from an office, employment or pension. When determining employment income source, the IRD will generally use the location of employment test. This test considers the locations of the employment 24 EXPAT INVESTOR ? contract, the employer’s residence and the place of remuneration. The most important of the three criteria is the employment contract and it refers to the place where the contract was negotiated and entered into. Employer’s residence refers to the place where the corporation has central management and control. The Commissioner of the IRD will have the discretion to consider other factors beyond the location of employment test when relevant. For those individuals who are not permanent residents of Hong Kong and have performed services in Hong Kong, in order to determine whether there is liability to salaries’ tax it is necessary to calculate the number of visits to Hong Kong during each tax year of assessment beginning at 1 April to 31 March of the following year. Visits refer to the days in Hong Kong and not the period spent performing services in Hong Kong. If the total number of visits is less than 60 days, income is exempt. However, if the number of visits exceeds 60 days, either all of the income is subject to salaries tax or there is apportionment based upon whether location of employment is Hong Kong or non- Hong Kong. January/February 2009 For those individuals who are Hong Kong permanent residents and have non-Hong Kong employment, income is apportioned based upon whether the income relates to services rendered in Hong Kong. Otherwise income is generally subject to salaries tax under ‘time in, time out apportionment’. This basis considers the number days in which services were rendered in Hong Kong compared to the total days in the year. Areas to consider Aside from the location of employment issues already mentioned, there are other issues which require further consideration in respect to the remuneration package. One important aspect is the structuring of the housing benefit of expatriates and the difference in taxation between a rental allowance and rental reimbursement. Other issues to consider include the taxation treatment of share options, holiday travel warrants, education benefits and other fringe benefits which are generally part of the expatriate remuneration package. As individual circumstances differ, it is necessary expatinvestor.com to consult a professional for further advice. Finally, upon cessation of employment there may be a termination payout or gratuity. In order to determine the taxability of these payouts, it is necessary to review the nature of the payment and its connection with the expatriate’s employment, if any. Another related issue is the spreading back of lump sum payments received upon the cessation of employment. If the payment is taxable, it may be advantageous for the individual to make an election and spread the payments over the maximum of three years. Before leaving for UK – the Hong Kong checklist ? Employer submits BIR 56G to the IRD one month before departure from Hong Kong and will also withhold any further payments to the employee. ? Employee has to submit a BIR 60 individual return to the IRD. ? Employee should ensure that he has sufficient funds available for the tax payment as the notices of assessment are usually issued with short due date. After the employee has paid his outstanding salaries tax liabilities, the IRD will issue a Letter of Release to both employee and employer. After receiving this tax clearance, the employer will release amounts previously withheld to employee. ? Generally, if salaries tax is not paid in accordance with a notice of assessment a surcharge of 5% is applicable and if still outstanding after six months from the due date a further surcharge of 10% of the amount in default applies. ? If tax is in default, the IRD may also issue a garnishee order to employer to demand the payment of tax and the employer may ultimately become liable if it did not withhold payments from the employee. ? In certain tax cases, the Commissioner of IRD may under oath satisfy a District Judge that the tax defaulter intends to depart from Hong Kong. The District Judge may issue a departure prevention order preventing the defaulter from leaving Hong Kong without paying his tax liabilities or providing security. The levels and bases of taxation are subject to change. www.thefrygroup.co.uk Fast Facts 22340
March April 2009