Hong Kong payroll and tax overview

Hong Kong is a special administrative territory of the People’s Republic of China and is located on the southern coast of the Chinese mainland, bordered to the north by the Chinese city of Guangdong and on all other sides by the South China Sea. Formerly a colony of the British Empire, Hong Kong was returned to China in 1997 but maintains a separate political and economic system. Thanks to an investment-friendly climate, low levels of government intervention, and an attractive tax system, Hong Kong has become one of the world’s most prominent financial hubs and its seventh-largest trading entity. Hong Kong is a wealthy territory with high standards of healthcare and education, and high levels of personal income. Hong Kong industrialised rapidly in the 20th century with the services sector growing to dominate the economy, accounting for almost 93% of economic output. Important industries in Hong Kong include financial services, professional and producer services, logistics, and tourism, while the creative industries, communications, medical, and educational services also grew in prominence in the 21st century. Strong regional and global trade links make Hong Kong an extremely attractive location for international business: in 2019, Hong Kong’s GDP stood at around $372.9 billion and it was ranked 3 on the World Bank’s Ease of Doing Business Survey.

Why Invest in Hong Kong?

Investors interested in Hong Kong should consider the following factors:

• Business gateway: Hong Kong acts as an unrivalled business gateway to the markets of China - and its population of over 1.3 billion - and the lucrative wider APAC region, while also offering excellent connections to the rest of the world, including Russia, Europe, the UK and the USA.
• Tax system: Thousands of international organisations choose to set-up in Hong Kong thanks to its easy-to-navigate and business-friendly tax system. The corporate tax rate in Hong Kong is capped at 16.5%, while income tax is charged progressively at a rate of 2%-17% and there is no tax on capital gains.
• Infrastructure: Hong Kong’s infrastructures are amongst the best in the world, offering businesses excellent connection to utilities, communication networks and public transport. Hong Kong’s reputation as a historic trade hub is well-earned: an efficient international port system connects with locations all over the world, while Hong Kong International airport processes over 53.9 million passengers every year.
• Work & lifestyle: As one of the wealthiest and most diverse cities in the world, Hong Kong is a unique and exciting place to live and work. While the city itself is luxurious and modern, with abundant amenities and public transport links, rural and coastal locations nearby represent opportunities to enjoy spectacular natural beauty.
• Skilled employees: Employees in Hong Kong are characteristically dedicated and hard working, with a strong understanding of Asian business culture. Employers draw from a talented labour pool: Hong Kong’s immigration policies are designed to attract skill and talent, and the city is home to four universities ranked among the top 50 in the world.

Foreign Direct Investment in Hong Kong

Hong Kong is one of the world’s most business-friendly cities. Free market policies, the rule of law and free flow of information means a level playing field for all companies. The territory enjoys a world-class business infrastructure and easy recruitment of skilled workers. The government of Hong Kong welcomes inward investment, providing foreign investors with attractive low levels of taxation and political stability. Incentives to invest in certain industries are available from the Economic Analysis and Business Facilitation Unit (EABFU), a department within the Financial Secretary's Office.

Registering a Company and Establishing an Entity in Hong Kong

Hong Kong is one of the top countries for the simplicity of setting up a business. To establish an entity, choosing the name of your business in Hong Kong can be nearly as important as deciding on a legal entity. A company name must be searched at the Hong Kong Companies Registry to find out whether the name of your choice has been taken, thus it must be approved.

The next thing to figure out is the kind of legal entity you would like to select for your business in Hong Kong. The following documents are available online at the CR’s e-Registry with the correct fees:

1. Incorporation Form (Form NNC1 for limited company by shares)
2. A copy of the Company’s Articles of Association
3. A Notice to Business Registration Office (IRBR1)

Online applications for company incorporation and business registration can normally be processed within an hour. If you submit your application in hard-copy form, the Certificate of Incorporation and Business Registration Certificate will normally be issued within four working days.

The next step is opening a bank account, which is straightforward; however, you will need the registration and incorporation certificate for this.

Business Banking in Hong Kong

In Hong Kong, it is not mandatory to make payments to employees from an in-country bank account. Payment can be made on behalf of the client using bank transfers. Bank transfers within the same bank will usually take place within the same day and the next day for any other bank. International transfers can take between three to seven working days. In the case of payments to the Mandatory Provident Funds (MPF) Trustees for the MPF contributions, this is required to come from a bank account in Hong Kong.

Working Days and Working Hours in Hong Kong

The working week in Hong Kong is Monday to Friday from 9:00am to 6:00pm. There are no statutory provisions which prescribe maximum working hours. The Employment Ordinance (EO) does however provide that in addition to paid statutory (public) holidays, an employee is entitled to no less than one rest day in every period of seven days.

Basic Facts about Hong Kong

Located on land extending from the southern coastland into the South China Sea, Hong Kong has long been regarded as a historic gateway to both the Chinese mainland, and continental Asia. Inhabited by indigenous people since prehistory, and conquered by the Qin dynasty in 214 BC, Hong Kong - which was then a collection of farming and fishing communities - was ceded to Britain after the First Opium War in 1841. Over the course of the 19th and 20th centuries, the territory became one of the most prosperous and significant commercial trading hubs in the world, and was eventually returned to China in 1997, and became a special administrative region. Reflecting its economic success, the city of Hong Kong is highly urbanised, with a high-density population and the highest number of skyscrapers in the world. The sights and spectacles of Hong Kong attract millions of tourists every year, but beyond the city, the territory is hilly and mountainous, with numerous areas reserved as country parks and nature reserves. Hong Kong’s climate is generally humid and subtropical, with mild winters and hot, dry summers.

General Information

Full Name: Hong Kong

Population: 7.50 million (HK Census and Statistics Department, 2018)

Major Language: Mandarin, English

Major Religion: Buddhism, Taoism

Monetary Unit: Hong Kong dollar

Main Exports: Electrical and electronic goods, clothing

GNI per Capita: US $ 50,300 (World Bank, 2018)

Internet Domain: .hk

International Dialling Code: +852

The tax year runs from 1 April to 31 March.

Income Tax in Hong Kong

In Hong Kong, there is no income tax withholding at source via payroll throughout the tax year. It is the employee’s responsibility to file his/her annual tax declaration and pay directly to the Inland Revenue Department (IRD), the local tax authority.

Companies need to report remuneration paid to employees by submitting an annual employer’s return (BIR56A and IR56B).

Even though there is no income tax withholding at source, the Inland Revenue Ordinance (IRO) states that any person chargeable to tax and intending to leave Hong Kong shall notify the Inland Revenue Department (IRD) no later than 1 month before the expected date of departure. Upon receipt of the notification, the IRD will decide whether the person leaving is required to settle all tax liabilities prior to departure. The employer of the individual is also required to give notification to the IRD of the impending departure of the employee at least 1 month before the expected departure date. At the same time, the employer must also temporarily withhold payments of salaries and all other moneys to that employee until the IRD issues a “letter of release”.

Social Security in Hong Kong

The Mandatory Provident Fund (MPF) is a compulsory saving scheme (pension fund) designed by the Hong Kong government as a major protection scheme for aged and retired residents. The system is mandatory for all employees in Hong Kong who have an employment contract of 60 days or more, and applies also to the self-employed between ages 18 and 65. Foreign citizens who work in Hong Kong for periods shorter than 13 months, or who are covered by another country's retirement system, may be exempted.

Under the scheme, the choice of MPF provider is the responsibility of the employer and employees are expected to join the MPF provider of their new employers when they change job. An employee's MPF assets are fully vested and are portable when the employee changes employers. Benefits that have accrued under the scheme of a former employer can be transferred to a scheme operated by the new employer. There are strict guidelines on the types of assets in the investment funds. However, MPF providers may offer more than one investment option constituted along the guidelines to its members through different funds, thus employees may build their own investment portfolio out of the funds provided by the provider chosen by their employers. Employees may elect on the asset allocation among different funds available from their providers, but may only do so for their part of the retirement contribution

According to the Mandatory Provident Fund (MPF) Ordinance, the employee will join the employer's MPF Scheme automatically after completing 60 working days. Employers and employees are each required to make regular mandatory contributions of 5% of the employee’s relevant income to an MPF scheme, subject to the minimum and maximum relevant income levels. For a monthly-paid employee, the current minimum and maximum relevant income levels are $7,100 and $30,000 respectively.

"Relevant income" refers to all monetary payments paid or payable by an employer to an employee, including wages, salary, leave pay, fees, commissions, bonuses, gratuities, perquisites or allowances, but excluding severance payments or long service payments under the Employment Ordinance (Chapter 57, Laws of Hong Kong).

Both employees and employers are free to make voluntary contributions in addition to mandatory contributions.

The mandatory contributions for a contribution period should be remitted to the MPF trustee on or before the contribution day. Generally, for monthly-paid employees, the contribution day is the 10th day of each month. For example, the contributions for the contribution period of September should be paid on or before 10 October.

Reporting in Hong Kong

Monthly

On a monthly basis, the Remittance Statement should be completed and submitted either electronically or manually on or before the 10th of each month. The monthly MPF contribution payment to the approved trustee (e.g. HSBC Provident Fund, Manulife Provident Fund) of a registered scheme should also be made on or before the 10th of each month either through direct debit or through cheque payment.

Yearly

The forms BIR56A and IR56B should be completed on a yearly basis at the end of the tax year. These forms are submitted by the employer (annual returns) reporting remuneration and pensions to the employees. The Inland Revenue Department (IRD) will send the BIR56A by mail to the employer and should be returned along with the IR56B within one month after the BIR56A has been received. It is usually sent to the company on 1st April every year.

New Employees in Hong Kong

Notification by an employer of a new employee should be done through IR56E form. This needs to be completed and returned to the Inland Revenue Department (IRD) within three months of commencing the employment.

Leavers in Hong Kong

The final payment of a leaving employee should be made within seven days of the termination.

The employer should notify the authorities of any employee who is about to cease to be employed by either completing an IR56F or IR56G form. The form to be filled in depends on whether the employee plans to leave or continue to stay in HK, and must be submitted to the IRD one month before the employee’s leaving date. The IR56F is completed for leavers who will remain in Hong Kong, while IR56G is completed for leavers who will permanently leave Hong Kong after separation from a company. This will send notification to the IRD about the termination and further actions required to recover any Income Tax owed before the employee’s departure.

An employer who has filed an IR56G is further obligated to withhold all further payments to the employee from the date of the filing of the IR56G. A copy of IR56G should be provided to the departing employee who should in turn approach the IRD to ensure Tax clearance is made. Once the employee has settled any Tax liabilities, he or she will receive a “Letter of Release”. Only upon sight of this letter can an employer make final payment to this departing individual.

Payroll in Hong Kong

In Hong Kong, there is no obligation for employers to withhold income tax from their employees, but they are obligated to withhold social security contributions as part of their payroll, and report that money to the Inland Revenue. Employees must report their income to the Inland Revenue themselves in their annual tax returns, although income tax is only charged on income sourced from within Hong Kong, and only from employees who have been resident for 60 days or more: foreign income is not taxed, regardless of an employee’s residency status. Social security obligations in Hong Kong involve the following considerations:

• Employees must contribute 5% of their salary to the Mandatory Provident Fund (MPF).
• Employers must also contribute 5%.
• A minimum HKD 7,100 must be contributed to the MPF - up to a maximum HKD 30,000 per month.

To help navigate Hong Kong’s payroll regulations, it may be useful to engage a global payroll provider: outsourcing payroll offers a way to deliver compliance, and ensure global employee populations are paid accurately and on time. Employers may provide payslips to employees in hard copy form, or by email, and must keep payroll records for a minimum of 7 years.