Simple Tax Guide for Americans in Hong Kong
At Taxes for Expats we have been preparing U.S. tax returns for U.S. Citizens and Green Card holders in Hong Kong for over 16 years.
Among all the possible destinations for US expats, Hong Kong appears near the top of the list in popularity. Of course, living there has tax consequences for US expats. Hong Kong is an economic center for Southeast Asia as well as China, and is considered to be among the top cities throughout the world in terms of importance. A beautiful skyline, a city center that is well organized, and a clear energy in the city make it a wonderful choice for US expats.
US Expat Taxes - Hong Kong
US citizens, as well as permanent residents, are required to file expatriate tax returns with the United States government every year regardless of their country of residence. Along with the typical tax return for income, many people are also required to submit a return disclosing assets which are held in bank accounts in foreign countries by using FinCEN Form 114 (FBAR).
The United States is among only a few governments who tax international income earned by their citizens, as well as permanent residents, residing overseas. There are, however, some provisions that help protect from possible double taxation. These include:
- The Foreign Earned Income Exclusion. This exclusion allows one to exclude USD 101,300 (this amount is for 2016 taxes) in earned income from foreign sources.
- A tax credit allowing tax on remaining income to be reduced based on the taxes paid to foreign governments.
- An exclusion on foreign housing that allows additional exclusions from their income for some amounts paid to cover household expenses due to living abroad.
Preparing a quality tax return following proper tax planning should allow one to use these, as well as other strategies, in minimizing or possibly eliminating tax liability. Note that in most cases the filing of a tax return is required, even if taxes are not owed.
Who Qualifies as a Resident of Hong Kong?
Residency in Hong Kong is based upon territory - where you live, your citizenship, and residency status are of no concern. Hong Kong only taxes income from your activities within Hong Kong. In general, income is considered to originate within Hong Kong if your employer is located within Hong Kong, and also when the contract is negotiated and signed, and is enforceable there. Also, if you are paid for work there, that income becomes taxable by Hong Kong. When your stay within Hong Kong is short term (fewer than sixty days), you become exempt from the salaries tax.
Tax Rates for Hong Kong
Among the many reasons Hong Kong remains a popular place for both expatriates and for corporations is their favorable system of taxation. The Hong Kong tax rate is progressive, and capped at a rate of 17%. This is significantly lower than many taxes in western nations, inclusive of United States expat tax.
The Hong Kong tax on salaries is based on a person’s income, less any personal allowances, allowable deductions, and donations to charity. The most tax that can be paid is limited by the standard tax rate on income from employment, less allowable deductions. Standard tax rate for 2016 taxes is 15%.
Tax rates for income are:
|2%||Of the initial||HKD 40,000|
|7%||Of the next||HKD 40,000|
|12%||Of the next||HKD 40,000|
|17%||Of any over||HKD 120,000|
At the conclusion of the year, profits tax and property tax are charged at a standard flat 15% tax rate. Personal allowances and deductions do not apply.
Hong Kong does not assess any state or regional taxes.
When Are Hong Kong Taxes Due?
The tax year in Hong Kong starts on April 1, and ends on March 31. The Inland Revenue Department should issue you your return in the first part of May. The return is required to be completed no later than one month from receipt of the return. If you don’t receive your return and you are aware that you do owe taxes, then you must notify the Inland Revenue Department no later than July 31. With good reason, the Inland Revenue Department does allow for due date extensions, but your application for extension must be sent prior to the original due date.
There is no tax withholding in Hong Kong. Payment of taxes is in two separate installments. The initial payment is 75%, which is due in the last quarter. The remaining tax is due immediately after the end of the year. It is important to remember that these dates are different than United States expat tax due dates. Because the dates are different than United States tax deadlines, when you complete your United States tax return you must pro-rate income and taxes paid.
Key US Tax Dates
- April 15 - Even though expatriates get automatic extensions to June 15, if taxes are owed the interest will begin accruing on April 15th.
- June 15 - US expatriate taxes are due unless you have filed for, and received, an extension.
- June 30 - The FBAR form is due.
- October 15 - If you received an extension, your expat taxes are due on this date.
Hong Kong Social Security
There is not a tradition system of social security in Hong Kong. Instead, they require Mandatory Provident Fund that provides the basic framework for privately managed funds to accumulate benefits for Hong Kong workers at retirement. The current minimum contribution from both employer and employee is 5%, including any cash equivalents to income. There is also a maximum contribution limit of HKD 15,000 each (employer and employee). A person earning less than HKD 7,100 per month is not required to make payment.
Payment into the Mandatory Provident Fund is not required if your Hong Kong stay is temporary, or if you pay into United States Social Security.
Contributions to the Mandatory Provident Fund, and into other recognized retirement plans are deductible, subject to a HKD 15,000 maximum.
Does Hong Kong Tax Foreign Income?
Expat taxes for Hong Kong are a little different than United States expat taxes.
Persons with jobs not within Hong Kong are only liable for the tax on salaries on any income from work which occurs within Hong Kong. This is calculated based on “days in” compared to “days out”. Employment outside Hong Kong is determined by these three items:
- The employment contract is negotiated, signed, and is enforceable outside Hong Kong
- The employer is a non-resident
- The employee is paid their wage outside Hong Kong
There is not a treaty on taxes between Hong Kong and the United States. There is a US - China tax treaty, but it is not applicable to Hong Kong.
Hong Kong Taxes
For many reasons, including taxes, US expats choose Hong Kong as a destination. There are many taxes in other areas that do not exist there. These include Value Added Tax, withholding of taxes, taxes on capital gains, sales tax, and wealth taxes. In addition, Hong Kong doesn’t have gift or estate taxes.
There is a duty imposed by Hong Kong on stocks and property transactions. The government of Hong Kong has more information on that here.
Keep in mind that by simply residing there, you are not exempt from other international taxes. Of course, the United States Internal Revenue Service will want to take a share of taxes as well. Because Hong Kong taxes are less than US taxes, you might owe more US expat tax than other expats do in their countries, since they can deduct taxes paid in Hong Kong. Because of this, you might owe the IRS a share of your income.
Questions About Hong Kong Taxes?
Contact us! We have an expert team to provide tax advice to expats, and give you all the information you need to know to file your United States expat tax return while living outside the country.
Hong Kong- Specific Terms Glossary
Gross Salary - Report the total amount of the annual Gross Salary in Earned Income section of our Tax Questionnaire.
Hong Kong Social Security - HK requires Mandatory Provident Fund that provides the basic framework for privately managed funds to accumulate benefits for Hong Kong workers at retirement. Your own contributions to the MPF should be reported in the Tax Questionnaire under the Main > Earned Income tab.
Contrary to the name, this is where income from Rental Property is reported. Report your rental income and associated expenses in the Tax Questionnaire under the Passive Income > Rentals tab.
The section relates to income from Self-Employment Income. Report in the Tax Questionnaire under the Self-Employment tab. Note that Self-Employment Income tab is not displayed by default. To see it, answer Yes to the question Were you self-employed during the tax year (either abroad or in the US)?
This amount represents the total tax assessed on your taxable income. Report this tax in the Main > Earned Income section of the Tax Questionnaire (TQ).
As stated below, the TQ offers two options, one to use tax assessed for the foreign tax credit, or simply use the amount for tax actually paid. While in the TQ, please click the corresponding help link (green question-mark) for further detail.
Hong Kong Investments and Business
The circumstances in which you find yourself living or working in Hong Kong will impact the type of visa you require to start your own business. The types of visas you may select from include, but are not limited to:
- Entry for Investment
- Capital Investment Entrant Scheme (CIES)
- Dependent Visa
If you need assistance with the visa application process there are business immigration consultancies in Hong Kong that can help you.
As a Sole Proprietor, you are self-employed. You will need to report your self-employment to the IRS via form Schedule C.
Expats planning to go into business with one or more people may decide to register their business as a partnership. You will be required to report the partnership to the IRS via form 8865.
The most common business structure used when starting a business in Hong Kong is a limited liability company (LLC). Limited companies must register with the Companies Registry in Queensway, where the necessary registration paperwork can be completed. A certificate of incorporation will be issued once the incorporation form has been approved. You will be required to report the LLC to the IRS via form 5471.
You will be required to report the Corporation to the IRS via form 5471.
The Hong Kong pension system is viewed by Hong Kong public policy as a “three-pillar system”.
Hong Kong has a contribution-based private system, which is supplemented by means-tested old-age benefits paid by the Government. However, the private system is divided into two pillars: mandatory and voluntary contributions.
Employees may choose to make voluntary contributions by issuing a written notice to their employer.
The Mandatory Provident Fund Schemes require mandatory contributions to the MPF scheme from both the Hong Kong employer and the Hong Kong employee. Self-employed individuals are also required to contribute to an MPF scheme.
MPFs are mandatory, fully funded and privately managed contribution schemes. You and your employer both have to contribute 5% of your monthly income, but at maximum HKD 1,250 each, to an MPF scheme of your choice. You will have to contribute to an MPF scheme even if you have your own business in Hong Kong. There are three different types of MPFs:
- Master Trust schemes are the most common schemes.
- Employer-Sponsored schemes are exclusive to the employees of a company.
- Industry schemes focus on workers in sectors such as catering and construction.
Under Hong Kong’s system, low-income individuals above pension age may be eligible for certain taxpayer-funded benefits. Under SSA schemes, the Government tops up your pension if your income and your assets do not exceed a specified amount.
Expatriates are unlikely to qualify for SSA benefits unless they intend to reside in Hong Kong for at least seven years.
Hong Kong Financial Accounts
- Individual bank accounts such as savings accounts, checking accounts, and time deposits.
- Retirement accounts - balance on Pillar 2 and Pillar 3 accounts
- Brokerage accounts, commodity futures or options accounts,
- Insurance policies and annuity contracts with a cash value (i.e. such as a whole life insurance policy).
- Business accounts where U.S person has a greater than 50 percent interest in the entity