Are you paying too much salaries tax? The Inland Revenue Ordinance provides employers with the opportunity to legally structure employees’ contracts of employment in a tax efficient manner, but how many make the effort?
Whilst the following is not an exhaustive list of benefits it nonetheless illustrates how a remuneration package can be structured.
The starting point is to determine whether an employee should have a Hong Kong or offshore contract of employment. All income accruing under the former is potentially liable to HK salaries tax, subject to the sixty day rule, whereas the calculation of the assessable income accruing under the later will be determined by the ratio of time spent “in” and “outside” Hong Kong.
If an employee has assessable income the provision of housing or the reimbursement of rent is a very attractive benefit. An amount equivalent to 10% of the employee’s assessable income, as opposed to the actual rent paid, is taken as the monetary value of the benefit i.e. if your assessable income is HK$500,000 p.a. your assessable rental benefit would be HK$50,000 p.a. as opposed to the actual amount of the rent paid.
If the employer pays an expense which is not the liability of the employee if cannot be deemed to be an assessable benefit, subject to specific exclusions e.g. children’s’ education costs etc. For example, if the employer contracts directly with a utility company for the payment of water or electricity or for the telephone line in respect of the employee’s residence such payments are tax free.
Similarly, if the employer provides the employee with medical and dental insurance such that the liability to pay the premium is that of the employer no assessable benefit arises. The same principle will apply to the provision of transport, including motor vehicles.
Without increasing the employee’s tax bill an employer may also contribute an amount equivalent to 15% of the employee’s remuneration to the employee’s MPF fund, or from a slightly different angle, provide the employee with an interest free loan or a loan at below market rates of interest.
As always, there are pitfalls and an incorrectly worded employment contract may lead to what would otherwise have been a tax free benefit becoming a taxable source of income, so please talk to your professional adviser.
