Hong Kong SAR
An assessment year (or tax year) begins on 1 April of a year and ends on 31 March of the following year.
Basis of assessment
The basis of assessment is the total assessable income accrued to a person in a given year of assessment with appropriate adjustments for allowable deductions and personal allowances.
An individual who is a Hong Kong resident may elect for personal assessment whereby income chargeable to salaries tax, profits tax and property tax is aggregated in a single assessment. Personal assessment enables an individual to offset a business loss against income subject to salaries tax or property tax and to claim deduction of loan interest on rental properties which is not available under property tax. Losses brought forward from previous tax years under personal assessment may be used to offset against income in current year or subsequent years. Allowable deductions and appropriate personal allowances are granted under personal assessment and the tax is calculated on the balance in the same manner as for salaries tax. The maximum tax payable is, however, limited to tax at the standard tax rate on the person's total assessable income less allowable deductions, but without a deduction for personal allowances.
A married person may elect for personal assessment on one's own rather than jointly with one's spouse as far as one is an individual who (i) is of or above the age of 18 years or is under that age if both parents are deceased and (ii) is either ordinarily resident in Hong Kong SAR or a temporary resident of Hong Kong SAR.
However, if a married couple has elected for joint assessment for salaries tax purposes, then an election for personal assessment must be made jointly by both individuals of the married couple.
Joint assessment for married couples
Although the two individuals of a married couple who both earn taxable income are normally taxed separately, they may elect to be taxed jointly (i.e. election for joint assessment) where it is beneficial to them.
Under joint assessment, the total income of both spouses will be aggregated under one assessment, with adjustments for allowable deductions and appropriate personal allowances.
Individual tax returns are issued on the first working day of May each year. The filing deadline is usually within a month from the date of issue. However, individuals who are represented by a tax representative are normally granted an extension of an additional month for filing their returns. Further extensions for return filing may be possible upon application and will be considered on a case-by-case basis.
In more complicated cases (e.g. those involving time apportionment claim), a tax return is usually filed together with a tax computation showing how the net chargeable income is computed. In general, no supporting documents (e.g. donation receipts) are required to be submitted together with a tax return. However, the HKIRD may request such supporting documents subsequent to the filing of the return.
A notice of assessment will be issued after the tax return has been processed by the HKIRD under the ‘assess first, audit later’ approach. Taxpayers may be subject to post-assessment investigation of the HKIRD at a later date.
Payment of tax
Tax is usually payable in two instalments. The dates of payment of tax, which generally fall in January and April of the year following the year in which the tax return is issued, are determined by the Commissioner of Inland Revenue (CIR) and specified in an assessment notice. A system of provisional tax payments applies whereby estimated tax payments are made during the current year. The provisional salaries tax payable is normally estimated based on the previous year’s net chargeable income. The provisional salaries tax already paid is credited against the final salaries tax assessed for a year of assessment, which is determined after filing of the return.
An employer is not obliged to withhold salaries tax from the remuneration paid to an employee except in cases where an employee is about to leave Hong Kong SAR for more than one month other than on a normal business trip. In such cases, the employer may be required to withhold payments from the departing employee.
As dividends and interest derived by individuals are not subject to Hong Kong income tax, there is no withholding requirement on such income derived by an individual.
Withholding tax is applicable to royalties received by non-resident individuals for the use of the relevant intellectual property in Hong Kong SAR or for the use outside Hong Kong SAR and the royalties paid can be claimed as deductible under profits tax by the payer.
There is no specific tax audit cycle in Hong Kong SAR. Tax investigation targets are selected based on specific facts and circumstances of individual cases and certain criteria (e.g. income level) determined by the HKIRD.
Statute of limitations
An additional assessment may be made by a HKIRD tax assessor if a taxpayer chargeable to tax has not been assessed to tax or has been assessed at less than the proper amount. The assessment must be made within the relevant year of assessment or within six years after the end of that year of assessment. The time limit for making additional assessments is extended when a taxpayer either has not been assessed, or is under-assessed, due to fraud or wilful evasion. In that case an additional assessment may be made up to ten years after the end of the relevant assessment year.
Topics of focus for tax authorities
Salaries tax issues that are often subject to close scrutiny of the tax authority include: time apportionment claim, income exemption claim, taxability of termination payments, taxation of employee share benefits, and taxation of carried interest.