Salaries Tax of Taxation

Hong Kong Salaries Tax is charged on an individual in respect of his or her income arising in or derived from Hong Kong from any office or employment and also any income derived from services rendered in Hong Kong.

The definition of income in the Inland Revenue Ordinance ("IRO") includes, inter alia, wages, salary, bonus, gratuity, perquisites and allowances if they are provided as reward for services. The IRO sets out the tax treatment of benefits-in-kind or perquisites but only four are specifically mentioned, namely, housing, holiday warrants (or leave passage allowances), stock options and education allowances.

Other benefits-in-kind are only taxable if they fall within the following categories, namely;

1. Benefits capable of being converted into money's worth by the recipient.
2. Payments made by an employer to discharge any personal liability of the employee.

It should be noted that under the above rules the benefit does not actually have to be converted into cash; it is sufficient that the employee could convert it into cash himself. Thus, for example, if an employer gives an employee a stereo system as a reward for services, this would be a taxable benefit as the employee could sell the stereo system and convert it into cash. The question of the value to be placed on the asset will depend on the nature of the asset, that is whether it is the full retail price or the second hand value. A gift or luncheon voucher given as a reward for services would be taxed at full face value. A suit or similar personal item would be valued at its second hand value.

A summary of the taxation treatment of the main benefits-in-kind provided in Hong Kong is set out overleaf.

If the employer is subject to Hong Kong Profits Tax on its income, then the benefits provided to employees will be fully deductible for Profits Tax purposes even if the benefits are not taxable or taxed at reduced rates in the hands of the employees.

In view of the potential tax savings that are available to employees through the use of benefits-in-kind, employers should consider the use of tax efficient employment contracts, at the time of engaging staff or introduce such benefits as a top up of existing arrangements at the time of promotion or salary review.

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