Tax Planning Tips

Tax evasion is an illegal method of obtaining a tax benefit. Tax avoidance is the attempt to obtain a tax benefit by legal means. A taxpayer can achieve maximum tax efficiency through tax planning. We will introduce some useful means of tax planning in Hong Kong. If you have any questions about the content, please feel free to contact us.

Please choose:

(1) Profits Tax Planning

(2) Salaries Tax Planning

(3) Property Tax Planning

 

 

 

Profits Tax Planning


Payment of Personal Expenses by the Company

This is the most common way of minimizing tax liability adopted by small-medium companies. In order for such expenses to be qualified for deduction, company should prove that such expenses is not personal expenses defined by IRO. In this sense, company should entered into an employment contract between the company and the director spcifying clearly that the expenses should be born by the company.

 

To "Employ" relatives

Since Personal Allowances can be deducted from salary income and the tax rate of the first HK$97,500 after deduction of the allowances is lower than the standard rate of 15.5%, hence income be taxed under salary tax is far advantageous than being taxed under profit tax.

 

Limited Company can Setup "Unlimited Company" to Reduce Tax

Since the tax rate for corporation (17.5%) is lower than the tax rate for non-corporation (15.5%), tax saving can be obtained by transferring profit from limited company to "unlimited company".

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Salaries Tax Planning


Quarters

Rent reimbursement by an employer is exempt. The employer is only subject to tax on maximum 10% of his net assessable income in respect of the provision of quarters. Employee can discuss with his employer to let the employer pay the rent for his quarter. While the total salary expense remain the same, employee can reduce his tax liability.

 

Provision of fringe benefits and facilities

As long as the fringe benefits provided by the employer are not convertible into cash, they will not be treated as assessble income of the employeee. According to the IRO, only the abovementioned quarters, holiday warrants and options are exempted from tax.

Therefore, employer can increase the fringe benefits of employess without increasing their salaries. Those exempted fringe benefits include:-

  • Provision of messing, but it must be non-transferrable coupons;
  • Provision of motor vehicle, but it can be lent to others by the employee;
  • Medical and dental services arranged by the employer;
  • Provision of furniture and residential facilities;
  • Servant/driver employed by the employer;
  • Contract entered into between the employer and the utilities suppliers (ie the elctricity company, the gas company, the water authority) for the supply of facilities to the employee's home;
  • The employer can set up a discretionary trust from which the income can be used to pay for the education of the employer's children.

 

Deductible Expenses and Depreciation

All outgoings and expenses, other than expenses of a domestic, private or capital nature, wholly, exclusively and necessarily incurred in the production of assessable income, are allowed to be deducted from assessable income. Taxpayer can request deduction of such outgoings and expenses in the tax return, but proper records and receipt must be kept.

 

Using of Limited Company to Reduce Tax

Due to the seperate legal personality enjoyed by a corporation, taxpayerr can transfer his income to the limited company and be taxed after deduction of reasonable expenses of the company. But it should be noted that the cost of formation and maintenance of a limited company is not low, taxpayer should be assessed carefully.

 

60-Days Rule

Income from employment is exempt from salaries tax if all services of that employment are performed outside Hong Kong. Section 8(1B) excludes income where services are performed in Hong Kong during visits not exceeding 60 days. If possible, the taxpayer should not visit Hong Kong for more than 60 days in the year of assessment. The work base and the home base of the taxpayer should not be in Hong Kong otherwise the presence may not be considered to be "visits".

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Property Tax Planning


Using of Limited Company to Own Property

Interest on loans used to finance the purchase of property is not deductible under property tax. An individual can only deduct mortgage interest if he has elected for personal assessment.

A way to claim mortgage interest deductions and yet avoid electing personal assessment is to let a company own the property. The rental income is chargeable under profits tax but the interest is deductible provided that the certain conditions are fulfilled.

 

Management Fees Paid by Tenant

Assessable value not only includes rental income but all the considerations, e.g. lump-sum premium, rental for furnitures, etc. But actual management expenses or repairs and outgoings are not deductible under property tax. If it is stated in the leasing agreement that alll the rates, repairs and management fees are paid by the tenant, the assessable value can be reduced.

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