With business-friendly tax policies and a relatively straightforward payroll system it is no wonder why many multinational entities are looking to expand to the cosmopolitan gateway that is Hong Kong. However, to ensure maximum benefit and avoid serious penalties, it is crucial to understand the subtle nuances of the region’s payroll legislation.
New Employees & Employee Information
The immigration policies of Hong Kong are designed to attract skill and talent, and the city is home to four universities ranked among the top 50 in the world.
Collecting employee information before the employee hire date is the first step to starting the payroll process. For companies doing business in Hong Kong, employee information collection is relatively simple. New employee notification must be reported to the Inland Revenue Department with the passport, signed contract and work permit submitted as support documentation within three months of the employees start date.
Companies operating in Hong Kong have a lot of flexibility on compensation packages with employees outside of the statutory payroll requirements. For example, there are no standardized working hours. Therefore, an employee’s hourly workweek is outlined in their contract, which depending on their sector, employee status, and other variables can differ.
Compensation components range from general base salary to certain fringe benefits like car allowance, child´s education and care, maternity leave and paid holidays. The most popular among these benefits is a housing allowance, which, not unusually is paid directly to the landlord since this ensures that the allowance is being properly utilised.
Income tax, or salary tax as it is more widely known in Hong Kong, is not withheld at the source by employers, but it is compulsory for companies to report all employee renumeration by submitting an employer´s return (BIR56A and IR568) to IRD annually. Additionally, they are required to report all new employment, terminations or death, and long-term leaves with the forms IR56E, IR56F and IR56G respectively.
Salary tax is charged at a progressive rate from 2- 17% on employee net pay. Alternatively, an employee may choose to pay a flat 15% rate and it is the employee´s responsibility to file an annual declaration and pay it directly to IRD.
In the case of an employee termination the company must report this by filing the IR56F no less than one month in advance to the Inland Revenue Department (IRD). The employee is then subject to withholding of renumeration from the employer until the IRD issues a letter of release, which clears the employee of all debts that could be owed to the state in the form of tax or social contributions.
Though an employer does not withhold salary tax from the employee, it is compulsory to make social contributions to the Mandatory Provident Fund. Recently launched in 2000, the MPF is Hong Kong´s pension scheme, and as the name suggests, it is an obligatory contribution for the employee and employer.
To begin contributions, an employee must complete an enrolment form and elect their investment portfolio. The completed form is provided to the trustee, who then enrols the employee in an MPF account. Once this has been processed, a notice of participation will be issued to the employee.
Both parties contribute 5% on any income that is a minimum HKD 7,100 or a maximum of HKD 30,000 monthly. In other words, if the employee´s income is less than the minimum the employee is not obligated to make this contribution; however, the employer must. On the other hand, if an employee´s income exceeds the upper limit neither the employee nor employer are required to contribute beyond 5% of the maximum.
Record Keeping and Reporting in Hong Kong
Monthly, with each contribution to the MPF, employers must provide a statement showing the amount of each employee’s relevant income, as well as the amounts that both parties contributed. A copy of this statement must be made available to the employee within seven working days after the contribution was made. Regardless if the record statement is a hardcopy of a payslip or is provided to the employee digitally, it must be kept on file by the employer for a minimum of seven years.
Before and employee´s last day of employment, regardless of the reason for termination, the employer must arrange for the last payment of mandatory contributions on behalf of the employee, notify the MPF the date of termination via the remittance statement or another form of written notice. The employee must also receive a record of this contribution as well.
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