By Vincenzo Villamena, CPA
Hong Kong has been a favorite destination for US expats, and for us, too, although the current uncertainties may impact this. (See my recent article on Forbes.) Taxes are low in Hong Kong but the tax system is quite different from what Americans are used to in the US. Moreover, Americans in Hong Kong need to consider their US taxes as well.
While this sounds overwhelming, we break it down into 12 key topics. We have worked with many Americans living in HK. We have also set up companies there including our own, so we are intricately familiar with the tax system and cross-border issues.
Whether it is dealing with the complexity of having a different tax year than the standard calendar year of the US or making sure expats are maximizing their foreign housing exclusion due to the high cost of renting, we make sure our clients optimize their tax situation.
If you need help with your taxes you can schedule a consultation with us here. We can also advise you on business structure and banking in Hong Kong.
This guide covers 12 key tax topics for Americans living in Hong Kong:
- Do expats pay tax in Hong Kong?
- Tax rates in Hong Kong
- What expats need to know about Hong Kong’s tax system
- Does the U.S. have a tax treaty with Hong Kong?
- The Hong Kong Provident Fund and US social security for expats
- Exclude HK income from US income tax with the Foreign Earned Income Exclusion
- Offset high housing costs in Hong Kong with the Foreign Housing Exclusion
- Foreign Tax Credit
- Other US filing requirements for Americans living in Hong Kong
- Banking for Americans in Hong Kong
- Incorporating a Hong Kong company
- How to file your US taxes when living in Hong Kong
Let’s get started.
1. Do expats pay tax in Hong Kong?
Hong Kong levies taxes on certain income generated there, albeit tax rates are low compared to the United States (more on that below).
Americans must report any income earned or derived from Hong Kong offices, employment, or services performed in Hong Kong during trips of more than 60 days. Taxes are filed with Hong Kong’s tax agency, the Inland Revenue Department (IRD).
One of the primary tax advantages of Hong Kong is territorial taxation. In a territorial tax system, income earned in the territory is taxable and income earned outside of the territory is generally not taxed.
In short, this means that the IRD does not tax foreign income as long as taxes were paid in the foreign jurisdiction. This can be a huge win for expats with the correct structure.
For example, owning and operating a Hong Kong Corporation with a US C Corporation, if done correctly, would lead to an effective tax rate of 10.5%. Hence, it fulfills the HK territorial tax requirement as long as the income is earned outside of Hong Kong.
But don’t forget, Americans living in Hong Kong must also file their taxes with the IRS regardless of where they live.
2. Tax rates in Hong Kong
In Hong Kong, individual income is taxed at either a progressive rate on net chargeable income (similar to Adjusted Gross Income in the US) or at a standard rate of 15% on net income. Taxpayers pay whichever is lower.
The tax rates in Hong Kong are as follows:
|Net taxable income (2018/2019)||Rate|
|200,000 HKD and above||17%|
As you can see, Hong Kong’s income tax rates are not the lowest, but they are competitive. This is especially true when compared to US federal income taxes which top out at 37%.
The corporate tax rate is 16.5%. Unincorporated businesses pay a 15% tax on their revenue. And for some foreign corporations in HK, taxes can even be zero. More about Hong Kong corporations below in #11.)
Capital gains, interest and dividends are completely tax-free. In addition, Hong Kong does not have a wealth tax or estate tax.
Likewise, the IRD does not apply sales tax on goods except alcohol and tobacco. Another nice benefit for expats is that there are no tariffs or duties for importing personal and household goods.
3. What US expats need to know about Hong Kong’s tax system
Unlike the US tax year, which runs from January 1 to December 31, the tax year in Hong Kong is from April 1 to March 31. This can create some complications when claiming exclusions or credits with the IRS (more on this later).
In Hong Kong, both the employers and the employee file tax assessments to the IRD separately. The employer submits to the IRD information about the employee’s income. You as an employee also receive a copy, which you should review carefully.
The IRD then sends tax returns to taxpayers. Most expats receive a composite return from the IRD. Composite returns include income from rental properties, employment, and business profits.
The IRD usually sends the returns out between April and May (a bit later this year because of the pandemic). After taxpayers receive their return, they need to review it, report all income that is subject to Hong Kong tax, and send it back to the IRD.
The due date for the return is one month from the issue date. Taxpayers can request an extension, but they must submit the extension request before the return’s original due date.
Generally, the employer notifies the IRD that an employee will owe tax. However, in some cases, the employer might not notify the IRD or the expat might receive income from sources other than employment. When this happens, the expat should provide written notice to the IRD that they will owe taxes. Once received, the IRD will issue the expat taxpayer their tax return to be filled out and mailed back as normal.
This is a general overview of the Hong Kong tax system. For more information on filing taxes in HK, please check this guide to filing tax returns with the IRD and consult with a local tax accountant. Online Taxman has several trusted partners in Hong Kong and can help clients with tax preparation and audit services there.
4. Does the United States have a tax treaty with Hong Kong?
Unfortunately, there is no Hong Kong US tax treaty. The United States and Hong Kong also do not have a totalization agreement. Tax treaties and totalization agreements help Americans abroad avoid double taxation or mandatory contributions to two social security systems.
Because of this lack of agreements, it’s especially important to work with a tax advisor who has a clear understanding of both systems. Hong Kong has a unique tax code based on its historical status as a British colony.
Without a tax treaty, there are many areas subject to interpretation and require case law and a general understanding of both tax codes. This makes it more important to hire a qualified tax advisor that is familiar with both jurisdictions. (You can schedule a consultation with our experts here.)
5. The Hong Kong Mandatory Provident Fund and US social security for expats
Social security and retirement contributions can be a tricky issue for expats. Instead of a typical social security tax, Hong Kong has a retirement fund for workers called the Mandatory Provident Fund (MPF).
Fortunately, employed expats are exempt from contributing to the Provident Fund if they participate in a foreign retirement plan. Employees on a temporary stay in Hong Kong are not required to pay into the Provident Fund either.
Expats who do not participate in a foreign retirement plan and who are not on temporary assignment must make contributions to the Provident Fund. Employers and employees are each required to contribute at least 5% of the employee’s salary. Annual contributions have a limit of 15,000 HKD per year employee or employer, for a total maximum of 30,000 HKD.
The employer contribution may be considered taxable income to the employee. Furthermore, to become fully vested in the MPF, you must work in HK for a minimum of 10 years. However, a participant begins to vest at 10% per year after year 3. This could also potentially be taxable each year that the MPF partially vests.
6. Exclude HK income from US income tax with the Foreign Earned Income Exclusion
With the Foreign Earned Income Exclusion (FEIE) Americans abroad can exclude up to $107,600 (2020) in foreign earned income from income taxes. However, to qualify they must meet either the Bona Fide Residency Test or the Physical Presence Test. Our detailed post about the Foreign Earned Income Exclusion explains more.
Since taxes in Hong Kong are lower than in the US, Americans in Hong Kong typically benefit significantly from the FEIE.
7. Offset high housing cost in Hong Kong with the Foreign Housing Exclusion
Americans who are eligible for the FEIE may also qualify to exclude or deduct some housing expenses with the Foreign Housing Exclusion or Deduction.
Given the high cost of living and housing in Hong Kong, the IRS allows a significantly higher exclusion for expats in Hong Kong, compared to many other locations.
Americans living in Hong Kong can exclude or deduct up to $114,300 of eligible housing expenses. This is more than three times as much as most other locations.
Eligible expenses include costs such as rent, gas, water, certain home repairs, and more. And, because utilities in Hong Kong are fairly expensive, this exclusion or deduction comes in handy.
In one case, a client of ours decided to move out of the apartment that he owns in order to rent it out. He received rental income on which he did not have to pay tax due to depreciation and other expenses. The rent he was receiving essentially offset the rent he was paying. However, he was able to use the Foreign Housing Exclusion for the rent he paid. This resulted in about $80,000 of tax-free income. As they say, it can be better to own a place that you can rent and rent where you want to live…
8. Foreign Tax Credit
The Foreign Tax Credit (FTC) is a dollar-for-dollar credit for taxes paid to a foreign country. To qualify, Americans must have paid qualifying taxes to a foreign government and meet some other requirements. However, you don’t need to meet either of the two tests required for the Foreign Earned Income Exclusion.
Keep in mind that you cannot use the FTC for income that you already excluded using the Foreign Earned Income Exclusion.
Because Hong Kong tax rates are relatively low, the Foreign Earned Income Exclusion is generally the first choice. But, American taxpayers with income that exceeds the FEIE threshold should consider also using the Foreign Tax Credit.
Why? Because income that exceeds the FEIE threshold is taxable. So, the Foreign Tax Credit can be used to reduce the taxes owed on the income above the FEIE.
As discussed previously, it is usually best for US expats living in HK to max out the Foreign Earned Income Exclusion and Housing Exclusion. The Foreign Tax Credit will then partially offset the remaining taxes due. US taxpayers should still be prepared to pay because the US tax rate is much higher than the HK tax rate for income over $120,000.
Keep in mind that claiming exclusions and credits can be complicated because of the different tax due dates mentioned earlier. An expert expat accountant can help you with this.
Another nuance that comes up when taking the Foreign Tax Credit in Hong Kong is whether to use the FTC based on cash vs. accrued basis.
Given the difference in the tax year, sometimes it is easier to use accrued basis so you can calculate the tax credits based on the true taxes owed. This is especially helpful if there was a big bonus or windfall. The other more complex option would be to use actual taxes you paid in the following year.
Questions and analyses like this are what Online Taxman does for clients to help optimize their tax situation.
9. Other US filing requirements for Americans abroad
Finally, Americans in Hong Kong should check if they are still liable for any US state tax. Some US states try to hang on to their former residents even when they live abroad.
They also need to be aware of reporting requirements for foreign bank accounts and assets. Failure to report accounts can result in fines.
10. Banking for Americans in Hong Kong
Hong Kong has long been a trusted financial and business center. However, in recent years, it has become more difficult for Americans without residency to open accounts in Hong Kong. And recent new developments have made many call into question the future of Hong Kong as a business hub.
Politics aside, we believe that it is important to diversify and plant flags in many jurisdictions. This is why we recommend looking at other countries for banking with an HK company, including Singapore, Switzerland, Belize, etc.
Generally, to open a bank account in Hong Kong, American expats must be residents of Hong Kong or willing to make a large initial deposit.
If you need assistance opening an offshore bank account, schedule a consultation with our team and we would be glad to assist you with choosing a jurisdiction and opening the account.
11. Incorporating a Hong Kong company
Hong Kong still enjoys a good reputation as a business jurisdiction. While a HK company is more prestigious than corporations in many other locations, it comes at a price.
Although the cost of incorporating in Hong Kong is relatively reasonable and quick compared to other jurisdictions, ongoing costs are high, as annual audits are required.
Albeit a bit more costly and time-consuming, this also adds to the legitimacy of Hong Kong as a jurisdiction compared to other places in the world. Working with a provider such as Online Taxman can avoid these headaches and ensure that your corporate affairs are in order to focus on your business.
The corporate tax rate in Hong Kong is 16.5% for companies that operate in or have clients in Hong Kong. And for corporations that operate in another country and do not have clients in Hong Kong, the corporate tax rate is 0%.
Regardless of which rate your corporation qualifies for, you still need to submit an annual tax return for your corporation.
The taxation of Intellectual Property (IP) in Hong Kong makes it an extremely favorable jurisdiction for IP coming from China. Many Chinese companies consider Hong Kong more advantageous to Singapore.
Another advantage of a Hong Kong company is access to China and Asia in general. We work with many clients with e-commerce businesses that set up Hong Kong companies in order to pay their Chinese suppliers. HK is essentially the gateway to doing business in China and other parts of Asia.
As you can see, Incorporating in HK has many advantages besides a low tax rate. It achieves this along with having a good bank account and credit card processing of a respected and central jurisdiction in Asia.
12. How to file your US taxes when living in Hong Kong
Now that we covered the key tax topics for Americans in Hong Kong, let’s talk about the practicalities of preparing your US tax return.
Using your US-based accountant may not be the best option. Not only because you can’t visit the office and they are in a quite different time zone. Often, they also don’t know the ins and outs of expat taxation, such as the Foreign Earned Income Exclusion and Housing Exclusion.
We are registered in Hong Kong and have many years of experience in saving US expats money on their taxes. Our entire process is securely online. And we have an accountant available at a time that works for you. You can schedule a consultation with us to get to know us, get advice on your tax situation, and receive a quote for tax preparation.
Living in Hong Kong as American
Expats have many reasons to love Hong Kong. Vibrant and diverse gastronomy and nightlife, coupled with the ability to take a serene nature walk on the same island, it offers a lot of variety for an Asian metropolis.
With over 85,000 Americans living in Hong Kong, US tax planning is an important topic. While US tax might seem intimidating from abroad, with proper strategy and help from a tax advisor, you can rest easy.
For help preparing your tax return, set up a consultation with one of our expert accountants below.