Globe-Trotting Sportsman Or Entertainer: Hong Kong

Hong Kong is a low-tax jurisdiction, and has a territorial basis of taxation. This means that an itinerant individual with multi-source income is in a very favourable tax situation in Hong Kong. The following is a brief summary of Hong Kong taxation.

Tax levied on income, known as 'salaries' tax is based on the territorial principle and applies to income "arising in or derived from a Hong Kong employment". Some types of income attract reduced or nil taxation. For example :

• Income paid in Hong Kong but which relates to services rendered outside the islands is exempt from salaries tax if the fiscal authorities are satisfied that tax has already been paid on that income in a foreign jurisdiction (much multi-source income for travelling professionals may fall under this heading).
  
• An individual with Hong Kong source employment who works abroad but renders services in Hong Kong for less than 60 days in any tax year is exempt from salaries tax in the jurisdiction.
  
• An individual with Hong Kong source employment who works abroad but renders services in Hong Kong for more than 60 days in any tax year is assessed on the proportion of his total income that the number of days worked in Hong Kong bears to 365.
  
• The Hong Kong based employee of a non resident corporation Salaries tax is not payable on that proportion of income earned in relation to work done outside Hong Kong by such an individual on a contract governed by the laws of a foreign jurisdiction, where the employee is paid outside Hong Kong.

Non-employment source income such as share dividends and capital gains realized on the sale of shares are not taxable in the territory. Progressive salaries tax rates are applied after deduction of various allowances.

Social insurance payments have been voluntary, and are made into approved private schemes; but as from December 2000 at least 5% of salary must be paid into a special fund.

Estate duty in Hong Kong traditionally applied only to assets situated in Hong Kong, such as bank accounts, shares registered in the territory, and real property. The tax applied to estates valued at over US$1m and rose to a maximum of 15% on estates over $1.35m.

However, the Revenue (Abolition of Estate Duty) Ordinance 2005 ["the Ordinance"] came into effect on 11 February 2006.

The new legislation meant that no estate duty affidavits and accounts need to be filed and no estate duty clearance papers are needed for the application for a grant of representation in respect of deaths occurring on or after that date. The estate duty chargeable in respect of estates of persons dying on or after 15 July 2005 and before 11 February 2006 ("transitional estates") with the principal value exceeding $7.5 million was reduced to a nominal amount of $100.

There is a tax on the imputed rental value of real property in Hong Kong, payable regardless of residence status. There are also stamp duties on most types of transaction.

NB: Hong Kong tax rules are considerably more complicated than the above simplified summary, and professional advice on the situation of any particular individual is advisable.

American citizens, and nationals of the very few other countries that tax world-wide income on the basis of citizenship, won't be able to take advantage of the low-tax environment in Hong Kong, but for all other nationals, it is available.

In choosing between various types of offshore asset for investment purposes, the main consideration for a Hong Kong-based individual will be his or her intended residential plans following departure from Hong Kong. If the plan is to move on on to another offshore jurisdiction, then investment choices will not be much constrained, but if the plan is to return to a high-tax jurisdiction, then it is vital to study the anti-avoidance legislation of that jurisdiction before acquiring offshore assets. Some jurisdictions tax offshore assets more severely than domestic assets and 'look through' trust arrangements, while others accept trust assets as being outwith the tax net.

Equally, if it is planned to return to a high-tax jurisdiction, almost all of which tax world-wide income, then plans must be made to shelter income insofar as this is possible, by using trusts or other tax-distancing vehicles, if this is practicable within the tax regime of the chosen jurisdiction. The UK offers a special regime which may be helpful (select 'Globe-trotting Sportsman or Entertainer' and 'UK').

If the eventual residential jurisdiction is one of those that has a very restrictive tax regime, then individuals falling under this heading may need to resort to corporate structures to market their skills and manage derivative income flows. It may well be that these can usefully be based in offshore jurisdictions, although complex structures may be necessary if corporate anti-avoidance rules are to be avoided.

www.lowtax.net contains details of the corporate and individual tax regimes for 35 offshore jurisdictions.

NB: The suggestions given above do not constitute investment advice. They are intended only to assist individuals in finding appropriate professional advice, which is essential for anyone planning offshore investment.