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Issue 1.2 - April 2008
Tax notes

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Under Hong Kong's tax legislation the provision of properly controlled and administered benefits-in-kind can result in significant tax savings for employees.

The Inland Revenue Ordinance (IRO) charges Salaries Tax on individuals in respect of their income arising in or derived from Hong Kong from any office or employment, and income derived from services rendered in Hong Kong.

The definition of income includes not only wages, salaries, bonuses and allowances but also perquisites (or benefits-in-kind) if they are provided as a reward for services.

The IRO deals specifically with the tax treatment of only four benefits-in-kind ¡V housing, holiday journey benefits, stock options and education allowances.

The IRO provides that other benefits-in-kind are only taxable if they fall within one of the following two categories:

(a) Benefits capable of being converted to money's worth by the recipient

(b) Amounts paid by an employer to discharge the personal liability of the employee.

The advantage of planning
A summary of the Salaries Tax treatment of the more significant benefits-in-kind provided in Hong Kong is set out overleaf. It will be seen that, with proper implementation and control, various benefits can be provided in a tax advantageous or tax free manner to an employee. Moreover if the employer is subject to Hong Kong Profits Tax, the cost of the benefits provided will be fully tax deductible for the employer even if the benefits are received tax free in the hands of the employees.

The use of tax efficient benefits-in-kind in employment contracts can result in tax savings to employees. Employers should consider the use of such tax efficient employment controls when engaging staff or consider introducing such benefits in addition to existing arrangements at the time of promotion or salary review.

Proper control
It is important that the provision of benefits by an employer be properly controlled by the employer, particularly in the case of housing benefits where formal policies and controls should be implemented by the employer.

Housing benefits
Where an employee derives a benefit from the occupation of rent free or subsidised accommodation at the expense of the employer, the taxable benefit is the rental value (as defined in the IRO) of the residence. Where an employee rents the residential property himself and obtains partial reimbursement from his employer, the taxable benefit is then the rental value less the difference between the gross rent paid and the reimbursement to the employee.

The assessable rental value for an employee is usually calculated based on a percentage of the taxable remuneration of the employee. The percentage uplift for hotel accommodation is 4% for one room, 8% for two rooms and 10% for more than two rooms. The percentage for a flat or house is 10%. Rent for this purpose includes rates and maintenance charges.

However, if an employer pays the employee an allowance for accommodation, this falls within the definition of a cash allowance and is subject to Salaries Tax in full in the employee's hands.

It is important that this benefit is properly controlled by the employer. This is discussed in more detail in our Tax Notes Issue 2.1.

Holiday journey benefits
Up to 31 March 2003 the value of any holiday warrant or leave passage granted to an employee or any allowance for the purchase of such items, was exempt from Salaries Tax if it was actually expended for that purpose.

However, with effect from 1 April 2003 all payments made by an employer in connection with a holiday journey for an employee are subject to Salaries Tax in the hands of the employee. This is the case regardless of whether the benefit can be converted into cash or whether the liability for payment is that of the employer or the employee.

The assessable benefit to the employee is the actual cost incurred by the employer or the allowance paid to the employee in the case of cash allowances.

Share option schemes
Any gain realised by the exercise, assignment or release of an option to acquire shares is taxable if the option was granted to an individual because of his employment or office. It should be noted that it is the exercise rather than the granting of the option which is the taxable event.

Education
Education allowances and benefits are taxable in the hands of the employee even if an employer contracts directly with the school. The use of a properly structured educational trust for the benefit of employees' children may, however, render the benefit non taxable in the hands of the employees, whilst the employer receives a deduction for Profits Tax purposes.

Utilities
The employer must contract directly with the utility company for the provision of gas, electricity or water supplies as appropriate if these benefits are to be received tax free by the employee.

Car
There is no deemed benefit for the provision of a company car to an employee and the general rules apply. Thus a company car may be provided free of tax to the employee if the car is purchased by the company as a company asset. The running costs of the car can also be provided tax free if the employer contracts for and pays for insurance, petrol, maintenance and parking in the business area.

Interest free loans
The provision of interest free or low interest loans to employees does not result in a taxable benefit unless the employer waives repayment of all or part of the capital of the loan.

Medical benefits
For a tax free medical benefit to be provided, the employer must contract directly with the various medical establishments involved and be billed, and pay the fees, in its own name. Alternatively the employer could provide medical benefits to designated staff by contracting directly with an insurance company.

Contact Information

Paul Chow
T  +852 2218 3188
E  paul.chow@gthk.com.hk

Gary James
T  +852 2218 3137
E  gary.james@gthk.com.hk

David Southwood
T  +852 2218 3103
E  david.southwood@gthk.com.hk

Brenda Cheung
T  +852 2218 3136
E  brenda.cheung@gthk.com.hk

Mary Ho
T  +852 2218 3168
E  mary.ho@gthk.com.hk

Daisy Ip
T  +852 2218 3168
E  daisy.ip@gthk.com.hk

Winnie Tsui
T  +852 2218 3280
E  winnie.wy.tsui@gthk.com.hk

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About Tax notes
Tax notes are issued in summary form exclusively for the information of clients and staff of Grant Thornton and should not be used or relied upon as a substitute for detailed advice. Accordingly Grant Thornton accepts no responsibility for any loss that occurs to any party who acts on the information contained herein without further consultation with ourselves.

Published by Grant Thornton