1 TAX PLANNING FChFP Conversion Course Jason Lam CPA

2 Tax planning ≠ tax evasion (illegal)

3 TAXATION SYSTEM IN HONG KONG the territorial principle

4 TAXATION SYSTEM IN HONG KONG Profit tax rate: –Corporation – 17.5% (03/04; 04/05) –Unincorporated business – 15.5% (03/04) 16% (04/05) 16% (04/05) Salaries tax rate: –Standard rate – 15.5% (03/04) 16% (04/05) 16% (04/05) Property tax rate: –15.5% (03/04) –16% (04/05)

5 TAX PLANNING STRATEGIES Deflection Income deferral Deduction - Remuneration packaging –Holiday passage

6 INDIVIDUAL TAX PLANNING EMPLOYMENT INCOME –60 Day Rule of Visit HK Employment No service in HK Service in HK No tax VisitorNon-visitor ＞ 60 days ≦ 60 days Tax No tax

7 Non HK Employment No service in HK Service in HK No tax VisitorNon-visitor ＞ 60 days ≦ 60 days Tax No tax Apportional

8 INDIVIDUAL TAX PLANNING EMPLOYMENT INCOME –Remuneration Package If a benefit cannot be converted into cash, no salaries tax liability would arise

9 Example 1 Assuming Mr. X is now receiving a monthly salary of HK$60,000 per month with 12 months’ salary for a year. If he can structure his employment package in such a way that out of the employment package, HK$10,000 per month is regarded as a refund of rent paid, his tax position will be completely different. Revised

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12 Example 2 Assuming Mr. X in example 1 above now decides to acquire a property for his own use. Mr. X is required to pay mortgage loan interest of HK$20,000 a month. He can choose either to buy the property under his own name or arrange a company to acquire the property and lease the property to his employer for a monthly rental of HK$20,000 as quarter provided to him. In this case, his tax position will also be different.

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15 INDIVIDUAL TAX PLANNING EMPLOYMENT INCOME –Stock Options –Holiday Passage –Rental Arrangement for Housing Accommodation –Termination Payment (Compensation for loss of office)

16 SOLE PROPRIETORSHIP / PARTNERSHIP INCOME –Section 9A of the Inland Revenue Ordinance PROPERTY INVESTMENT INCOME USE OF PERSONAL ASSESSMENT INDIVIDUAL TAX PLANNING

17 Example 3 Assuming Mr. Y received salary income of HK$600,000 during the year. He also owned a property for letting purpose and derived rental income of HK$200,000 during the year. For such property, he has incurred mortgage loan interest of HK$150,000 during the same year. His tax position will be as follows:

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20 PROFITS TAX PLANNING Only profits arising in and deriving from Hong Kong is taxable No tax on capital gains

21 PROFITS TAX PLANNING STRATEGIES (1) Segregation of onshore and offshore businesses and profits Apportionment of profits Deduction of expenses Timing and classification of capital expenditure

22 PROFITS TAX PLANNING STRATEGIES (2) Apportionment of onshore and offshore expenses Using companies with tax losses Taxability of interest income Delay recognition of profits Choice of financial year end Securing capital gain claim

23 ANTI-AVOIDANCE PROVISIONS ╳ do not have real commercial substance and justification ╳ sole or dominant purpose of obtaining a tax benefit

24 Sections 61 and 61A Sec 61: concerns artificial and fictitious transactions Sec 61A: concerns transactions which are actually entered or effected but with the sole or dominant purpose of obtaining a tax benefit

25 Individual Tax Rules in China 1.Upon application to and approval from the tax authorities, the taxation of foreign-source income can be limited to that received from Chinese enterprises, Chinese establishments, Chinese economic organisations, and Chinese individuals. 2.The 90-day test is extended to 183 days if the individual is a tax resident of a country that has executed a taxation treaty with China.

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