Anna Chan, head of the Oldham, Li & Nie’s Tax Advisory & Private Client Departments, provides an overview of tax implications that Hongkongers and expats need to consider when relocating
Hong Kong’s tax rate is low, and the system is simple to understand which is one of the reasons many people overlook tax considerations when they are planning a relocation. The hard reality, however, is that popular emigration destinations, such as the UK and Canada, have a much higher tax rate and more complex tax system. For this reason, if you are looking to relocate, you need to set some time aside to work out how to minimise your tax exposure.
Many of these tax-saving moves, can only be done while you are still a Hong Kong tax resident. It is therefore advisable to allow sufficient time before your actual departure to consult a tax lawyer. At the very least you will need to update your current market value (CMV) status, have a Will drawn up for Hong Kong assets and find out whether you will be taxed on any Hong Kong salary and assets in your new country of residence.
Unlike Hong Kong, most countries impose tax on residents’ worldwide income, meaning that investment gains generated in a foreign location (i.e. Hong Kong) could be subject to local tax. The good news is that most countries do not tax gains that were generated overseas prior to a relocation, as long as you have proof. For those emigrating to Canada and the UK, this would usually mean providing sufficient record to show the CMV of your investments, such as surveyor reports, immediately prior to your relocation.
Likewise, any revenue, including salaries from Hong Kong employment or profits from an ongoing Hong Kong business could be subject to local taxes. That being said, in many countries, including the UK, non- domiciles can benefit from special taxation rules on foreign-sourced income. And in Canada, thanks to the Double Tax Agreements (DTA) between Canada and Hong Kong, the local tax is waived. Canadian tax residents with dual residency in Hong Kong are only taxed in Hong Kong on salaries derived from Hong Kong employment. Further, the withholding tax rate on dividends is generally limited to 15%.
On another note, if you are relocating temporarily, you have to be cautious about the length of your stay in order to avoid worldwide tax. In Canada, for instance, a continuous stay of over 183 days in a tax year would make you a tax resident and therefore subject to worldwide tax.
Hong Kong employers also need to ensure that they have arrangements in place that permit employees to work from overseas. This is because an employee’s activities could be construed as the company having a presence/establishment overseas, and if such activities generate much profit, the employer could be subject to local corporate taxes.
Estate duty is another important factor to consider prior to relocation, and you are well advised to have a Will executed for Hong Kong assets. Inheritance tax was abolished in Hong Kong in 2006, but it can be as high as 40% in the UK. While there is no inheritance tax in Canada per se, in effect the tax exists because the Canada Revenue Agency charges on assets at the time of death.
A Hong Kong Will allows you to argue that Hong Kong remains your place of domicile and thus no estate duty should be imposed. This argument is especially strong if you are only a tax resident in the country you have relocated to, and you have not made it your permanent home.
Anna Chan heads Oldham, Li & Nie’s Tax Advisory & Private Client Departments. She has over 10 years of experience advising on tax issues ranging from pre-immigration tax compliance and planning for tax efficiency to transactional tax structuring.Anna Chan, Emigration, Hong Kong Tax, law, Oldham Li & Nie, tax law