A Complete Guide to Digital Nomads & Taxes in Hong Kong

Having the freedom to work from anywhere in the world is incredibly enticing. And digital nomads enjoy this freedom to the fullest.

Thanks to the internet and technology, they can be termed as people who work from a remote location anywhere in the world.

One of the key concerns that one has as such a remote worker is the tax treatment of their income.

Since the person may be working out of various countries and each country has its own tax obligations and regulations, figuring out what tax rates apply to such an individual can be challenging. This is also the case with Hong Kong, considered one of the best countries to start a business for digital nomads.

In this blog post, you will learn everything about digital nomad taxes in Hong Kong.

What Do Digital Nomads Do?

Digital nomads are essentially remote workers. They are not bound by any location and travel freely to any foreign country while working.

They may be self-employed or employed by an organization. However, they cannot be pigeonholed into one specific task as they work in different industries in various capacities.

Here are some of the popular sectors that have a vast number of such remote workers:

• Design
• IT
• Accounting
• Marketing
• Project management
• Sales
• Software development
• Writing
• Teaching
• Transcription and translation
• Recruiting and HR

What Do Taxes Look Like for Digital Nomads in Hong Kong?

While capital gains tax are of no concern in Hong Kong, taxation laws are a critical concern for its remote workers.

While tax exemption in Hong Kong is attractive, especially for those who might qualify for the US Foreign Earned Income Exclusion (FEIE), it's important to understand this benefit applies to US citizens and residents abroad. Can every digital remote worker benefit from the same tax advantages in Hong Kong?

At the outset, note that taxes in Hong Kong are based on the territorial principle. This means that Hong Kong authorities can tax only such income earned in Hong Kong. But there are no specific digital nomad taxes levied by authorities.

On a side note, if a digital nomad spends more than 183 days in Hong Kong, they could be considered a tax resident. This means their income could be subject to Hong Kong tax and may have to pay taxes, regardless of the source location.

Here's a break up of the various applicable taxes:

Salaries Tax

Any individual who earns income from a Hong Kong office by virtue of Hong Kong employment or due to services rendered in Hong Kong through visits of more than 60 days in any tax year is liable to pay Hong Kong salaries tax.

In Hong Kong, there is no need to pay "self-employment taxes," for there is none. But, self-employed individuals, including digital nomads, are liable to pay income tax on their earnings.

Hong Kong uses a progressive tax system, meaning the tax rate you pay increases as your income goes up, including rental income. Here's a breakdown of how much tax you would pay based on your net chargeable income:

• If your net chargeable income is up to HKD 50,000, you will pay a 2% income tax rate, resulting in a tax amount of HKD 1,000.
• The income tax rate jumps to 6% for the next HKD 50,000, so you would pay HKD 3,000 in tax. If you have a HKD 100,000 net chargeable income, you must pay the first 2% (HKD 1,000) rate and the next 6% rate (HKD 3,000), which will amount to HKD 4,000.
• For the next HKD 50,000, the income tax rate jumps to 10%, meaning you would owe HKD 5,000 in tax. If you have a HKD 150,000 net chargeable income, you must pay the prior 6% rate (HKD 4,000) and the next 10% rate (HKD 5,000), which will amount to HKD 9,000.
• For the next HKD 50,000, the income tax rate jumps to 14%, resulting in a tax amount of HKD 7,000. This means that suppose you have a HKD 200,000 net chargeable income, you must pay the prior 10% rate (HKD 9,000) and the next 14% rate (HKD 7,000), which will amount to HKD 16,000.
• For the next HKD 50,000, the rate falls under the highest tax bracket of 17%. The exact amount of income tax owed in this bracket depends on your specific income level.

Source: Tax Rates of Salaries Tax & Personal Assessment

The tax is levied progressively on the net taxable income post deductions and allowances. Income taxes begin at 2% and are capped at 17%, as per the tax slab.

However, if the tax you need to pay basis of your net chargeable income is more than the tax charged at a standard rate of 15% on your net total income, then you need to pay tax at 15%.

Your chargeable income is calculated based on the various types of income you need to report through your tax return. This includes:

• Salary and wages
• Allowances and fringe benefits
• Bonuses
• Commissions
• Pensions
• Share options

Your residence or citizenship has no relevance when deciding liability for paying Hong Kong salaries tax. Any income earned locally by nomadic workers who stay less than 60 days is exempt from payment of salaries tax.

As per the Inland Revenue Department, any employment qualifies as non-Hong Kong employment only when the following three conditions are met:

• The employment contract was negotiated and entered into and is enforceable outside Hong Kong;
• The employer is not a resident of Hong Kong; and
• The employee's salary is paid outside Hong Kong.

Unless all conditions are met, the employment will likely qualify as Hong Kong employment and attract relevant salary taxes.

Profits Tax

Any person, including a corporation, partnership, or sole proprietorship, carrying on a business in Hong Kong has to pay tax on the profits made in Hong Kong, regardless of the person's tax residence. Nomadic workers also fall within this unless they belong to jurisdictions with tax treaties with Hong Kong to protect against double taxation.

Hong Kong follows a two-tiered profits tax rates regime. The tax rate is as follows:

• Assessable profits not more than HKD 2,000,000 have an 8.25% tax rate.
• Assessable profits exceeding HKD 2,000,000 have a 16.5% tax rate.

Source: Tax Rates of Profits Tax

From January 2023, Hong Kong authorities have classified the following types of offshore income to be subject to profits tax if such income is received in Hong Kong SAR by a multinational enterprise, unless a few additional conditions are met:

• Interest
• IP income
• Disposal gains from selling equity interests
• Dividends

Property Tax

Starting from February 28, 2024, Hong Kong removed the Buyer's Stamp Duty (BSD) for all property buyers, including non-permanent residents. As a result, non-permanent residents are no longer subjected to an additional 15% BSD in addition to the Ad Valorem Stamp Duty (AVD) when buying residential property.

Automatic Exchange of Information (AEOI)

It is also worth noting that Hong Kong is a signatory to the Automatic Exchange of Information agreement of OECD. As a result, Inland Revenue Department is obliged to report information of all digital nomads back to the tax authorities of their country of residence.

As of 2022, Hong Kong authorities have an information exchange relationship with 74 countries through bilateral or multilateral competent authority agreements.

If you have not been declaring your income and paying taxes in your country of residence and want to use Hong Kong to escape your tax liability, you can get in trouble.

How Can Digital Nomads Benefit From the ‘Tax Haven'?

While there is no international tax law for a nomadic worker, they can't escape the tax burden entirely. However, tax havens can help reduce the tax liability of nomadic workers to some extent:

For starters, nomadic workers can take advantage of the flexible taxation laws of tax havens by becoming a non-resident in their home country and demonstrating that they have permanently cut off ties. Some of the benefits include:

• Exemption from profits tax in case of offshore income generated by a company incorporated in Hong Kong;
• No capital exchange control regulations that promote free repatriation of income;

Setting up a business in a tax haven can also help nomadic workers save on taxes, provided the business operations are carried out elsewhere. For example, there are no withholding taxes on any interest and dividends earned from shareholding, investments, and deposits;

Bottom Line

If you are a remote worker in search of a destination with an efficient tax regime, Hong Kong is an excellent destination to consider. But remember that simply becoming a digital nomad cannot help you forgo your tax liability. While you can reduce your taxes or become tax-neutral, escaping tax payments is punishable.

Are you searching for seasoned advice for structuring your operations to minimize your tax burden in Hong Kong? Get in touch with Air Corporate right away.

The experienced team at Air Corporate can guide you through the entire process and also help you set up a company in Hong Kong.