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  • HONG KONG AND MACAU

    Global Employer Services Newsletter September 2020

What’s influencing investors’ business strategies for Hong Kong and Macau?

During the first two quarters of 2020, the COVID-19 pandemic continued to escalate across the globe, with an increase in confirmed cases reported daily in almost every country in the world. The challenges created by the COVID-19 pandemic have severely impacted the global economy. Governments throughout the world have promptly implemented measures to try and stop the spread of COVID-19, imposing lockdowns, social distancing, quarantine arrangements, restrictions on travel and public events, etc. Meanwhile, they have put in place relief measures to ease the financial burden on businesses and individuals during these difficult times.

The measures taken by the governments of Hong Kong and Macau have drawn comparisons between the two cities in terms of the methods of their governance. Following Chairman Xi’s visit to Macau to mark the 20th anniversary of the establishment of the Macau Special Administrative Region in December 2019, there has been conjecture about whether the mainland Chinese leadership will announce new policies on diversifying Macau’s gaming-dependent economy, developing it from a casino hub into an international financial centre. These new policies, once implemented, would certainly bring about a radical change in Macau’s economy and would open up new opportunities and challenges.

The article we published in the April 2017 updated readers on how the evolution of Macau’s economy has impacted investors’ business strategies; its low taxation regime, free port and lack of foreign exchange controls have created a new business environment that has attracted overseas investors. Will the upcoming new policies to transform Macau into an international financial centre result in direct competition between Macau and Hong Kong, or impact Hong Kong’s prestige as an international financial centre? Macau would also seem to face significant challenges in any future transformation into an international financial centre; for example, it will need to make significant investments in its infrastructure, supply of qualified professionals, enactment of new securities laws and so on before it can elevate its status to that of a global financial centre.

Investors who are considering making new investments in Macau and Hong Kong should take a glance at Tables 1 to 3, which show comparisons between the latest rates for profits (complementary) tax and salaries (professional) tax, as well as other relevant legislation, in the two cities.

Table 1. Latest Profits Tax rates in Hong Kong and Macau

Hong Kong Profits Tax Rates

Macau Profits Tax (Complementary Tax) Rates

Corporations

16.5%/8.25%

Annual assessable profits not exceeding MOP 600,000

0%

Unincorporated businesses

15%/7.5%

MOP 600,001 and above

12%

Note: Profits tax for the first HKD 2,000,000 of profit for corporations and unincorporated businesses is reduced to 8.25% and 7.5%, respectively.

Note: Companies incorporated in Macau fall into two groups. Companies in Group A must adhere to proper accounting requirements and maintain capital levels of at least MOP 1,000,000. Companies in Group B are either filing their tax returns for the first time or do not meet the capital requirements to be included in Group A. Companies in Group B are taxed based on assessed profits, whilst those in Group A are levied on certified tax returns submitted to the Macau Finance Bureau.

 


Table 2. Latest Salaries Tax rates in Hong Kong and Macau

Hong Kong Salaries Tax Rates

Macau Professional Tax Rates

Assessable annual income (HKD)

 

Salaries Tax rates (note 2)

Assessable annual income (MOP)

Professional Tax rates (note a)

From

To

 

From

To

 

0

50,000

2%

0

144,000

0%

50,001

100,000

6%

144,001

164,000

7%

100,001

150,000

10%

164,001

184,000

8%

150,001

200,000

14%

184,001

224,000

9%

Remainder

 

17%

224,001

304,000

10%

Standard rate (note 1)

 

15%

304,001

424,000

11%

 

 

 

424,001

and above

12%

Notes

  1. The tax assessment is limited to a maximum of the standard rate on the total assessable income before allowances.
  2. Progressive tax rates on net assessable income (after allowances and deductible expenses).
  3. Hong Kong employers are not required to withhold Salaries Tax from an employee’s income.
  4. An employer must prepare and submit an annual Employer’s Return reporting the remuneration earned by all existing employees for the previous fiscal year (April 1 to March 31) to the Inland Revenue Department (IRD).
  5. Hong Kong employees are responsible for preparing and submitting an individual tax return to the IRD for a Salaries Tax assessment and for paying the assessed Salaries Tax to the IRD direct.

Notes

a) Professional tax is calculated on the basis of net assessable income (i.e. income earned by an employee after deducting non-taxable income and then a 30% fixed deduction) at the above progressive tax rates. The amount of professional tax due is subject to a 30% waiver according to the tax relief measures.

b) Withholding taxes

An employer must withhold the tax amount payable from the employee’s income. The withheld tax should be paid quarterly to the Finance Bureau in January, April, July and October.

c) Filing taxes

An employer must prepare a quarterly professional tax return and an annual Employer’s Return to report the remuneration earned by all employees for the quarter and the calendar year. The quarterly return must be submitted to the Finance Bureau in January, April, July and October for the previous quarter, and the annual return must be submitted in January or February for the previous year.


There is good news for investors making investments in both cities, as they will not have to pay tax twice on a single source of income generated from their engagement in cross-border trade and investment activities. The order on a comprehensive arrangement for the avoidance of double taxation in Hong Kong and Macau was gazetted on 22 May 2020, and the order was tabled at the Legislative Council for negative vetting on 27 May 2020. The arrangement will enter into force after both cities have completed the ratification procedures for the arrangements under the comprehensive avoidance taxation agreement signed by Hong Kong in November 2019.

The highlights of the arrangement are listed below:

  • Double taxation will be avoided in that any Macau tax paid by Hong Kong residents in respect of income derived from sources in Macau can be used as a credit against the Hong Kong tax payable in respect of the same income, subject to the provisions of the tax laws in Hong Kong.
  • Profit from cross-border shipping, air and land transport that is earned by Hong Kong residents but arises in Macau will not be taxed in Macau.
  • If an eligible teacher or researcher employed in Hong Kong conducts teaching or research activities at a recognised education or scientific research institution in Macau, the income they earn, if it is paid by or on behalf of the Hong Kong employer, will be exempt from tax in Macau for up to three years, provided that tax is paid on the income in Hong Kong and any research has been done in the public interest.

As well as the differences in the tax systems and tax rates in Hong Kong and Macau, investors should be aware of the differences in the related legislation in the two cities, as this will influence their investment strategies and their investment or operational costs.

There are significant variations between Hong Kong and Macau in terms of pay scale and pay structure, as well as statutory retirement benefit when hiring talent. The differences between the statutory retirement benefit systems are shown in Table 3.

Table 3. Retirement benefit systems in Hong Kong and Macau

Hong Kong Mandatory Provident Fund (MPF)

Macau Social Security Fund (SSF)

The employer is required to set up an MPF scheme for each employee through the appointment of an MPF service provider within 60 days of the date the employment begins. Under the scheme, both employer and employee are required to contribute 5% of the total relevant income (see note) with a cap at HKD 1,500 each.

All employers and employees are required to register with the SSF and pay contributions for employees in the contribution month that immediately follows the date their employment starts.

 

Employment terms

Employer’s monthly MPF contribution

Employee’s monthly MPF contribution (to be deducted from monthly salary)

Employment terms

Employer’s monthly contribution

Employee’s monthly contribution (to be deducted from monthly salary)

Total monthly contribution

Applies to all regular and casual employees employed under full-time and part-time contracts

5% of employee’s monthly relevant income, capped at HKD 1,500

5% of monthly relevant income, capped at HKD 1,500

Long-term employee

MOP60

MOP30

MOP90

 

 

 

Casual worker (works at least 15 days in a month)

MOP 60

MOP 30

MOP 90

 

 

 

Casual worker (works less than 15 days in a month)

MOP 30

MOP 15

MOP 45

 

 

 

Payment of SSF contribution

  • Long-term employees:
    Contributions for the preceding calendar quarter are payable in January, April, July and October.
  • Casual workers:
    Contributions are paid in the month that immediately follows the working month of the employee. For example, if an employee works in January, their contributions should be paid in February.

 

Note: Relevant Income includes wages, salary, leave pay, fees, commission, bonuses, gratuities, perquisites or allowances, housing allowances and other housing benefit paid or payable by an employer (directly or indirectly) to an employee under a contract. It excludes severance or long-service payments.

There are also significant variations between Hong Kong’s and Macau’s employment-related legislation. The main differences are in the provisions of the Employment Ordinance of Hong Kong (and the Labor Relations Law of Macau), the minimum wage, compensation insurance for employees, and maximum working hours. As employers, investors must keep to the requirements and deadlines for complying with the relevant laws. If they are convicted of failing to comply, they may be fined or prosecuted.

Given that the processes involved in complying with these legal requirements are labour-intensive, investors may consider outsourcing this work to specialist service providers to give them peace of mind.

On the other hand, the official languages of Macau are Chinese and Portuguese, and all statutory forms and documents are provided in these two languages (whilst the official languages of Hong Kong are Chinese and English). This may trigger demand amongst multinational corporations from English-speaking countries for local professionals or outsourcing service providers who are proficient in the official languages to ensure that they are complying with the local statutory requirements.

Joseph Hong
[email protected]