Hong Kong Fact-File Part 2:
Individual Business Domestic Taxation

2.14 Hong Kong Individual Business Tax-Efficient Profit Distribution

Choosing between dividends, salary and fringe benefits

All Hong Kong-sourced earnings are subject to a 15% salary tax; likewise, all profits arising in the SAR are subject to profit tax at either 16.5% or 15% (depending on whether the business is incorporated or unincorporated, respectively). Partnerships are effectively ‘transparent’ for the purposes of tax, meaning that the same applies. Therefore, the choice to compensate oneself from one’s own business via salary, dividends, or fringe benefits is somewhat academic.

Where dividends are paid out by a limited liability company to its’ shareholders, the dividends are exempted from the shareholder’s tax liability and not subject to any withholding tax. But the dividends will have been taxed at the profits tax rate of 16.5% as part of the company’s profits. Additionally, any gains arising from exercising share options are subject to salary tax.

Any salary drawn by the proprietor is subject to the same tax conditions as dividends and is not a deductible allowance from profit tax calculations.

The majority of benefits in kind, such as accommodations, loans, etc, are again not deductible business expenses and will be taxed under salaries tax.

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