US Tax of Hong Kong Income, Account & Assets
U.S. Taxation of Hong Kong Income: A common question we receive is whether income earned in Hong Kong is taxable in the U.S. The Hong Kong tax system is setup different than the tax system in the United States and the IRS tax and reporting compliance requirements are complicated.
Therefore, if you are a Hong Kong citizen and reside outside of Hong Kong and/or are a US citizen and conduct business within Hong Kong, it is important that you understand the distinction between the US and Hong Kong tax system, and that you consider these differences when planning and strategizing tax minimization strategies.
In addition, since the Internal Revenue Service has taken an aggressive approach on matters involving foreign accounts compliance and unreported foreign income, it is important to get into compliance to avoid offshore penalties.
IRS International Tax Compliance
We represent numerous individuals each year with income, assets, accounts and investments in Hong Kong.
Whether our client is a Hong Kong citizen who has relocated to the United States, or a U.S. person who has relocated to Hong Kong, there are various different IRS tax related issues a person with income from Hong Kong will have to assess — depending on the type of income they are earning.
Here are some of the basics:
The first and most important aspect of US tax on income from Hong Kong is that the US taxes individuals on their worldwide income.
Therefore, if you are a US person working in Hong Kong, then you have to be cognizant of the fact that the income you earn abroad is going to be taxed in the United States.
But I Reside in Hong Kong?
Worldwide Income is different than Resident Based Taxation. The U.S. Taxes U.S. persons (not just U.S. Citizens) different than how most countries operate.
In most countries, when a person relocates to a new country, the original country does not tax the individual on income that was earned beyond its borders – because the are considered nonresidents.
Alternatively, the United States bases its tax rules on U.S. Person status, which includes:
- U.S. Citizens
- Legal Permanent Residents, and
- Nonresident who meet the Substantial Presence Test
Foreign Earned Income Exclusion
If you reside overseas in Hong Kong you may be able to qualify for the Foreign Earned Income Exclusion (FEIE), using IRS Form 2555.
If you qualify for FEIE, it means that even though the United States taxes you on your worldwide income, if you meet the exclusion then $102,000 (adjusted for inflation) is exempt from US taxation.
In other words, if you work overseas in Hong Kong and made $95,000 USD equivalent and meet the FEIE requirements then you would not owe any tax to the United States on that income — even if it was tax-free in Hong Kong
*If you already pay tax in Hong Kong come, you do not get a credit back from United States.
In addition, you may also receive a foreign housing exclusion for a portion of the money you spend on housing in Hong Kong. Therefore, it is important to keep track of your expenses for housing when you live abroad.
Paid Foreign Taxes in Hong Kong (Foreign Tax Credit)
Unlike the Foreign Earned Income Exclusion which only refers to “earned income,” the Foreign Tax Credit can be applied to either earned income or passive income.
Therefore, if you were employed overseas and earned money, but already paid tax on that money you may be able to apply a credit towards some (if not all) of the tax money you already paid in Hong Kong
In addition, if you earned passive income such as interest, dividends, royalties or capital gains you can also apply a foreign tax credit for passive income.
Tax-Free Income In Hong Kong?
Unlike the United States, many foreign countries have tax free income on items such as interest, dividend, or capital gains. While the United States does offer some tax exempt interest, usually at the state level on municipal bonds (a.k.a. muni bonds), in some countries, an entire category of income (such as passive interest or dividends) is exempt from tax.
Unfortunately, the United States typically does not acknowledge the tax-free status. Therefore, if you earned interest income or dividends (or any other type of passive income that may have escaped tax in Hong Kong) you may still have to pay tax on that money in United States.
Hong Kong Retirement (Provident Fund)
Just like United States has its own retirement plans which are tax deferred during the growth face such as a 401(k), Hong Kong also has a similar retirement plan called a Provident fund. Many countries such as Singapore and Thailand also have provident funds as well.
While the retirement may grow tax free in Hong Kong, the foreign retirement growth (and contribution deferrals) are going to be taxed in the U.S. — unless there is a tax treaty between the countries to help avoid it.
For example, there is no tax treaty with Singapore, and the United States has determined that both growth and deferral contributions into a Singapore Central Provident Fund (CPF) is taxable during the growth and contribution phases.
Alternatively, Australian superannuation, while not specifically identified in the U.S./Australia tax treaty may be exempt because there is a treaty between the different countries and the IRS not yet determined whether a superannuation is considered social security equivalent or pension equivalent.
Therefore, presumably the growth within the fund of the Hong Kong provident fund may be taxable. And, if you are a U.S. person and working for a Hong Kong with an employer who is deferring money into that fund, those deferrals may be taxed along with your non-deferred regular income (aka, it does not rest receive tax-deferred treatment as a 401(k) equivalent).
No U.S. Totalization Agreement
In addition to tax treaties, the United States has entered into totalization agreements with various countries as well. The purpose of a totalization agreement is to avoid double payments of social security taxes to both United States and a foreign country.
For example, if a person works in a foreign country and has to pay Social Security into that country (especially if they are self-employed and would have to pay the entire portion), the United States has lightened the burden by entering into a totalization agreements with countries so that the person would not have to pay the same tax to the United States.
Currently there is no Totalization Agreement with Hong Kong.
FBAR, FATCA & Foreign Reporting
We represent many individuals each year from Hong Kong and it is very common for clients to have accounts and investments in Hong Kong that they did not know (or knew) and had not reported it to United States, including:
- Bank Accounts
- Investment Accounts
- Passive Income
- Foreign Company Ownership
The United States has made the enforcement of foreign reporting a key enforcement priority. Therefore, it is important that if you have unreported income, accounts, assets, or investments from Hong Kong that were not reported to the United States that you consider getting into compliance sooner as opposed to later (since the programs can be terminated at any time, the penalty can increase, and/or if the IRS contacts you first, you lose the opportunity to enter into any if the IRS Amnesty Programs).
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.