If you have employees in Hong Kong, you are likely aware that no income tax is collected from employees via payroll throughout the tax year. Rather than having income tax withheld, employees in Hong Kong are required to independently file with, and pay their income tax contributions to, Hong Kong’s Inland Revenue Department at the end of the tax year.
What you may be unaware of is the responsibility that you, as an employer, have to the IRD with regard to income tax and terminating employees. In the event of an employment separation, Hong Kong requires all employers to ascertain if terminating individuals plan to leave Hong Kong and to then notify the Inland Revenue Department of terminations by filing either a form IR56F or IR56G. What may surprise you is that the IRD requires one of these filings be made one full month prior to an employee’s departure.
If an employee is leaving Hong Kong, whether it is for good, or simply an extended period of time, the IRD wants the opportunity to collect the tax that is owed by the employee before that person leaves the country and becomes unreachable.
The submission of an IR56F indicates to the IRD that an employee will be staying in Hong Kong post separation. In this case, the employer has no further liability in the matter, as the IRD will be able to collect from the employee the income tax due at the end of the tax year.
However, if a terminating employee is planning to leave Hong Kong after separation from a company, an IR56G form should be submitted. This will send notification to the IRD that someone is leaving the country and further steps need to be taken to recover their income tax owed before they depart.
An employer who has filed an IR56G is further obligated to withhold all further pay from the date of the filing of the IR56G. A copy of the IR56G should be provided to the separating employee who should in turn approach the IRD to ensure tax clearance is made. Once the employee has settled any tax liabilities, they will receive a “letter of release”. Only upon site of this letter can an employer make final payment to this departing individual.
If a terminating employee fails to pay their taxes before departing the country, the IRD will issue a notice to the employer requesting garnishment of the taxes owed from the employee’s final pay. This notice is called an IR113. Employers can be assured that an IR113 will be considered a valid defense in court to any claim brought against them by an employee for withheld salary.
All of this is something to keep in mind when hiring non-local or expatriate employees.