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Guide to Pay Company’s Employees, Directors, and/or Shareholders

So now, you have incorporated your new company in Hong Kong, and you are ready to do business in this wonderful city. However, there are a few things you need to know before you start running your business. Among many other requirements, as a business owner, you must know that all Hong Kong companies are required to keep a proper record of all payments made to the employees, directors, and shareholders. You have to declare all these payments to the Inland Revenue Department (IRD) in either the Profits Tax Return or Employer’s Tax Return. Therefore, it is essential for you to understand how to pay company’s employees, directors, and/or shareholders, and what the implications of these payments are.

 

How To Pay Employees?

According to the Employment Ordinance, an employee is defined as someone hired under an employment contract (either a written or an oral agreement) whether located in Hong Kong or not. Please note that if the director has entered into an employment contract with the company, he or she is also considered the employee of the company.

Employees in Hong Kong are usually under regular payroll practices. Employees will be paid a fixed regular payment agreed upon in an employment contract and the standard practice is to pay employees a monthly salary. All employees are responsible for file their tax unless the company pay for it. Employees are welcome to calculate the amount of tax they need to pay with the help of tax calculator developed by the Inland Revenue Department. Prior to this, you could also find out the tax rates of salaries tax in Hong Kong. Any employee who is not in Hong Kong for more than 60 days of a tax year (whether he or she is a Hong Kong resident or not) is eligible to apply for individual tax exemption.

 

How To Pay Directors?

If a director has entered an employment contract with the company, he or she is eligible to receive a salary. On the other hand, all directors (regardless of their status as an employee or not) are entitled to receive director’s fees from their company. In Hong Kong, director’s fee is always subjected to salaries tax, regardless of the location of the director as well as his or her resident status in Hong Kong. As such, the company must always declare the director’s fees at the same time as payments made to employees in the Employer’s Tax Return to the IRD every April.

 

How To Pay Shareholders?

While director(s) will get a director’s fees from the company, a shareholder will be paid a dividend (a distribution of profits made by the company). All dividends can only be paid after profits tax and it must be declared in the Profits Tax Return to the IRD every year. In Hong Kong, dividends are not subject to individual salaries tax but any tax thereon will be charged to the company. You may find out more about current profits tax rates in Hong Kong from Government’s Tax Rates of Profit Tax table. Please note that if a shareholder lives elsewhere, the shareholder should check if he or she needs to pay tax in the country where they lived.

 

Out of Pocket Business Expenses

Companies are free to structure remuneration packages as they see fit – to support the work-related expenses of its directors, employees, and shareholders. The typical work-related expenses include transportation costs incurred in business trips, the entertainment cost and etc.

While the remuneration package should be structured accordingly to the staff’s role and responsibilities and industry’s standards, these work-related expenses incurred should also align with the company’s activities as well as the person’s role and duties. The company’s expenses policy should spell out what expense is legitimate and what is not. It should also set out what evidence/supporting document employees need to prove their claim (such as receipts), and whether they need approval or countersigning before the claims submission.

In summary, getting paid is important in human resource management. However, the way payments are made is equally as important. Your company must keep the correct records of the way directors, employees and shareholders received money.