Salary vs Dividends in Hong Kong: The Tax Maths for Owners

At a glance

Rates, allowances, standard-rate bands and the conditions for the two-tiered regime are as most recently published by the Inland Revenue Department.

Two routes, two points of taxation

Salary: the money comes out of the company, the company deducts it as an expense, and assessable profits fall. But once it reaches the director, salaries tax applies.

Dividend: the money comes out of post-tax profit, so the company cannot deduct it. But the shareholder pays nothing further on receipt.

So the whole thing reduces to one comparison: for the same sum of money, how much tax does it attract on the company side, and how much on the personal side.

That is the biggest difference from the UK and US — there, dividends are taxed again at the personal level, so you pay at both layers. In Hong Kong you pay at one layer of your choosing.

Broadly, how do you judge it?

Profits still in the lower band (the first HK$2m of the two-tiered rate not yet used up).

At company level the rate is 8.25%, which is already very low. And once the director’s salaries tax climbs into a higher marginal band, it can exceed 8.25%. In that case, more dividend and less salary may cost less overall.

Profits past the lower band (16.5% applying).

The company-level rate is now expensive, and salary reduces company profits. If the director’s marginal salaries tax rate is clearly below 16.5%, there is room to convert part of the profit into salary.

A mix of the two is usually the real answer.

Real cases are rarely “all salary” or “all dividend”. Most pay a reasonable salary (using up the personal allowance and the lower bands) and take the rest as dividend.

Worth noting: this judgement ties into eligibility for the two-tiered rate — among connected entities under the same controlling person, only one can use the lower band. With several companies, think carefully about which one gets it.

Tax is not the only consideration

This is where people calculate only the tax and end up regretting it.

Mortgages and lending. Banks look at proof of income. Keep the salary artificially low for years and you will find the income evidence too thin when you want to buy a property or the company wants to borrow.

MPF and retirement. No salary means no MPF contributions, and nothing accumulating in the retirement account.

Visas and residence. Some immigration arrangements look at remuneration levels; see what visa a non-local employee needs.

Cash flow. A dividend needs distributable profits. A company with accumulated losses cannot pay one, even if there is money in the bank.

One line you cannot cross

The salary has to be genuine.

That means: the director has actual duties, the amount is reasonable, it is paid in the normal way, it is reported on IR56B, and MPF is contributed.

If director’s remuneration is invented or heavily inflated purely to save tax — paying a large salary to a family member with no involvement in the business, say — the IRD has anti-avoidance provisions that can disregard the arrangement, and beyond the back tax there may also be additional tax.

The same principle applies to dividends: there have to be genuine distributable profits, and the procedure has to be followed. Treating shareholder drawings as “dividends” with no profit in the accounts to support them builds up, year after year, into a director’s current account balance nobody can explain.

How to actually do it

One: work out your expected profit level for this year. Whether you land inside the lower band of the two-tiered rate is the starting point for the whole decision.

Two: look at the director’s personal side — allowances and other income. The personal marginal rate is the other half of the answer.

Three: recalculate every year. The profit level changes and so does the optimal mix. This year’s ratio may not suit next year.

Four: once decided, follow the procedure properly. Salary means IR56B and MPF; dividends mean a resolution and accounts to support it. Half-doing it is the worst outcome.

This calculation is worth doing every year

Get the ratio right and the saving is not a one-off — it recurs every year. And the calculation itself is not complicated. What is hard is having an accurate profit forecast and the personal income figures, which means having the books up to date.

Want someone to work out the best mix on this year’s actual numbers? Talk to us.

This is general information and does not constitute tax or investment advice. Rates, allowances, the conditions for the two-tiered regime and the anti-avoidance provisions are as set out in the Inland Revenue Ordinance and most recently published by the IRD; for a specific arrangement, consult a professional tax adviser.