Directors can be paid in two broad ways: director's fees for holding the office of director, and salary for work done as an employee (for example, as managing director). The distinction affects salaries tax sourcing, MPF and reporting. Both must be properly approved and recorded.
Director's fees from a Hong Kong company are generally treated as Hong Kong-sourced and subject to salaries tax, wherever the director lives or works. All payments to directors must be reported to the Inland Revenue Department.
At a glance
- Director's fees
- Usually Hong Kong-sourced; taxable even for non-resident directors
- Salary
- Taxed under the usual employment rules
- MPF
- Applies to directors who are also employees
- Reporting
- Employer's Return and IR56 forms
Fees and salary compared
| Point | Director's fees | Salary as an employee |
|---|---|---|
| Paid for | Holding office as director | Work performed under an employment contract |
| Salaries tax source | Follows the location of the company's central management and control, usually Hong Kong for a Hong Kong company | Depends on the employment and where services are rendered |
| 60-day rule | Does not apply | May apply in certain cases for employees visiting Hong Kong |
| MPF | Not required if the director is not an employee | Required for employees aged 18 to 64, subject to exemptions |
| Reporting | Employer's Return and IR56 forms | Employer's Return and IR56 forms |
Approval and records
- Approve directors' remuneration in accordance with the articles, usually by the board or members.
- Record fees and salaries in minutes or written resolutions.
- Disclose directors' emoluments in the financial statements as required.
- Keep employment contracts for executive directors.
Other points
- Profits tax: reasonable remuneration is usually deductible for the company.
- Dividends are not deductible and are not taxable for shareholders in Hong Kong.
- Loans to directors are restricted under the Companies Ordinance, with exceptions; take advice before lending.
- Directors resident overseas must consider tax in their home country and any double taxation agreement.
Questions we are often asked
Our director lives overseas and never visits Hong Kong. Are fees taxable here?
Director's fees paid by a company whose central management and control is in Hong Kong are generally Hong Kong-sourced and taxable, regardless of where the director lives. Double taxation relief may be available in the director's home country.
Can we pay dividends instead of fees?
Dividends are paid from distributable profits to shareholders, not for services, and are not deductible for the company. The right mix depends on the individuals' tax positions; take advice.
Do non-executive directors need MPF?
MPF applies to employees. A director who is not an employee and receives only fees is generally not required to be enrolled.
Self-check: where do you stand?
| Question | If the answer is no |
|---|---|
| Is directors' remuneration approved and minuted? | Approve it properly |
| Are all director payments reported in the Employer's Return? | Include them |
| Is MPF applied to directors who are employees? | Enrol them |
| Do overseas directors understand their Hong Kong tax position? | Take advice |
- Payroll and reporting for directors.
- Resolutions approving remuneration.
- Coordinating with tax advisers on remuneration planning.
In summary
- Fees for office; salary for employment.
- Fees from a Hong Kong company are usually Hong Kong-sourced.
- Approve, record and report every payment.
Official references
- Inland Revenue Ordinance (Cap. 112), section 8
- Inland Revenue Department: Departmental Interpretation and Practice Notes on salaries tax, www.ird.gov.hk