How to Pay Yourself from Your Hong Kong Company (Tax-Efficiently): Salary vs. Dividends

Taking a salary from your Hong Kong company cuts its corporate tax bill but triggers a mountain of personal compliance paperwork and audit risks if "excessive." Taking a dividend is simpler, but a new FSIE rule could trap your foreign-sourced income at the company level—which is why a hybrid of the two is now the smartest play.

Paying Yourself a Salary vs. Taking Dividends in Hong Kong

You did it. You navigated the process of incorporating in Hong Kong, setting up an efficiant corporate structure to manage your global e-commerce, trading, or consulting business. The money is flowing in. Now, you’re staring at the profit in your company’s bank account and facing the founder's ultimate million-dollar question: "What’s the smartest way to pay myself?"

This is the moment where the dream of Hong Kong's simplicity can turn into a costly nightmare. The classic "salary vs. dividend" debate, once a simple spreadsheet calculation, has been completely upended by new global tax rules and hidden compliance traps that can either save you a fortune or cost you one.

What most new entrepreneurs don't realize is that pulling money from your company is no longer just a financial decision; it's a strategic one. Choosing the wrong path can lead to disallowed expenses, personal tax headaches, and a mountain of administrative work, while the right move—often a strategic hybrid—is the key to unlocking the true tax efficiency Hong Kong is famous for.

The Core Conflict: A Tax Deduction vs. a Profit Distribution

On the surface, the choice seems simple. It's a binary decision between two methods that are fundamentally different in the eyes of Hong Kong’s Inland Revenue Department (IRD).

• A Salary: This is an operating expense. Just like your software subscriptions or rent, the salary you pay yourself is deducted from the company's revenue before profit is calculated. This directly reduces your company's taxable profit and, therefore, its final Profits Tax bill.

• A Dividend: This is a distribution of profit. It's the cash you take after the company has already calculated its profit and paid its corporate taxes (8.25% on the first HK$2M, 16.5% after). It is not an expense and offers no tax deduction for the company.

  
  

The immediate, seemingly obvious answer is to just pay yourself a massive salary equal to your company's profit, right? You could zero out your corporate tax bill and pay yourself directly.

Wrong. This is the first and most common trap.

The Salary Playbook: The Tax Shield That Comes With a Paperwork Nightmare

The upside of the salary route is clear and powerful: the tax deduction. If your company earned HK$1 million in profit, paying yourself a HK$500,000 salary instantly cuts your corporate tax bill in half.

But this benefit comes with two major, non-obvious costs. The first, and what we spend hours walking new founders through, is the immediate and non-negotiable compliance burden. The moment you classify yourself as an "employee" (even as the 100% owner), you unleash a wave of mandatory IRD filings.

This isn't a "maybe." It's a legal requirement. Your company must:

• File an IR56E form when you "hire" yourself.

  
  

• File the annual Employer's Return (BIR56A) and the individual IR56B form every single year, detailing exactly what you were paid.

  
  

• File an IR56F or IR56G form if you "terminate" your employment or leave Hong Kong.

  
  

• Maintain meticulous payroll and employment records to justify these filings.

  
  

The real kicker? The IRD can and will issue penalties for late or incorrect filings, even if you had no personal Salaries Tax to pay. For a solo founder running a lean, global business, this administrative burden is a significant and recurring headache.

The second risk is even more costly: the audit trigger. The IRD isn't blind to this strategy. Any salary you pay yourself must be commercially reasonable and "incurred in the production of profits". If your company makes HK$2 million and you pay yourself a HK$2 million "salary" for what amounts to a few hours of strategic work a month, the tax assessor can challenge this during an audit. They can deem the salary "excessive" or "non-commercial," disallow the deduction, and send you a bill for the full, unpaid Profits Tax plus penalties.

The Dividend Playbook: The "Simple" Route With a New Global Trap

So, why not just take dividends? For years, this was the "simple" path. You avoid all the payroll compliance. You let the company pay its Profits Tax, and then the board (i.e., you) resolves to distribute the remaining cash.

The old "con" was just that it felt inefficient—you weren't getting that company-level tax deduction. But a far more dangerous, modern trap now exists: the Foreign-Sourced Income Exemption (FSIE) regime.

This new rule is a direct response to global tax reforms and it’s a landmine for the exact type of businesses Hong Kong attracts. Many of our clients, for instance, set up a Hong Kong company as a holding entity. Their HK company might own a subsidiary in the UK or an e-commerce operation in the EU, which then pays a dividend up to the Hong Kong parent company.

• Before FSIE: That foreign dividend income was 0% tax in Hong Kong. Simple.

• After FSIE: That same foreign dividend is now, by default, potentially taxable in Hong Kong at the full 16.5% corporate rate.

  
  

This means your company's profits could be taxed before you even have a chance to distribute them to yourself, decimating your net payout.

This is where expert guidance becomes critical. We navigate our clients through the FSIE "escape hatches." The income can still be tax-free if you meet specific conditions, the most common for an SME being the Participation Requirement. In simple terms, if your Hong Kong company has held at least 5% of the shares in the foreign subsidiary for at least 12 months, the dividend is generally exempt. For most 100% owner-managers, this is an easy test to pass, but you must know the rule exists and document your holding period.

The Insider's Strategy: Don't Choose, Combine

So, salary is a compliance nightmare and dividends have a hidden tax trap. What’s the solution?

In practice, for almost every owner-manager we advise, the most robust and tax-efficient strategy is not an "either/or" choice but a carefully structured hybrid approach¹⁷.

This is the playbook we build for our clients:

1. Pay Yourself a Modest, Defensible Salary: We help you determine a commercially reasonable base salary for your actual executive duties. This gives the company a legitimate, defensible tax deduction that lowers its Profits Tax bill. It's not about wiping out all profit, but about taking a fair "expense" for the work you do.

   
   

2. Embrace the Compliance: We accept that this salary triggers payroll compliance. As your corporate secretary, we set up the payroll records and manage the mandatory annual filings (BIR56A/B), ensuring you remain 100% compliant without you having to track the deadlines.

   
   

3. Check for FSIE, Then Distribute the Rest: After the company pays tax on its (now reduced) profits, we assess any foreign income streams against the FSIE rules. For most clients, we confirm the "Participation Requirement" is met. With that clear, the company can distribute all remaining after-tax profits as a dividend—a move that involves no extra payroll admin.

   
   

This hybrid model gives you the best of both worlds: a tax deduction at the company level (from the salary) and a simple, admin-light extraction method for the bulk of your profits (from the dividend). It balances tax efficiency with audit-proof compliance.

Paying yourself from your Hong Kong company is one of the most important financial decisions you'll make. The choice is no longer simple, and the stakes are higher than ever. The salary route offers a powerful deduction but at the cost of relentless paperwork. The dividend route, while simpler, is now guarded by the FSIE regime, which can be a costly trap for unwary holding companies.

A successful strategy requires you to look beyond a simple tax rate and consider the entire picture: your company's profits, your personal tax residency, and your tolerance for administrative work. The smartest founders don't just pick one; they build a model that works for them, ensuring their hard-earned money ends up where it belongs—in their pocket, not lost to avoidable taxes or penalties.