Summary

A State Administration of Taxation ("SAT") notice allows for preferential individual income tax ("IIT") treatment for Hong Kong and Macau residents working in China. Such preferential treatment may in more circumstances allow for time apportionment of salary income, as well as special treatment of certain bonus income.

Background

In May, the SAT issued a Notice Regarding The Implementation of The Employment Income Related Clauses in The Double Tax Arrangements between Mainland China and Hong Kong and Macau (SAT Bulletin [2012] No. 16, "Bulletin 16").

Bulletin 16 seems to provide certain preferential IIT treatment to Hong Kong and Macau residents working in China, although its implementation is yet to be tested.

Impact of Bulletin 16

Bulletin 16 provides a key benefit to Hong Kong residents working in China but still living in Hong Kong. Under the general IIT rules, they cannot enjoy time apportionment and their salary income will be fully taxed in China unless they have a separate position outside of China. At the same time, they will also be taxed in Hong Kong if they spend more than 60 days in Hong Kong during a tax year. 

Bulletin 16 allows a Hong Kong or Macau resident employed in Hong Kong or Macau and seconded to work full time in China to enjoy time apportionment even without a position outside of China. For example, a Hong Kong resident who goes to Shenzhen on Mondays to work in Shenzhen on weekdays and comes back to Hong Kong on Fridays, may be able to pay tax in China on only four-seventh of his/her salary. 

Special treatment of bonus

Another benefit under Bulletin 16 relates to bonus income attributable to multiple periods.  Under the general IIT rules, bonus income attributable to multiple periods cannot be time-apportioned based on actual days spent in China. If an expatriate has spent one day in China in a particular month, the bonus income attributable to that month will be fully taxed in China. Bulletin 16 purports to allow time apportionment on bonus income based on actual days spent in China during the period for which the bonus income is earned.

When does the preferential IIT treatment commence?

Bulletin 16 applies to income earned on or after 1 June 2012.

Action points for employers

  • Hong Kong and Macau employers must file a 'Guoshuifa [2009] No 124' form each time they apply for the preferential treatment under Bulletin 16 for their employees.
  • Employers should also ensure that working arrangements which involve cross border duties are appropriately documented and the favourable tax treatment is provided in respect of those employees who are eligible.